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A Not-So-Surprising Accession

9. January 2014, von Alexandre Abreu, Comments (0)

On January 1st, 2014, the day on which the euro had its 15th birthday, Latvia became the 18th member of the eurozone. This accession was prepared over many years and Lithuania is scheduled to follow in 2015, but still this will have come as a surprise to many. Given the predicaments to which eurozone members, and especially the more peripheral and economically-fragile ones, have been subjected to in the last few years, one would imagine eurozone exits to be more likely than eurozone accessions. And yet here we have Latvia proving just the opposite. So what are we to make of all this?

Let us begin by rewinding the tape a few years. Latvia was hit by a severe financial crisis in 2008, as a consequence of the bursting of a credit bubble. In its core, the mechanism was not dissimilar from those which affected most crisis-ridden countries of the eurozone periphery: an inadequate exchange rate (in the case of the Latvian lats, due to its peg to the euro since 2005) giving rise to a mismatch between external economic competitiveness and financial-market inflows and a gradually inflating bubble leading to an inevitable bust triggered by the Global Financial Crisis.

Like the crisis-ridden countries of the eurozone periphery, Latvia requested, and was given, a bailout package (worth €7.5Bn) by the EC-ECB-IMF troika. Quite unlike the peripheral eurozone countries, however, Latvia did have a significant margin to choose between two alternative courses of action when it came to responding to the crisis: given that it had not actually adopted the euro, but merely pegged its currency to it, the choice between internal and external devaluation was a real one. Thus, the Latvian government of the time could perfectly well have abandoned the ERM II mechanism, devalued the lats, undertaken external stabilisation in a way which ensured that the cost of adjustment was borne by the whole of society, and subsequently pursued counter-cyclical fiscal policies. Instead, it chose internal devaluation: keeping the peg and having the overwhelming cost of adjustment be borne by workers through the reduction of ‘labour costs’. The class dimension of this choice is not difficult to see: between having everyone pay (through devaluation-induced inflation) and having workers and the popular classes pay (through wage cuts and austerity measures such as school and hospital closures), the Latvian government chose the latter. And it did so with more than a little cynicism, by attempting to suggest that this choice was made out of social considerations.

Now, we cannot say for sure what would have happened had Latvia made the alternative choice. What we do know, however, is what the selected course of action brought about: a 24% drop in GDP, including a drop by 17.7% in 2009 alone; an increase in unemployment from 8% to 18% in 2008-2009; and the emigration of about one-tenth of the labour force. What the ‘austeritarian’ camp hails as one of its greatest success stories (because of the subsequent recovery: 5.5% in 2011, 5.6% in 2012) is arguably anything but: six years into the crisis, Latvian output remains below the pre-crisis level, unemployment remains at 11% despite mass emigration, poverty and inequality have increased, social services have been slashed, and the demographic fallout of mass emigration will only be felt in earnest further down the road.

What is most interesting to note, then, is that the Latvian government was in a much better position to avoid the social pains of austerity than the countries of the eurozone periphery but nevertheless chose not to do so – and it chose not to do so because what seems like a dysfunctional choice from the point of view of society as a whole, is in fact a perfectly rational course of action from the point of view of particular vested interests. From the standpoint of the financial elite and of the politicians that represent it, joining the euro and abandoning the lats has little to do with the pursuit of noble continental ideals, and a lot to do with further reinforcing of class power. Little wonder then that not more than 22% of Latvians favour joining the euro. And so the tragedy continues.

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.”

Frau Merkel and the ‘C-Word’

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

Both the European Commission and the International Monetary Fund (IMF) have just published findings about the performance of the German economy and the state of structural reforms. While there is plenty of discussions in Berlin about what ‘the others’ (in particular France) are not getting right, there is not much of a debate on what ‘the others’ (Commission and IMF) suggest that Germany is or is not getting right. The new findings did not get much attention in the public debate.

Not surprisingly perhaps, as both reports continue what sounds like good news and point out that Germany’s public finances have been overall sound. The IMF underlines that Germany’s “safe haven status and strong balance sheets” has been an “anchor of stability” during the eurozone recovery. When it comes to the recommendations, however, the IMF experts do again not shy away from getting involved with the politics of the euro crisis, welcoming this year’s marginal loosening of the fiscal stance: “(…) fiscal over-performance should be firmly avoided as it could imply a contractionary fiscal stance that is unwarranted in the current low growth environment.”

The Commission is more cautious on the question that has been dominating the eurozone debate for the past months: is Germany that is leading on fiscal consolidation (which makes it look like the teacher’s pet, something Chancellor Merkel was so pleased about in her home country) the real burden to the eurozone? It is hardly surprising that the Commission avoids this hot issue, since the report is a mere recommendation to the Council of Ministers. And, arguably, the Commission diligently follows a rather narrow mandate in assessing German fiscal policy and its 2013 national reform programme. However, against the background of a fierce debate (mostly resonating outside of Germany) on how to trigger jobs and growth in the eurozone the European Commission’s proposals look rather innocent. Frau Merkel, of course, will have been pleased not only with the findings, but also with the fact that the Commission basically restricted itself to inserting the data they collected in the Member States into tables without spending too much time on interpreting them.

The IMF underlines Germany’s crucial role in shaping the future institutional and legal framework of the eurozone. This reads like a hardly veiled criticism on Chancellor Merkel’s so far rather woolly ideas. Just last week, her joint proposal with President Hollande on establishing the function of a permanent president for the eurozone raised eyebrows even within her coalition in Berlin. While I believe it was right to respond to the French initiative launched by President Hollande, as I suggested in my previous blog piece, Merkel should not underestimate the attention she gets for such moves. She might have considered it as a friendly yet half-hearted response to the bruised neighbour, likely to end up watered down or even abandoned the moment its gets on the agenda of the 27 members. But Merkel should know that any move that might shed light on where Germany wants to take the eurozone is taken rather seriously these days and tactical moves are likely to be met with indignation.

Another more telling intervention of Angela Merkel received attention this week. In an interview with DER SPIEGEL the chancellor reiterated what has become in my opinion the word around which she develops her construction plan for Europe: coordination. In her world, the Commission president has a “coordinating function over the policies of the national governments” and therefore should continue to be nominated by the heads of state and government (with a certain role for the European Parliament to play). No more transfer of competencies to the Commission, but improved coordination in policy areas that can strengthen the competitiveness of the eurozone. Read again her Bruges speech of 2010 – it is pretty much in there already.

Needless to say that Merkel’s “c-word” has been a declaration of war to those who carry the “f-word” banner (in the continental, not the British understanding of federalism) advocating for strong and independent EU institutions. A widely overlooked decision: the heads of state used a clause in the Lisbon Treaty and agreed to keep one Commissioner for each Member State at the recent May summit. While this was only a formal adoption of a decision previously being granted to Ireland, Chancellor Merkel was surely pleased. After all, the European party families are gearing up their campaigns for the European Parliament elections in 2014 with joint candidates for the post of the Commission president. What a nightmare for the ‘c-lady’ to imagine a democratically legitimised president of the European Commission representing the majority in the EP, presiding over a reduced college of Commissioners. What would the reports of such a more independent figure have looked like?

After the questionable results of the “open methods of coordination” in the Lisbon Strategy of 2000 – will coordination as a mode of governance get its second wind? Frau Merkel is taking the lead in its revival.

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.”

Euro crisis: a View from Lisbon

20. February 2013, von Alexandre Abreu, Comments (0)

In my first contribution to this blog, I would like to start with outlining what I’ll set out to do in the coming months. The readers of this blog will be quite familiar with the ‘orthodox’ account of the current crisis in the eurozone: profligate public spending by governments in the European periphery, which need to be brought under discipline from the outside, coupled with anaemic growth/recession largely caused by excessively high wages and excessive labour market regulation, calling for ‘structural reform’. Moreover, readers will also be well acquainted with some of the systemic aspects which have long been emphasised by the more politically-progressive accounts: the inability on the part of peripheral economies to adjust to asymmetric shocks after having forfeited most of their economic policy instruments; their dramatic loss of competitiveness due to an overvalued Euro and an overvalued implicit internal exchange rate; the ECB’s late, indirect and highly conditional assumption of its role as lender of last resort; not to mention the deleterious effects of austerity upon growth, employment, social cohesion… and even the budget deficit and the sustainability of public debt themselves.

I will not be rephrasing these arguments in detail. Rather, in addition to commenting on new developments as they occur, what I’ll try to do is to render all of the above a bit more vivid to you by showing how these rival accounts apply to the Portuguese case; how general factors and forces at the European level articulate with class interests in Portugal; what the effects of the prescribed medicine have been in this country; and what the balance of forces and the state of the public debate are at any given moment.

As an appetiser of sorts, here are some of the issues that I’ll be expanding on in my next few blog posts:

  • Seen from the left, burgeoning public debt is largely a consequence of the crisis, not a cause (Portuguese public debt stood at 72% of GDP in 2008, compared to over 120% at present). However, there have been, and continue to be, serious issues concerning the quality of public spending (including public-private partnerships that commit the Portuguese Government to ensuring internal rates of return in excess of 10% to major conglomerates for decades to come).
  • Seen from the left, rising labour costs in Portugal have not been the cause of deteriorating competitiveness (indeed, unit capital costs have increased more than unit labour costs over the last two decades). Rather, the overvalued (implicit and explicit) exchange rate, alongside the inability to upgrade the pattern of productive specialization (itself explained by structural factors), are what is to blame.
  • Seen from the left, the medicine that has been prescribed in tandem by the ECB-EC-IMF “troika” and the right-wing Portuguese government places all the burden of an “adjustment” which will not work upon those who are most vulnerable and least responsible: workers and popular classes. This involves dismantling a Welfare State that is barely 40 years old, having been a product of the 1974 democratic revolution – a settling of scores long sought by the most conservative sectors of Portuguese society.
  • Seen from the left, the way in which the crisis has been addressed so far by both the Portuguese and European authorities is not at all about bringing public debt under control or boosting competitiveness. Rather, it is about seizing a unique opportunity to re-engineer society in neoliberal fashion, by dismantling the Welfare State and sharply compressing direct and indirect wages.

These are critical, dangerous, but also very interesting times. I hope you’ll find my left-leaning views from Lisbon to be interesting and informative, too.

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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