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Are we Living in a Post-EU Society?

20. November 2013, von Adriaan Schout, Comments (0)

There seems to be a paradox: whereas the euro crisis has enforced deeper integration, economic and political attention is shifting away from the EU. Europhiles blame the Eurosceptics but EU-watchers should be careful to follow simplistic reasoning.

Dutch Foreign Affairs Minister Frans Timmermans has the reputation to be an EU-believer and was, among others, a convinced member of the Convention that drafted the Constitutional Treaty. When he became minister of foreign (including EU) affairs, the general impression in the Netherlands, and the rest of the EU, was that his appointment was a good sign of the Netherlands becoming pro-EU again. However, now one year in office, Timmermans has shown himself rather critical of the EU. He talked about a ‘Brussels bubble’ that has lost touch with reality, criticised EU salaries and insisted on closer control of the EU Commission by the European Council (i.e. intergovernmentalisation of the Commission). Of course, it is possible to contribute this to pragmatic kowtowing to the political signs of our times or to the more reserved EU attitude of the Dutch liberal Prime Minister Rutte and his coalition government of which Timmermans is a member.

Yet, there is more. Minister Timmermans is also travelling extensively abroad. In fact, he is much more in other parts of the world than in Brussels or in EU Member States. One could could argue that the Dutch international influence via the EU would be more pronounced and, hence, that the use of all his international activism outside the EU is debatable.

In the meantime, across the channel, Cameron has expressed the possibility of an in-out referendum. A part of British industry has been issuing threats of leaving the country, and many in the EU are once again appalled by the Brits who continue to be unsurpassed EU-sceptics. However, rather than condemning – as so often happens – the Brexit discussion ignited by Cameron, we could also try to take the British debate seriously. Similarly, we might need to consider that Timmermans’ external perspective is well-founded. In any case, it has to be admitted that the British are good at thinking outside the box, so maybe there is more substance behind the Brexit debate than simple Euroscepticism.

Studies also show that big as well as small and medium-sized industry in the UK question the relevance of current EU policies and of the importance of the EU. Whereas about half of the UK’s exports go to the EU, the other half is going to other parts of the world and, more importantly, it is there where the growth in export – not just the UK’s ─ is taking place. Discussions about competitiveness are now primarily linked to comparisons with countries such as India, China, Brazil and the USA.

Hence, rather than sticking to European navel-gazing, it seems justified to look at the rest of the world for market opportunities and for new threats. In principle, questioning social policy objectives – maybe precisely because they are more symbolic than real – and other developments in for example the growing tasks of the ECB and in the EU’s economic governance, seems a valid starting point in the current debates on the future of the EU. It is crucial to consider what such trends imply for the EU’s competitiveness. This is important from an economic perspective but one also has to consider that the EU’s international security and influence are intimately related to its economic strength. External benchmarking of the EU’s competitiveness should not suffer from internal euro crisis debates.

The EU may have to come to terms with the fact that we work and live in a post-EU society, which also helps to put the traditional European claims into perspective. There is a keen awareness in the Netherlands that 70% of our trade goes to countries within the EU, especially to countries within 1000 kilometres of our borders. This has actually little to do with the EU. Trade relations with neighbouring countries are bound to be important, irrespective of the European integration project. Although important, extensive trade with countries close by are more or less traditionally given. Trade with other parts of the world is clearly increasing and posing new and painful challenges. To focus trade relations more on the rest of the world seems a natural and necessary development.

We in the EU may have to accept the post-EU society as a reality. Voters, consumers and industry have interests beyond the internal market and internal eurozone worries. This recognition has, in principle, little to do with anti-EU sentiments. It would be a mistake to taboo those who’ cast their nets out further’. On the contrary, accepting this might actually help us to get a better focus on what is important within the EU, e.g. standing together in external relations, and what is potentially dangerous such as, for example, creating a French-type EU. The European Union is important, but there is a lot more in the world that counts.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Taking a Close Look at the Grand Coalition Talks: not so Grand on Europe?

5. November 2013, von Almut Möller, Comments (0)

Berlin is heading towards a grand coalition between Chancellor Merkel’s CDU, her Bavarian sister party, the CSU, and the Social Democrats (SPD). After an election campaign in which European issues were strangely absent, surely the delegations that sat down a month after the elections had to get their teeth into Europe.

By putting Europe on the agenda of the coalition talks at an early stage of the negotiations, the delegations wanted to send out two messages: firstly, Europe matters and, secondly, Conservatives and Social Democrats are optimistic about shaping a joint agenda, so no need for the rest of Europe to worry about Berlin not getting its act together. Clearly, healing the eurozone is of vital interest for this country and one of the priorities laid out by Chancellor Merkel for the future government. However, what leaked out on the confidential discussions last week was not quite matching these ambitions.

To start with, it is, arguably, rather strange to see European affairs merely been dealt with in a subgroup (“banking regulation, Europe, Euro”) which is part of a larger working group on Finances and the Federal Budget headed by Finance Minister Wolfgang Schäuble and Olaf Scholz, First Mayor of the Free and Hanseatic City of Hamburg. A subgroup? Hardly a sign that Europe is prioritised despite the presence of prominent figures such as Martin Schulz and Markus Söder, the Finance Minister of Bavaria. One cannot resist the comparison with the Convention on the Future of Europe convened in 2002, which did not have a working group on “EU institutions” because the issues on the table were so controversial that they had to be dealt with across different working groups. On major issues such as pending decisions on banking union, the SPD’s debt redemption fund, or referendums on EU affairs put forward by the CSU, there was clear and open controversy. Are these really merely tactical moves by the SPD to keep an independent profile from the CDU, especially in the run-up to the European Parliament elections (with Martin Schulz to be nominated as the PES’s candidate for the presidency of the European Commission later this week)?

Not surprisingly, a working document of the discussions that was leaked by the Young European Federalists (JEF) provoked an outcry of Germany’s young pro-Europeans. Apart from a general commitment to the EU this short draft consists of an odd mix of buzzwords for CDU/CSU and SPD: the principle of subsidiarity, a strong role of member states in public services, an EU budget prioritising growth, employment and innovation and the already agreed financial transaction tax. It is unclear what stage of the negotiations it reflected when it was leaked, but the paper ridiculed what are meant to be serious discussions.

Public debate in Germany is currently all about the alleged tapping of Angela Merkel’s phone by US intelligence. At the same time, perhaps to the surprise of those looking at Germany from the outside, the public continues to be largely immune to the most recent wave of criticism from the US Treasury challenging Germany’s external trade surplus and the risk that arguably the German model poses to the healing of the eurozone. I am not suggesting that one has to agree with such allegations, and certainly any German government should respond to such criticism with good arguments.

What is worrying me, however, is that most Germans are still not aware that there is also an intra-European challenge regarding the ‘German model’, which for me is much more important than the Washington angle. At a crucial point for the future of the eurozone, Germans remain rather clueless about what is at stake. How long will it take for political leaders in Germany to prepare the public for the hard choices and for the sacrifices that Germany and other eurozone countries will have to make, to build the future for a prosperous and cohesive economic and monetary union? The German President Joachim Gauck was right to address this state of mind which almost resembles sleepwalking in his speech on German unification day in October:

“Our country is not an island. We should not cherish the illusion that we will be spared from political and economic, environmental and military conflicts if we do not contribute to solving them.”

The president lacks political clout, yet he is an accepted normative lighthouse across the country. But he remains a rather lonesome voice on this issue so far – and I doubt whether Germans listening to his speech actually understood the point that the president tried to make. The German public cannot be blamed for this wide-spread ignorance (or innocence?). Where are the politicians today who have the courage and wisdom to unchain the Europe debate?

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Barroso Stretches the Limits of Subsidiarity

15. July 2013, von Adriaan Schout, Comments (0)

By Adriaan Schout and Judith Hoevenaars (Instituut Clingendael)

The eurocrisis has reignited debates on subsidiarity. On June 21st, the Dutch government presented the (disappointing) results of a subsidiarity review, listing 54 EU measures or policy fields which could better be regulated at the national level. The UK is working on a more extensive proposal to flow back European powers to the national level. These national exercises are a response to delinking enthusiasm for the ‘ever closer union’, while Brussels’ influence over the Member States grows. Subsidiarity, which governs the exercise of European powers, is under pressure as EU competences are expanding and it is no surprise that it tops the agenda in several Member States.

Yet, the principle of subsidiarity suffers from institutional vagueness. Subsidiarity is not just a technical or judicial concept, but also a political one. A legalistic interpretation of subsidiarity would emphasise that the EU should legislate ‘as closely as possible to the citizens’, especially in areas where it has no exclusive competence. However, the application of the principle, of which the rules are laid down in Protocol No 2 attached to the Treaties, inherently entails a political assessment. Subsidiarity is aimed at preventing unnecessary centralisation of powers just because that would favour the functioning of the EU in the view of the European institutions. Hence, the Commission has to justify each new proposal with a convincing argumentation why Europeanisation is required. Yet, the eurocrisis has stretched the boundaries of subsidiarity and the division of competences between Member States and the EU to its limits.

As it seems, the EU Commission’s political agenda is to centralise more powers in Brussels. In this respect, the Commission is using the political opportunity and room of maneuver in the application of the principle of subsidiarity to expand EU control. Barroso calls for a full banking, economic, fiscal and political union in the ‘Blueprint for a deep and genuine economic and monetary union’. His vision of the EU includes European ministers, an increased EU budget and centralised banking supervision. In particular, the Blueprint calls for centralisation of democratic control by the European Parliament. The institutional ambitions of the Commission and its wish for further conferral of competences to the EU level are legitimised by underlining that “national economic policy-making paid insufficient attention to the European context within which the economies operate”. In other words, the message is that the Member States can’t govern their economies, so national competences have to be handed over so that the EU will do it for them.

The blueprint is not written in the spirit of subsidiarity, exploring how the national administrations of the Member States can be strengthened to meet EU requirements, but from a centralised perspective. In response to the eurocrisis, the economic governance powers of the Commission have already expanded substantially. In the traditional division of roles the European institutions would set the standards (3% and 60%), the national governments or regions would be responsible for the implementation and the Commission would monitor and control the Member States. The EU reaction to the crisis has set aside this model of governance, deviating from the principle of subsidiarity, by pleading for more powers and budgets.

The principle of subsidiarity is reduced to a mere check box in the legislative procedure and has fallen victim to the political aspirations of the Commission. National governments and especially national parliaments – as guardians of the principle of subsidiarity – must ensure a strong subsidiarity test as a mandatory part of each EU legislative process also when it comes to the responses to the eurocrisis.

Reckless Spending and Excessive Wage Growth: Myths Debunked

13. June 2013, von Alexandre Abreu, Comments (0)

If I were to pinpoint the two most harmful and most often repeated myths at the core of the orthodox account of the euro crisis, these would surely be, first, that the public debt crisis across the eurozone was solely or mostly caused by reckless government spending; and second, that the fundamental competitiveness problem of the economies of the eurozone periphery is a result of excessive real wage growth. Both of these propositions have been repeated so often that they have become a sort of common wisdom – and yet they are both false.

Let us begin with the first proposition. The problem with it, of course, is that it disregards the crucial facts that: a) budget deficits are an endogenous variable whose ‘receipts’ and ‘expenditures’ components are both adversely affected by recession, as indeed they have been in the last few years and especially so in 2008-2009; b) that in many eurozone countries, bank bailouts account for a substantial portion of the budget deficits of the last few years and c) that factors other than budget deficits contribute to public debt levels spiralling out of control – namely the compounding interest charged on that debt, particularly when far in excess of GDP growth (the so-called ‘snowball effect’). Take all of these into account and you get a very different picture from the alleged government largesse.

Of course, there is a lot to be said about the quality of public finance in many of these countries in the last few years or decades, including with respect to ruinous public-private partnerships, tax exemptions and other forms of government capture by vested interests. However, the idea that the simultaneous public debt crises of numerous eurozone countries was caused by governments in all of these countries suddenly and recklessly deciding to increase spending on a whim is, quite simply, not true. What really underlies the public debt crisis is the lethal combination of recession, deflation and the unbelievably Byzantine financial-sector mediation between the ECB and governments (a case-study in financial expropriation for many decades to come). And the corollary is that austerity only makes everything worse and will continue to do so; the only way to solve the (public and private) debt crisis is growth along with moderate inflation (and in some cases the inevitable write-downs).

The second fallacy is also a particularly persistent and pervasive one, and usually relies on showing how the nominal compensation of employees, or alternatively unit labour costs (ULCs), increased in excess of productivity in the eurozone periphery in the last couple of decades, thereby causing competitiveness to deteriorate. In turn, this argument very quickly leads to the conclusion that regaining competitiveness requires sharp wage cuts (internal devaluation). This, too, has been repeated to the point of exhaustion, perhaps most notably and recently by Mr. Draghi in a two-hour session with the eurozone’s 17 heads of state and government in March (see the power point here). Both the argument and the conclusion are plainly wrong, however.

As Felipe and Kumar show in one of the most important (and neglected) papers to have been written on the euro crisis , while ULCs lend themselves to an intuitive and correct interpretation at the firm level (say, the labour cost of producing a table or laptop), at the aggregate level of the economy they are constructed using the economy’s value added, rather than physical quantities, as the measure of output – and therefore the ‘intuitive’ interpretation is no longer appropriate. Rather, these authors show algebraically that, at the aggregate level, ULCs are nothing other than a simple product of two factors: the labour share in the functional distribution of income multiplied by the price deflator (rate of inflation). Allow me to rephrase this: an increase in aggregate ULCs can only be accounted for about by an increase in the labour share of income and/or by inflation. Indeed, we can construct an exactly analogous indicator, called Unit Capital Costs (UKCs), which increases to the extent that the capital share of income increases and/or that there is inflation. And what do we get when we do compute this indicator for the eurozone economies? Refer back to Felipe and Kumar (p. 16) and… lo and behold: with the sole exception of Greece, UKCs increased more than ULCs in every single euro zone country both between 1980 and 2007 and between 1995 and 2007.

The interpretation should by now be obvious: Greece was the only euro country where the functional distribution of income changed in labour’s favour in the last three decades; in all the other countries, the capital share of income increased at the expense of labour; and the extent to which the various economies had greater or lesser increases in both their ULCs and their UKCs was a consequence of differential inflation. So ULCs are really quite distinct from real wages; and following this aggregate approach to its logical policy consequences would entail measures to cut down profits, not wages, in order to regain competitiveness. The real culprits of the differential change in ULCs (or the nominal compensation of employees) across the euro zone is differential inflation and the real wage decrease in the European core – not real wage increases in the periphery.

Promoting competitiveness in the periphery through wage compression is therefore both cynical and wrong – in several different ways. First, workers are being forced to foot the bill twice over; second, the prime determinant of economic competitiveness is not sale price per se, but rather sale prices combined with the pattern of productive specialisation (and recessionary internal devaluations are not helping with the latter, either); and third, the Great Stagnation that the US and Europe as a whole have been living through is a consequence of insufficient demand in the context of a massive (though protracted) process of debt deflation, so compressing wages in the current context is a sure way to further compress demand and curb growth (see here for more detailed information on this).

On some occasions, this erroneous diagnosis takes on an especially aberrant and cynical twist: that’s when the argument is constructed around a comparison of nominal ULCs (or the nominal compensation of employees) with real (i.e. deflated) productivity. Seems obviously wrong even to a first-year undergraduate, wouldn’t you say? Well, that’s actually what many analysts and commentators have been doing for quite a while – and it’s also a key part of Mr Draghi’s story (check slides 9 and 10 in his power point presentation, link above).

So neither is the public debt crisis caused by reckless spending, nor is declining competitiveness a consequence of excessive wage increases. And yet, these ‘fairy tales’ are repeated again and again to make us believe them and are used as a pretext for deleterious and counterproductive policies. We’ve been here before (does the name Heinrich Brüning ring any bells?) – and it wasn’t pretty. Shouldn’t we be taking the lessons from history far more seriously?

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Will France Become like the Netherlands or the Netherlands like France?

28. May 2013, von Adriaan Schout, Comments (1)

To understand the euro project we need to go back to 1989 and the frustrations over exchange rate adaptations under the European Exchange Rate Mechanism (ERM). France was frustrated by the hard Deutsch Mark and, occasionally, lost billions on aligning the FF to the DM. Mitterrand used the German unification as a lever to get Kohl to accept the euro. This was regarded by the Dutch with grave worries for various reasons. In essence, the euro is a French project.

For one, the Dutch, together with the Germans, wanted at least to ensure that the euro would be a hard currency and demanded the Maastricht criteria, the SGP and an independent ECB. The demand for rules to reinforce economic institutions continues and resulted of late in an ‘independent Commissioner’ and semi-automatic sanctions. The euro may have a French pedigree but was supposed to become German/Dutch and, with that, ‘southern’ Europeans would/should become like the Germans/Dutch. One of the most recent steps in this effort was the line in the six pack that all countries should have an independent budgetary authority. The Dutch have such a prestigious economic analysis bureau but in France this function has been part of the Ministry of Finance. Strong economic governance goes together with strong, independent, rule-bound and transparent institutions.

The Netherlands is now in a recession and economic prospects seem to be gloomy for some time to come. To be able to reform, the Dutch need to rely on their proven social ‘polder-model’ and recently a social pact between employers and employees was agreed on and supported by the government. However, the government did not want the independent budgetary control office to examine the consequences of this social pact nor its implications for the 3% rule. Moreover, this control office recently had a shift in leadership and a top civil from the ministry of finance was appointed. The new director may be extremely competent but the image of independence is endangered. Moreover, Prime Minister Rutte spoke out to be optimistic about economic prospects. Yet, over-optimism has been one of the most annoying characteristic of politicians when it comes to reliable statements about the SGP criteria. Recently Hollande also presented a brighter economic future for France than Olli Rehn. In the debate for EP on 7 May, Dijsselbloem ̶ albeit it as chair of the Eurogroup ̶ emphasised that we should not examine the weakness of banks until the eurozone has the resolution mechanisms in place. Hence, the message seems to be, let us postpone the facts until we think we are ready. Is it wise to circumvent facts, to thwart the image of independence and not to analyse major reform proposals?

Rumsfeld once stated that there are known unknowns and unknown unknowns, but the eurozone has invented the ‘unknowns we’d rather not know’. The French had a political perspective on the fiscal policy whereas the Germans and Dutch stood for rationality. As it now seems, the euro is not changing Hollande into Kohl, but it might make the Netherlands more French.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Help the Bruised French out of the Corner!

23. May 2013, von Almut Möller, Comments (1)

There has been a lot of bad news last week: the Eurozone is further contracting, France is moving into recession and the EU has been dramatically losing support all across Europe according to figures published in a Pew poll.

Watching President Hollande’s Élysée address one year into his presidency one saw a cornered head of state fighting for his survival at home and against a growing mistrust in Europe towards the French willingness and ability to reform. Not surprisingly, President Hollande, in a desperate attempt to lift the spirits of his fellow Frenchmen, started off his speech with the French leadership in Mali. Not surprisingly, the French president then tried to gain ground vis-à-vis the dominant German neighbour by coming up with a ‘European initiative’: a real economic government, a strategy for investment, a European Energy Community and a eurozone budget. While there might be doubts about the depth and the impact of his proposals one has to acknowledge that the French president did come out of the corner.

In Berlin, however, one hears a lot of derisive commentary about France these days and there are indeed clearly different views about the future architecture of the eurozone. But I saw a man who believed in what he said, who warned that the recession caused by austerity was threatening the very identity of Europe. A President who insisted that his country had made its choice for Europe right from the start, who in the course of the crisis has been trying to “shake things up in Europe” and who is increasingly frustrated about the lack of response from Berlin. A frustration that is likely to expand also to his social democratic friends in the SPD, despite Hollande’s presence during the celebrations of the SPD’s 150th birthday this week. Hollande is watching his country being put into the camp of the ‘poor southerners’ and being publicly accused by the President of the European Commission of not understanding the opportunities of globalisation. What a humiliation for a proud nation to being graciously awarded an extra two years to cut down its deficit – in terms of communication I found this a disaster.
We have got to the point where a public blame game is going on that undermines and disempowers even the most potent leaders in Europe – how does this create the urgently needed trust among citizens that their politicians will eventually manage to find a way out of the crisis?

In all this – and it feels almost absurd living and working here – Berlin still feels like an island of peace. Recession? Didn’t the most recent numbers suggest that the German economy continued to grow, albeit mildly? And doesn’t the minor growth rate support the chancellor’s argument made continuously during the crisis that Germany cannot lift the rest of the eurozone on its own? A lack of citizens’ support? Doesn’t Germany score best in the Pew poll, with 60 per cent of Germans still in favour of the EU despite taxpayers’ money being used for the bailouts?

I wonder if Angela Merkel sometimes wakes up in the morning and asks herself whether she is Alice in Wonderland. Like Alice’s fantasy world, Merkel’s Berlin is full of absurdities these days. As the crisis is threatening to tear the union apart, Frau Merkel enjoys a never ending round dance around herself and an abundance of what I would like to call ‘conversations of comfort’. Not that it is her who actively triggers them – they just seem to happen. Just last month she conversed with the Polish Prime Minister Donald Tusk in the proud representation of Deutsche Bank in Berlin. Just having published a biography on Merkel’s foreign policy Stefan Kornelius, the foreign editor of Süddeutsche Zeitung, led the conversation: no drama, no real challenge, just pleasure and comfort and agreement, and the Polish Prime Minister doing the job for Merkel by raving about pretty much anything Merkel and German. The venue was packed on this occasion and politics, business and the media gathering all seemed to be a bit in love with the lady that holds court in the most non-courting way: she just sat there and enjoyed it as seemingly everybody else. A few days later, it felt like the whole of Europe was hanging on her every word when Frau Merkel conversed with the editors of a women’s magazine in a trendy Berlin theatre, chatting about cooking and what she likes in men.

When are the media starting to do their job properly? I really hope for German and French national televisions to gang up and convince Merkel and Hollande to battle it out openly in a TV duel. One of Merkel’s ways of dealing with potentially uncomfortable adversaries is by simply ignoring them – a strategy that seems to work and make her look even stronger. With a few exceptions, she hasn’t even given her social democratic challenger Peer Steinbrück the dignity of a direct address yet. The worst thing that can happen to Hollande in his attempt to contribute to the future architecture of the eurozone now is to be ignored by the German Chancellor. Berlin should know its responsibilities.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Dangerous Fantasies and Really Existing ‘Adjustment’

15. May 2013, von Alexandre Abreu, Comments (1)

It has been two years to the month since the original Memorandum of Understanding (MoU) was signed between the ECB-EC-IMF Troika and the Portuguese Government. Elections followed shortly after, bringing into power a new conservative coalition government, which proceeded to implement the structural adjustment programme with unbridled enthusiasm. In the words of Prime Minister Passos Coelho in June 2011, the newly-elected government was “keen to surpass the Troika”.

And, as a matter of fact, it has: successive cuts in government spending, affecting in particular the health, education and social security areas (albeit not the police budget, as befits the ‘austeritarian’ model); sharp increases in user fees, VAT and income taxes; radical changes in labour laws (including slashing unemployment benefits, longer working hours and raising the age of retirement – significant choices at a time of hyper-unemployment); the ongoing privatisation of the remainder of the state-owned sector and numerous other measures in accordance with the austerity/privatisation/deregulation model. In sum, the full neoliberal package in compressed form, of which the economic and social effects have long been well-known from the experience of the global South in the 1980s, though it has to be kept in mind that the first-wave of Structural Adjustment Programmes (SAPs), unlike the current ones, at least made allowance for currency devaluations.

The results speak for themselves. In Portugal, U-3 unemployment shot up from 12% to 17.5% in the last two years, while broad unemployment is currently around 27% and unemployment protection coverage has been significantly reduced. Consumption, investment and therefore GDP have all been freefalling: in the case of GDP, the total reduction since the MoU entered into effect has been around -5%. The current account deficit has been significantly narrowed (in fact, almost eliminated), but that was due to the effect upon imports of the sharp compression of domestic demand and the closure of tens of thousands of SMEs (the brief spike in exports in 2012 was caused by the temporary external depreciation of the euro and was quickly reversed in mid-2012). And most tellingly of all, public debt has kept increasing in both absolute and relative terms (from 108% of GDP in 2011 to 126% at present); for the most part because fiscal revenues kept falling as a consequence of the (largely self-induced) recession. Not yet as catastrophic as the Greek case, but well on its way there – and with a fully compliant government in power.

Now, this is not quite how it was supposed to turn out, was it? Wasn’t the whole idea to bring public debt under control and to unleash the economy’s growth potential by getting rid of excessive regulation, protection and government interference? Wasn’t the slashing of ‘unit labour costs’ (that persistent fallacy, to which I shall return in my next post) supposed to have boosted competitiveness and brought about sustained growth? Well, maybe so in the fantasy world of expansionary austerity and supply-side economics. But of course we all know that austerity is not expansionary and by now we should all know that this crisis (not just in Portugal, but more generally in Europe and across advanced economies as a whole) is being driven by demand, not supply. So why do the Troika and governments across Europe keep insisting on the same recipe? Why have all seven revisions of the Portuguese MoU involved the acknowledgement of a complete failure to attain the targets that were previously set, while carrying on prescribing the same measures yet predicting an imminent recovery? Is it stupidity or malice?

Well, I certainly don’t think that either these decision-makers or their technical staff are stupid people. So, as Sherlock Holmes would put it, that leaves malice as the only plausible explanation. And we have good grounds for pinpointing exactly what malice means here. Studies of the effects of the first-wave SAPs (see here and here, for example) have shown that neoliberal structural adjustment has consistently failed to bring about growth, vastly increased poverty, but, crucially, significantly increased the capital share of national income at the expense of labour. In the Portuguese case and in 2012 alone, the labour share of income dropped from 65% to 62% ̶ and all the gains were concentrated in larger corporations, not SMEs.

This is really about getting a larger piece of a smaller pie and that is why you get a coalition of international and domestic interests pushing forth this agenda. Large capital is bent on increasing its power – even if it destroys the entire European project. There’s not much time left to rein it in and avoid such an outcome.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Is there an Alternative for Europe in Germany?

15. March 2013, von Almut Möller, Comments (1)

In my last blog I made the point that despite Germany being a major player in the reform of the eurozone and despite federal elections taking place in the fall of 2013, Germans at the moment seem rather indifferent about the eurozone’s future direction.

I found this to be rather baffling, since the decisions taken by eurozone leaders these days are not mere technical or legal adjustments, but will determine the substance of policies in the currency union and have already done so.

But is it really true that Europe is absent in the minds of German citizens? Perhaps it is a question of weeks now.

The election campaigns haven’t got into full swing yet, as the political parties are still in the process of putting together and adopting their platforms. And it was only this week that a new party with a distinctly anti-euro profile has entered the stage (to which I will come back).

Over these past two weeks, both the leaders of the Green Party (BÜNDNIS 90/DIE GRÜNEN) and the Social Democrats (SPD) have presented their draft platforms to the public. The Greens will put the draft to their party congress in Berlin in late April. In June, every party member gets the chance to cast a vote on the top ten priorities for the Green campaign. As to the Social Democrats, their party congress will convene in mid-April in the southern German city of Augsburg to adopt the 2013 platform. Those seeking for “Europe controversy” in the country notorious for its “Europe consensus” are likely to eventually find some food for commentary at these gatherings.

Leafing through the 100-pages platform of the SPD and searching for “Europe”, there was a particular thing that struck me. EU matters have usually been framed as a grand thought and duty for Germany, more of a political ritual found in intros or conclusions, or in the obligatory chapter at the end in pamphlets of this kind (sometimes together with foreign policy). For voters that made the effort to read through those pamphlets, things must have quite naturally looked as something of a separate matter (“We will work for a better Germany for you, and then there is also the EU which we, good Germans as we are, want to build.”).

Today, European affairs have become much more a matter of policy substance – and with issues such as budget and banking supervision or the tax on financial transactions, quite naturally, intertwined with the domestic context. The new message, accelerated by the past years of crisis, is “We will work for a better Germany for you, and our playing field to achieve this is also Europe”. In other words, we can only preserve our freedom, prosperity and social justice in this world when taking much more responsibility for each other. My guess is that this is a line that still won’t go down naturally with traditional SPD voters.

Needless to say that for the Greens, advocating Europe in such a way is an easier argument to make. The party’s environmental agenda, one of its main pillars since entering the formal political arena in Germany thirty years ago, is by its very nature a field in which the borders of nation-states do not matter all that much.
It is too early to tell though whether the parties challenging Angela Merkel’s return to the chancellery manage to frame their agendas to really make a difference – and to portray European affairs no longer as a matter of statecraft at EU summits, but of political choices, of political drama and of majorities.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Europe – Absent?

25. February 2013, von Almut Möller, Comments (1)

This is my first entry in the Eurozone 2013 blog. Based in Berlin, in the following months I will comment on the steps taken by EU leaders to reform the Eurozone from the German capital, and will include my observations on the German euro debate.

As it happens, the German President, Joachim Gauck, has just given his long-awaited Europe speech in Berlin. Surely, the outside observer might think, his speech was only one of many interventions in a Europe debate in full-swing in Germany. After all, this is a key country when it comes to fixing economic and monetary union (EMU), with more major steps that will affect the direction and functioning of the eurozone and the overall EU likely to be taken this year. Surely, one might think, in a year of federal elections there will be competing political and economic visions on the future of Europe, and the opposition parties will want to mobilize their respective constituencies in the battle for the chancellery.

You will be surprised to hear that compared to what is at stake, and contrary to what we have seen in the French 2012 presidential as well as in the 2013 Italian election campaign: Germans so far are not fretting about Europe.

I see three main reasons for Europe being largely absent from the campaign so far:

1. Crisis, what crisis? The crisis is not making the headlines, at least for the moment. And with the German economy still doing well, a majority of Germans – unlike fellow EU citizens in other countries – simply do not feel the impact of the crisis.

2. The Merkel factor. Germans tend to trust Angela Merkel’s ability to do what is necessary to help the countries in crisis to recover (and there is a sense of solidarity by now), and to keep an eye on Germany’s interests when negotiating the future make-up of the euro governance with the other euro members.

3. The consensus country. Because of 1) and 2), all opposition parties struggle to challenge Angela Merkel’s conservative party. Adding to this is that Germans currently seem to like the idea of a ‘grand’ coalition of Conservatives and Social Democrats, so there is a tactical temptation for the Social Democrats not to bark too loudly.

Going back to the president’s speech; it is unlikely to trigger a euro debate. The president in the German system does not have political clout and by custom does not get involved in politics. In today’s speech, President Gauck did not cross this line. But the office is traditionally used to shape fundamental debates, and I believe this speech will be influencing the parameters of the Europe debate among the elites in the months to come.

Indeed, the president presented some fresh thinking. Gauck, a pastor and civil rights activist in the German Democratic Republic, put Europe’s citizens at the centre of his hour-long speech. Hardly did he touch on the crisis, on the role of governments, and on detailed suggestions on how to make the European Union work better.

He must have felt that in Germany and across Europe, citizens feel disempowered by the crisis, by nonstop rhetoric that makes them fearful, by complex and technical measures difficult to grasp, and by diplomats negotiating about their future behind closed doors.

Gauck’s language therefore was a language of empowerment. This was the vision of a democrat, a free citizen of Europe, wanting to encourage Europe’s citizens to live up to the task of being citizens in a European res publica, learning to shape their future together.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

The European Periphery: Between a Rock and a Hard Place

20. February 2013, von Alexandre Abreu, Comments (1)

The strategy of the Portuguese government in the context of the current crisis, which is essentially aligned with the prescriptions of the ECB-EC-IMF troika, revolves around two axes that, indeed, were also typical of the policy packages implemented in the global south from the 1980s onwards: stabilisation, which in this case refers to slashing public expenditure and curbing the current account deficit; and structural adjustment, which basically refers to labour market deregulation and the privatisation of those companies that still remain(ed) within the public realm.

In the context of this strategy, the resumption of a growth trajectory (even while adopting a permanently contradictory fiscal policy) is presented as hinging on the latter structural reforms. The alleged mechanism, which will be well-known to the readers of this blog, is to undertake an internal devaluation by forcing wages down, in order to mimic the external devaluation of a no-longer existing Portuguese currency. Wage compression across the board, promoted through various mechanisms (the downward pressure of unemployment upon wages, the nominal freezing of the minimum wage, labour market deregulation, etc.) is expected to translate into an increase in the price-competitiveness of Portuguese exports, and these in turn are expected to drive growth.

So what is wrong with this story? Basically, the problem is that it misrepresents the determinants and obstacles affecting the competitiveness of the Portuguese economy. In a paper published in Voxeu in 2011, Jesus Filipe and Utsav Kumar have shown, among other things, that the competitiveness problems of the European periphery, and of Portugal in particular, cannot be traced back to the evolution of their aggregate labour costs, but rather to the composition of their export baskets: Portugal’s exports, much like China’s and those of the remainder of the European periphery, are concentrated in the product groups characterised by relatively lesser complexity (in the sense put forth by Hidalgo and Hausmann), while Germany’s and France’s, for example, are concentrated in the more complex categories.

In this context, the developments of the past 15-20 years have left the European periphery between a rock and a hard place: on the one hand, direct competition in the least complex product range has increased dramatically in the wake of the EU’s Eastern enlargement, China’s accession to the WTO and the EU’s trade agreements with Morocco, without there being any possibility of adjusting through currency devaluation; on the other hand, the possibility of upgrading the complexity features of the export basket has been denied both by Germany’s (and other core countries’) own wage compression in the past 10-15 years and by the fact that the instruments that make it possible to actively promote such an upgrade are effectively denied by EU and WTO rules, unlike what was the case when the most advanced industrialised economies undertook that upgrade themselves. Kicking away the ladder, indeed.

So that’s why this strategy will not work: becoming competitive through wage compression in the same product categories as China and Morocco, for example, without recourse to currency devaluation or trade protection at the EU level, would require cutting down wages to an extent that could only bring about massive immiseration – and even that would probably not do the trick, given such issues as economies of scale or differences in environmental legislation. That the benign alternative – upgrading export complexity – is not feasible, either, under the current EU and Eurozone constraints shows the scale and complexity of the predicament in which the European periphery currently finds itself, well beyond the temporal horizon of any stabilisation package or financial assistance programme – and, of course, does not bode well for the future of the Euro.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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