• Establishing a New Framework for Coordinated International Economic Competition

  • Lutz Brangsch | 09 Nov 10 | Posted under: Theory
  • The insecurity concerning the further course of the economic cycle is omnipresent in politics and economy. Even if at surface level there is peace and quiet, the decisive question remains unanswered whether considering the economic recovery we can indeed speak of overcoming the crisis. With the extensive state interventions of the past two years the framework requirements for further economic and social development were fundamentally modified. Yet, this intervention has first and foremost focused on the financial side of the crisis. The consequences of a classical crisis were thus absorbed to a great extent. The problems of over-accumulation lying at the root of the crisis were not touched. The improvement of the situation was used to again push back further-reaching concepts of regulation especially with regard to the financial sector.

    In this article I will examine the similarities and the differences among the EU-states in their reactions as regards budget policy. Furthermore, I am posing the question of how these approaches, including the respective measures taken by the EU, interact and to what extent a new quality of state intervention within capitalist economy can be discerned, that is, to what extent is it possible to speak of a new quality of interaction between politics and economy.

    This is by no means an academic question. Rather, it involves determining the consequences for left political action after a thorough analysis of the movements of and within the dominant bloc. This is important also because the weakness of left movements was a factor determining the character of the economic crisis that erupted in 2007. The combination of economic, financial, food and climate crises was considerably determined by the political power relations encountered in reality.

    The framework of crisis reactions

    By now it is generally acknowledged that the economic crisis since 2007 was triggered by the deregulation of the financial markets, which set in during the 1980s and 90s. Redistributive and privatisation processes were connected to this deregulation, in that they provided fodder to the financial markets. The privatisation of social security systems, of old-age security in particular, also caused millions of wage-earners to become dependent on the development of the financial markets. Changes in financing enterprises in all branches of the economy led to a change of the power constellation within capital itself, to a shift of interests as well as to a change in the standards of entrepreneurial action. With “innovative financial-market products” the dynamics of redistribution processes within the entire society and throughout the whole world were enormously accelerated. The resulting capacity of financial capital to dispose, in fact, of all the resources of the world, the centralisation of power in financial corporations and the integration of the interests of other capital factions into the resulting economic circuits – all this provided space for the over-accumulation of capital in the different branches. The financial crisis which consolidated in 2007 brought all that to the surface.

    The EU played an active and supporting role in these processes. In doing so, it did not act independently of or even against the will of the member states. Of course, there were contradictions between the interests of individual countries. All in all, however, the political approaches of the member states and the EU supplemented each other. The orientation established by EU policy was also what the member states wanted. In case of doubt, referring to EU-law, initiated as it was by the member states, provided an argument for continuing along the neoliberally dominated course.

    But with its policy, the EU also set a frame which was to guarantee political stability. This became particularly obvious in social policies and in subsidies for the development of structures. In this process, mechanisms for consultation were created beyond the national level, as for example the method of open coordination. Furthermore, the promotion of citizens’ community engagement in the member states or the orientation towards the norms of good governance have to be counted among the consequences of this process. Most of all, the budget restrictions based on the Maastricht Criteria, the orientation towards the privatisation of social-security systems, the commercialisation of the market of public services and the preservation of the freedom of competition represent constitutive determinants of reactions to the crisis in the individual member states.

    Finally, the procedures and institutions have to be mentioned, which since the 1990s have been responsible for the surveillance and regulation of budget policy.

    With the decisions and debates in the course of the year 2010, and more specifically with the strategy of “Europe 2020”, the orientation towards a uniformisation of budget policies has been strengthened. Due to this, the patterns of shaping the economic and social order in the different member states will increasingly converge into a single one. In the period preceding the crisis, comprehensive preparations were made toward that aim. This concerns both the development of institutions and the changes of political culture. Budget policy and its concrete realisation are in this process pushed ever more to the centre of political conflict. This is not only about mere redistribution but also and increasingly about the question of how redistribution processes and budget policy are organised.

    This thesis will be supported by a comparison of the reactions of the different countries to the budget crises. The comparison is based on sources in German and on official EU publications. In this respect, this article is to be understood as encouraging a continuation of this empirical-comparative aspect of the analysis of EU policy on a broader basis.

    A short description

    In the context of the implementation of the norms of the Stability and Growth Pact, regulations in favour of the limitation of public expenses were created in most member states already in the years before the outbreak of the crisis. This happened partly by means of laws, partly on the basis of political decisions (such as coalition agreements). Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovakia, Slovenia and Spain have made respective arrangements, some of them having done so even before the turn of the millennium. A part of the political approaches which are now in effect were developed prior to the crisis in mutual interaction with the Maastricht Criteria. With the outbreak of the global economic crisis and the path chosen to fight its consequences this approach could not be maintained. Even those countries which until then had not experienced any sort of legally or politically determined limitation on their expenditures are now being brought into line with all the other countries by means of the Excessive Deficit Procedure (EDP) – beyond existing national regulations. In September 2010, regulations were established for sharpening sanction mechanisms.1 That means that beyond the causes of the states’ indebtedness resulting from the crisis, fundamental decisions about redistribution are being legitimised and enforced.

    This approach is substantiated by an understanding of the sustainability of public finances which moves exclusively within the framework of the financial side of budget policy:

    “The concept of the sustainability of public finances relates to the ability of a government to assume the financial burden of its debt currently and going forward. There is no clear-cut definition of a sustainable fiscal position, though the concept is rather intuitive. At a first instance it involves a debt level that does not entail – either now or in the foreseeable future – interest payments so large that they cannot be paid.”2

    The criterion referred to here of the sustainability of public financial policy is one inherent in the budget itself. The significance of budget policy as an instrument of securing a certain social or political balance is in fact not considered. This also does not change if the Stability and Growth Pact and the further strategic statements on behalf of the EU (most of all, Europe 20203) are taken into account. The strict growth orientation is an expression of a strict orientation toward public intervention in the interest of developing companies in the context of EU internal and international competition. The attempt at further subordinating budget, social and economic policies to the primacy of budget policy means a new step towards the subordination of society to the new oligarchy of top executives, state creditors, top management and big capital. Last but not least, this policy is also underpinned by the ECB, which has itself moved into the position of big creditor by buying public bonds from EU member states.

    When it comes to putting into practice all these approaches in the end shared by all the EU member states, quite remarkable differences reveal themselves. These becomes obvious in the current decisions for overcoming the crisis, but already in the stability and convergence programmes of the individual countries adopted in the beginning of the year 2010.4 The consequences of the budgetary decisions in the different spheres of policy are tackled in different ways.

    Nevertheless it can be said that in general hardly any innovative approaches are coming out of the decisions. The stability programmes have not led to astimalation of the structural politicy elements in the policies of either the individual countries or the EU. In this context we note, in the period between 2007 and 2010, a change in what could be important details.5

    At the core of all efforts at consolidation we instead find social policy. It is not astonishing that this path towards budget consolidation is followed with particular consistency by Germany. The other decisive moment is the area of public services. On the public revenue side, in so far as this is meant to be an important contribution to budget consolidation, we find an increase of indirect taxes. This has to be understood as a strategic orientation on the level of the EU: “Personal and in particular corporate income taxes, through their negative allocation effects, are the most detrimental in this respect. On the other hand, there is wide consensus that property and consumption taxes (including environmentally related taxes) are the least detrimental to growth. Against this background, there has been a general tendency over the last few years to shift taxation from labour and capital towards the taxation of consumption.”6

    Let us first focus on the field of social policy

    Regardless of the still incomplete decision-making processes the core areas are clearly discernable. Cutbacks in the area of public-retirement provisions and in the area of benefits for families and children have gotten absolute priority. By contrast, in the majority of countries the instruments of labour-market policy are handled with care. Indeed, this focus is compatible with the EU-strategy throughout. The indirect effect of budget policy on the social-security systems can be illustrated by the interrelatedness between budgetary action and the utterances found in the “Green Paper Towards an Adequate, Sustainable and Safe European Pension System”. While the Green Paper demands a balanced development of the different elements of a future pension system7, the exclusive orientation of budget control towards the expenditure side means pressure to reduce the role of pensions generated by social-security or state systems. In the same document, a guaranteeing of pension levels (also of private pensions) is demanded, which means an additional burden for public budgets and thus eventually a subsidising of insurance companies. Finally, the stricter regulation of the financial markets, which according to the Green Paper is necessary, is turning out not to be enforceable.

    The apparently low cost of labour-market policy (unless financial benefits for unemployed are concerned) can be explained by the same strategic goal – the creation of “employability”, providing labour that is disposable and as cheap as possible. In particular the pressure exerted on the sensitive areas of old-age pension security and family aid kindles competition on the labour market and thus improves the position of employers. After a deregulation of labour relations in recent years this aspect is not playing a dominant role in the concepts of consolidation – loosening protection against dismissals and measures to “increase flexibility” in the labour market are partly present in the consolidation concepts but can always be found in the arsenal of political demands.

    A second important source of budget consolidation is the area of public services

    In some countries even ministers’ incomes are affected by the measures, but this is mainly for propagandistic purposes. What is more important is the following:

    These concepts continue a trend similar to that seen in the 1980s. Since that time there has been an attempt to make these areas embrace the norms of entrepreneurial and private-economic thinking through reforms of public services and privatisations of public benefits. The loss of a sense of the public realm and loss of public space is being accelerated in the present crisis. With this, the focus of state action, and the activity of public services, shifts increasingly to a repressive focus. If in the strategies to overcome the crisis cutbacks in the sensitive areas of social policy are tied to the tendency to complete the erosion of the public services, the character of state action is necessarily undergoing change.

    Except for those immediate cuts in the public services the consolidation measures provide for cutbacks in development aid (for example, Denmark), in education (e.g. Bulgaria, Denmark, Great Britain) and in public investments (e.g., Great Britain, Luxembourg, Portugal). In some countries such as in Germany and in Portugal the military budgets also are to be included in the consolidation processes. In Germany, in particular, this is to become the starting point for reorganising the approach to war and the capacity of conducting wars. The reduction of armed forces is primarily a restructuring measure connected, it is true, to the always contested, yet at the same time all too obvious, demand for defending economic interests throughout the world.

    On the revenue side of the budget two trends are discernible. First, as already mentioned above, the increase of consumption taxes (that is, taxes that have to be paid by the masses of the people) is an important component of consolidation politics.

    Second, the drama inherent in this situation is seen in the fact that in some countries even high incomes, assets, luxury goods, etc. are to be more highly taxed or just taxed at all.

    The general trend, however, is taxation of the mass of the population. Even if not said explicitly, Latvia seems to represent the ideal when it comes to the distribution of revenues – high value-added tax (21%) and a corporate income tax amounting to 15%. The only concession made to the crisis is a change of the basis of assessment.8 In contrast to this and as a consequence of the crisis, the value-added tax was increased from 18 to the above-mentioned 21%.


    It is interesting how the focus of interventions proposed by the EU and the consolidation policies in the individual member states complement each other. Beyond all antagonisms with regard to interests, a sufficiently flexible frame for enforcing an austere competitive-position policy seems to have been found with the formation of the EU strategy. The decisive competition component is the ability to carry out the dismantling of the public realm in an “intelligent” way – that is, to avoid social disruption. Social politics is the crucial manoeuvrable factor of budget consolidation. This permits the reverse conclusion that the extent to which the EU strategy can be put into practice is increasingly dependent on the ability on the part of the left movements to counteract them. After all, Germany’s aggressive trade policy and the competitive advantage of German companies are reinforced by the new complex and differentiated regulation of labour relations and of the social. If Angela Merkel demands a Global Social Market Economy she is very close to that goal today – at least as far as the EU is concerned.9 Of course, that is not the social market economy most people imagine – for example, with stable social security. It is the social market economy Ludwig Erhard once demanded – a market economy with weak trade unions and patriarchal entrepreneurship.

    Against this background we cannot expect, for example, an EU “government of economic interests”. This regulatory path means “adaptation of the lowest possible standards”. Certainly, the regulation of trade policy in the EU is a useful instrument to re-shape the relations of competition among the member states. Yet, if we take into account the interplay mentioned here of the components of budget and social politics, public services and tax policy, this alone will not lead to a shift of political weight. We can increasingly see that budget policy itself must become the subject of social conflicts. By now, budget policy has replaced the former social partnership between companies and trade unions as a method of meeting strategic decisions on social policy. While in budget policies top management and entrepreneurship are conceded space due to their role of articulate state creditors, the greater part of the population cannot claim such a role for itself. As a consequence of the privatisation of social security the people are indeed state creditors to a much greater extent today than before, yet they do not have a voice as such. Therefore, the ways in which political struggles are fought will become ever more important. From this point of view, realising the procedures of direct democracy becomes a decisive instrument for defending the interests of the majority of the people.



    1. Proposal for a COUNCIL REGULATION (EU) No .../... amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure. Brussels, 29 Sept 2010 COM(2010) 522 final 2010/0276 (CNS), p. 5
    2. European Commission, Directorate-General for Economic and Financial Affairs: European Economy - 9/2009 — Sustainability Report — 2009, Luxembourg: Office for Official Publications of the European Communities, 2009, p.10
    3. COMMUNICATION FROM THE COMMISSION - EUROPE 2020 A strategy for smart, sustainable and inclusive growth Brussels, 3 Mar 2010, COM(2010) 2020
    4. See http://ec.europa.eu/economy_finance/sgp/convergence/programmes/2009-10_en.htm
    5. See Communication from the Commission to the spring European Council: Integrated Guidelines For Growth And Jobs (2008-2010), COM(2007)803 final, Brussels, 11 Dec 2007, p.11 
    6. European Commission: Monitoring tax revenues and tax reforms in EU Member States 2010. Tax policy after the crisis. EUROPEAN ECONOMY 6/2010 p. 28
    7. European Commission: COM(2010)365 final Brussels, 7 July 2010, Green Paper towards adequate, sustainable and safe European pension system SEC(2010)830, p.7
    8. Convergence Programme of the Republic of Latvia 2009-2012, January 2010, p. 34, http://ec.europa.eu/economy_finance/sgp/pdf/20_scps/2009-10/01_programme/lv_2010-01-29_cp_en.pdf
    9. „Wir brauchen einen Weltwirtschaftsrat“. Interview for the Stuttgarter Zeitung, Dec 1, 2008, see: http://www.bundeskanzlerin.de/nn_700276/Content/DE/Archiv16/Interview/2008/12/2008-12-01-merkel-stuttgarter-zeitung.html 

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