• 150 Years After ‘Capital’ – The EU’s Economic Reforms

  • Ilona Švihlíková | 28 Feb 18
  • Economic reforms for the EU are – once again – in the limelight. Although the prevalent view is that the current situation of the euro area is not sustainable (and certainly cannot be called socially progressive), the most charitable thing one can say of the proposed reforms is that they only improve the neoliberal capitalist core of the European Union and its Monetary Union (EMU).

    Understanding these economic reforms of the EU, focused as they are on the EMU, requires an understanding of the current stage of capitalism. The EU and especially the common currency framework do not exist in isolation from the development of the socio-economic system, and the current stage of capitalism is reflected in the current form of the EMU.

    In what follows I will first look at the main issues involving the EMU’s functioning, with a focus on its most problematic aspects. Then I will look at the overarching capitalist framework, focusing on major systemic forces that influence the system as a whole. And, finally, I offer suggestions as to how the EU’s economic problems might be dealt with and how disruptive forces might be deployed against the system. My position is a radical left one, which means that ‘moderate’ or social democratic views are seen as insufficient and as in the end giving in to capitalist forces.

    The EMU – problematic issues

    There are several problematic issues connected with the current form of the economic and monetary union. First, there is the very ‘DNA’ of the euro as the institutional and systemic completion of the common market.

    Second, there are issues around the reaction to the debt crises in peripheral European countries. Specifically, these reactions further solidified the neoliberal, anti-progressive framework of the EMU.

    We can summarise the failures as follows, the first aspect of which was present at the birth of the common currency:

    • The common market, of which the euro was to be the crowning touch, is based on liberalisation of capital and trade in goods and services. The mobility of labour was more of a complement. Most importantly, through the common market the EU (the EC at the time) accepted the logic of competitiveness and of competition among the Member States. The established framework inevitably led to downward social pressure, which was later reinforced by the transformation of the post-communist countries, serving as they have as cheap-labour hubs. This competitive framework was not accompanied by corresponding social protections, which led to the rise of the new right.
    • The convergence criteria are erroneous from the macroeconomic perspective. They focus on economic ‘outputs’ and do not take into consideration different economic structures and value-added integration into the international division of labour, etc. Their outlook is very limited, again strongly influenced by neoliberal thinking – thus the criterion of a deficit ceiling.
    • The institutional weakness reflects the fact that the EMU is an imperfect currency area. A fiscal institution is largely missing, as the common EU budget is too small to allow for the exercising of the necessary functions, originally called for even by mainstream economists. To fulfill the allocation and stabilisation function the budget would have to approach 20% of the euro area’s GDP; it is currently only 1% of GDP. The European Central Bank’s (ECB) mandate is very limited, focusing only on inflation (unlike the US’ Federal Reserve System (FED), for example). Social issues (wages and social standards) are not taken into account.
    • The current EMU is not an optimum currency area. Looking at three major theories on the topic, we come to the following conclusions. From Mundell’s point of view1 the crucial aspect is the mobility of labour and capital. As the mobility of capital is usually not a problem the issue becomes labour mobility. Unlike in the US, labour mobility in the EU is comparatively limited due to linguistic and cultural differences. Kenen’s view focuses on the economic structure, which proved to be one of the key factors in the debt crises.2 Kenen’s conclusion for a functioning monetary union is that the countries should have diversified economies, however similar in structure. But this condition has not been met. McKinnon’s theory concentrates on the openness of the economy.3 It holds that monetary union should function well among countries that are open to trade and trade among each other. In this case, the euro area would be a candidate for an optimum currency area. But as the economic reality has shown, the EMU is not an optimum currency area and its deficiencies have negatively influenced not only the socio-economic performance of the euro area but the idea of European integration as such.

    To sum up the first point, the framework and institutions of the EMU did not take into account the possibility of asymmetric shocks, relying only on the very unsatisfactory convergence criteria. No mechanism, no institution of fiscal transfer union were put into place to compensate for this serious flaw. Thus it was only a question of time before problems would occur. They were connected to the systemic crisis of the Great Recession.

    The reaction to the debt crises reinforced the EMU’s neoliberal character. Reform – even in the mildest reformist sense – is now even more difficult to achieve than it was before the crisis, as the neoliberal approaches have been solidly anchored in various treaties. In brief, the effects of the debt crisis are as follows:

    • Germany has achieved absolute dominance not only in the eurozone, but in the whole EU. The power asymmetry has had profound impact on economic policy. Paradoxically, instead of a ‘European Germany’, which was one of the basic ideas of the European integration process, we now have a German Europe.
    • Austerity policy is of German origin. As Paul Krugman put it, when it comes to macroeconomics, Germany lives in a different intellectual universe,4 which would not be a problem if Germany had not been able to impose austerity policy on countries stricken by debt crises. At any rate, my aim is not to provide an in-depth analysis of the real roots of the debt crises in which current-account imbalances play a crucial role. The German surplus was recycled to peripheral countries (for example through debt financing). The ‘rescue’ of these countries was more or less the rescue of German banks. Austerity policy was not only implemented but also anchored in treaties like the Fiscal Compact. Therefore its functioning is not limited to crisis situations: on the contrary, it creates crisis situations as it forms part of ‘the only correct policy’. It consists of cuts in expenditures on public services, social benefits, etc., and of tax hikes, for example, the VAT, which is a regressive tax with greater impact on the poor. The Fiscal Compact seriously limits a government’s fiscal room for manoeuvre and therefore aggravates crisis situations, forcing countries to ‘grow out of the crisis’ through export surpluses (export-led growth), thus following the German economic model as the only viable option.
    • Austerity policy has had very negative impact on the whole euro area, not only on countries hit by the crisis. The social impact is disastrous in terms of wages, unemployment, youth unemployment in particular, precarisation of work, and the phenomena of hysteresis, which leads to a permanent loss in potential output.
    • The common currency was supposed to result in convergence among EMU members. However, because of its architecture and the reactions to the crisis, the opposite occurred. In fact, the euro is a tool for divergence, exacerbating differences in the economic structures of Member States.
    • The divergence is creating three ‘zones’: the core, made up of Germany and the satellites with a common economic structure (Netherlands, Austria), the southern periphery (Spain, part of Italy, Greece, etc.), and the eastern periphery.

    We are witnessing deepening divisions between these ‘zones’, which are also reflected on the political level – in the loss of legitimacy of governments forced to pursue the only ‘correct’ – German – policy and the increase in nationalism and chauvinism, which are in fact defensive strategies and reactions to the straitjacket created by Germany. It is hard to imagine a positive future for the euro area and by extension the EU. What is therefore at stake in reform is the further viability of the EU.

    Capitalism is not what it used to be5

    Much has been written about the neoliberal turn in the 1980s connected with globalisation. Some key issues with the EU and the EMU’s architecture have been mentioned above – the limited room for fiscal policy, the lack of attention given to social rights, etc. In terms of the EU as a whole, the transformation of the post-communist countries is also an important factor. The EU was not the main actor in the economic transformation; in fact, it played a rather limited role. The transformation process was more or less governed by the Washington Consensus. One possible explanation is that the EU itself was in the course of completing its neoliberal turn. Despite expectations, no sort of ‘Marshall Plan’ ever emerged, probably because the threat of the alternative system had vanished.

    The post-communist countries thus passed through the transformation process in a neoliberal direction. They re-integrated into the world and the European economy on the basis of cheap currency, cheap labour, and vicinity to Western markets. After more than two decades we see the consequences: the creation of the second periphery in the EU, countries with cheap labour and trade unions with limited power. From some countries, for instance Poland, many emigrated abroad in search of better wages, which however then put pressure on wages in the Western countries. Chauvinism, with the image of the ‘Polish plumber’ ready to take away your job, is more alive than ever. This is one of the consequences of the neoliberal transformation that backfired on the core countries of the EU.

    Capitalism, like every socio-economic system, is going through different stages of development. Globalisation (the neoliberal phase of capitalism) is the latest of them. However, after the Great Recession we are still seeing a chaotic situation, both on the level of practical economy, and (happily) also on the academic level in terms of economics. What are the main features of the current stage of capitalism?

    • Financialisation, which in itself does not create any new value but, on the other hand, ‘draws’ resources away from the real economy. We can roughly define it as an increase in the importance of the financial sector for GDP and the increased use of financial instruments.
    • The importance of debt as an economic stimulant is decreasing. Just as obviously, the debt is not repayable (and was never intended to be repaid, unless used as a political weapon against countries like Greece).
    • Rent-seeking is perhaps the most important feature of the current stage of capitalism. Strong rent-seeking suggests not only the situation of ‘state capture’ but, from the socio-economic point of view, also the less important role played by profit.

    It is now 150 years since the appearance of Marx’s Capital, which was the breakthrough text that shed light on the mechanism of capital at the core of the system. The problem for today’s capitalism – whose internal and external forces created the above-mentioned features – is its loss of legitimacy. Instead of expanding private capital valorisation, which could be perceived as legitimate (although not necessarily socially fair), we are witnessing a system that is losing its legitimacy. However, even if illegitimate a system can function – at least for a while.

    There are nevertheless obvious signs that the system cannot reproduce itself. High inequality and reduced social mobility are the most explicit of these. Capitalism’s self-destructive forces were partly cushioned in the 1950s and 60s because of the ‘pact’ between capital and labour, which was, among other factors, enabled by the spread of labour-creating technologies.

    High inequality has made many conscious of the control exerted by the 1%. This and the rent-seeking that is substituting for entrepreneurial activities connected with profit are signs that instead of symbiosis in the social economy we are in a situation of parasitic dominance. Capitalism is losing its legitimacy for two principal reasons: its non-functioning (with rent replacing profit as the main surplus) and – a more positive development – the alternative features (for example, the sharing economy) that are disruptive of the system.

    These are alternative elements in the system that have bases other than capitalism. Although they exist within the capitalist system here we could reasonably expect to see the well-known historical process of quantity turning into quality. There are many signs pointing to the importance of the public sphere for full-capacity usage, with subsidies and contributions for the development of social enterprise as examples.

    We see the principle of sharing, for example of knowledge and skills, made possible by modern technology, together with autonomous activities (LeT systems, cooperatives, participatory companies). Although these are minority phenomena there is a high probability of their spreading.

    As we have said, the EU is part of the capitalist system and reflects its problems and contradictions. Solutions therefore have to take this, and the competing dynamics, into account: on the one hand, the parasitic features represented by rent-seeking and, on the other, the expansion of the sharing principle in various forms.

    Economic reforms of the EU

    On the left, we basically see, on the one hand, reformist approaches that essentially envisage the system as remaining capitalist but with some alterations, regulations, redistribution, etc. and, on the other, the radical approach, which hopes EU reform can be used for a gradual change of the system as such. The two approaches do not necessarily contradict each other and may be complementary.

    The reformist, or social democratic approach, assumes the ongoing existence of the capitalist system but sees it as needing ‘correction’ – for its own sake.

    The reformist approach may include the following:

    • Reinforcing the EU’s social pillar. This could mean strengthening collective bargaining, establishing a common minimum wage mechanism, by enhanced job creation through the public sector, etc.
    • To make this policy work, austerity policy, which is its antithesis, must be abandoned – not just temporarily for the sake of cyclic development but permanently removed from all EU documents – Fiscal Compact, Growth and Stability Pact, etc. States must regain their space for manoeuvre in carrying out fiscal policy.
    • The fiscal room for manoeuvre cannot remain purely fictional. This means first of all an end to the ‘race to the bottom’ among the Member States. Tax competition must come to an end. We cannot expect the EU to combat tax havens (like the Virgin Islands or the Cayman Islands) while having Member States that are practically tax havens themselves: Ireland, Luxembourg (which the current EC president, Jean-Claude Juncker, worked to keep that way), Cyprus, Netherlands, etc. Corporate taxation needs to be harmonised within certain parameters. Of course, countries that base their competitive advantage on low taxation (mostly post-communist countries) may be given special transitional treatment. There needs to be common measures against tax evasion (not only in corporate taxation through tax competition plus transfer pricing but also major evasion in VAT through so-called carousel fraud).
    • Implementation of the Financial Transaction Tax (FTT), which has been discussed in the EU, though with no result, would be a further progressive step. The special tax would help to decrease the advantage capital has over labour and also create additional financial resources that could be used for public job creation, infrastructure projects, environmental projects, etc.
    • A stronger common EU budget would be a logical consequence of the previous measures. As said above, it can have a stabilising role, for example for countries that would be hit by an asymmetrical shock. Not only the fiscal space given to the shock-stricken countries but also the common EU budget could be used to improve the situation.
    • Further reforms should tackle the question of the ECB. Its current mandate is very narrow, and there are serious flaws in the institution’s legitimacy. The first step could be to broaden the mandate, for example along the lines of the US’ Fed. In addition, the ECB should become a ‘lender of last resort’.
    • The EU should not support, or become involved in, trade and investment contracts that effectively enforce a race to the bottom, include provisions that could weaken environmental and social standards, or even include the Investor-State Dispute Settlement Clause (ISDS).
    • The EU should establish a list of public goods that are not to be privatised and must be kept as commons (in the form of state ownership, cooperatives, etc.); these should include water and water infrastructure, at least the basic education systems, pension system schemes, and healthcare institutions.

    Although these reforms may seem radical – certainly from the point of view of the current establishment – they do not necessarily presume the transition to a different socio-economic system, although many of them can be used for transition.

    What would the radical approach include?

    It is in fact much simpler and includes two basic, though not necessarily simple, tasks:

    • Since the economic situation is a question of power an analysis through the lens of political economy is crucial. The most important task of the radical left is to deprive the 1% of its power. I do not believe that the task of the radical left is to establish an artificial bureaucratic system of the kind that existed in my home country Czechoslovakia and in other East Bloc countries. Such a system would, I believe, be doomed to failure. The new system has to grow organically from the weaknesses and contradictions of the old, naturally incorporating new structures and mechanisms that are closely connected with the latest technological development.
      The power of the 1% is anchored in rent-seeking, which even for capitalist standards represents a parasitic mechanism and de facto reflects the deep crisis of capitalism. Rent-seeking is connected with privilege. The radical left therefore needs to analyse and attack this privilege, something I personally doubt can be accomplished through elections alone.
    • The second task is to create, support, and spread alternative ‘structures and mechanisms’ whose logic is not capitalist. These include a broad spectre of commons, cooperatives, participatory processes (participatory budgeting, employee participation), but also sharing features – for example platforms like Wikipedia. Radical approaches should not block the development of new technologies, which would be regressive. They should prevent the concentration of technologies in the hands of 1% and their abuse.

    The reform of the EU is important within the current state of affairs because the possibility of EU break-up, or rather its ‘emptying out’, is quite high and has in fact already begun. Both the reformist and the radical approaches require an actor. In view of the current decline of social democratic parties the radical left is in a unique position to stake out a dominant position within the left.


    1. Robert A. Mundell, ‘A Theory of Optimum Currency Areas’, The American Economic Review November 1961.
    2. Peter Kenen, ‘The Theory of Optimum Currency Areas: An Eclectic View’, in Robert Mundell and Alexander Swoboda (eds), Monetary Problems of the International Economy, Chicago: University of Chicago Press, 1969, pp.41-60.
    3. Ronald McKinnon. ‘Monetary and Exchange Rate Policies for International Financial Stability: A Proposal’, The Journal of Economic Perspectives 2,1 (1988), 83–103. For more arguments see Richard Baldwin and Charles Wyplosz, The Economics of European Integration, London: McGraw Hill-Education, 2009.
    4. Paul Krugman, ‘Germany’s Drag’, New York Times, 26 August 2016.
    5. This section is freely based on: Ilona Švihlíková and Miroslav Tejkl, Kapitalismus, socialismus a budoucnost, Prague: Rybka Publishing, 2017.