• Faced with a Crisis, Will the EU Manage to be More Than the Sum of its Parts?

  • By Lutz Brangsch | 20 May 09
  • In the course of its development the EU has been confronted by various complex contradictions which gave rise to specific solutions. Each of these stages involved institutions and agreements which left their mark on later developments in the form of compromises. Sometimes one has the impression that the Lisbon strategy or the introduction of the euro swept the slate clean. This view is not far wrong, but lacks precision. Institutions and regulations have their own history. 

    A complex of intersecting interests

    Regardless of its individual political structures, the EU today constitutes an economic space held together by so many ties that it seems hardly possible for any of its elements to break away. This goes for the financial sector that triggered the crisis, the corporations with EU-wide interests involving division of labour, political decisions (such as the Maastricht criteria or the Lisbon strategy), and the inter-governmental financial links through the EU budget and its various programmes. But these real integration processes stand in contradiction to the competition between states at the national level within whose framework they take place. At the political level, too, the EU seems on many issues to be more an association of states than an integrated political space. This impression is reinforced by the asymmetrical nature of the links, especially those with the East European member countries.

    What is important is not whether unity is invoked and proclaimed at the political level, but whether this unity can be founded on any kind of common interest. The crisis is not affecting an “EU economy” but national economies primarily linked by political decisions and corporations operating multinationally, yet organised according to national rules. In other words, an economic space constituted by a common currency, a number of joint legal regulations and intensive internal trade is being hit by a crisis whose subjects have the character of nation-states.

    In addition to these factors global problems have been regaining real political and economic weight for some years now. The greatest of these is climate change, which has become a genuine medium-term threat to the survival of the human race. Thus national interests clash with global/regional interests and long-term interests (e.g. regarding climate change) with short-term interests, etc. 

    The interests of the actors involved can be divided into various categories:

    First there is the category of the “old” constellations, i.e. the situation of competition within Europe and as it later developed in the context of world economic relations, especially with regard to the USA and Japan. The procedures and structures arising in this connection were aimed at the solution of concrete economic problems – examples are the European Coal and Steel Community, Euroatom or the EC agricultural market.

    The second category concerns the new constellations, mainly those directly linked to the goals of the Lisbon strategy. As a compromise it is seen by the various parties as an essential connecting link between the various interests in the EU. From the point of view of the EU institutions a departure means a delegitimising of integration, while from the point of view of the individual governments it means a shift in the power constellations.

    The third category is linked to the eastward enlargement and its geopolitical and ideological reasons. The swift admission of the East European member states was not just a reflexive reaction to the geopolitical and economic competition of the USA, but also an ideological challenge. EU entry was primarily a political question, while the question of the region’s economic future went by the board. The ideology of the free market triumphed over economic sense. The aim of securing the economic sustainability of the new system was subordinated to that of political stability. The price for this is now being paid in times of economic crisis, as there are no options to choose from – there is only the one “correct” way. 

    The fourth category concerns the mutual dependence of some of the EU member states as a result of the introduction of the euro and the contradictions this created vis-à-vis the other members.

    The fifth category concerns resistance and its alternatives, which mainly exist at the national level and are deeply divided. At the EU level there are hardly any forces capable of taking serious action. No amount of successful demonstrations should blind us to this fact. The left-wing movements were unable to take part in the integration process of the last twenty years and are largely blocked by the divisions in their own ranks within the individual states. This is what makes the Social Forum so important. On the other hand, various processes have established themselves at the EU level, which integrate NGOs in decision-making processes as isolated interest groups. The state of the left-wing movements is one of the reasons why this crisis broke out the way it did, and their capacity for change will also help shape the solutions. 

    Government in times of crisis

    Nowadays a solution to the crisis can only be achieved with the active participation of governments. Because of the high degree of monopolisation, the advanced level of social division of labour and the development of financial and credit systems, a spontaneous solution to economic crises by the business world itself has not been possible since the beginning of the 20th century. The course of the present crisis affords spectacular proof of this.

    If we view the present economic crisis as one of over-accumulation, political instruments must be directed at: 

    a) guaranteeing political stability; 

    b) organising a systematic devaluation of capital, and

    c) ensuring the economy is favourably positioned for the anticipated upswing. 

    These aims apply to individual states, to organisations like the EU, which in many fields acts as a quasi-state, and to international organisations. This admittedly assumes that the relevant political entities can find the necessary political will and recognise that this is their function and no one else’s. The forms of intervention continue to depend on the ability of the institutions to act, i.e. on their ability to enforce their decisions.

    The transition brought about by changing the European Communities into the European Union was linked to a shift in priorities from community policies to budget policy. This did not mean that community policies ceased to be important for the integration process, but they are less and less used as a point of reference for centrally taken decisions. Not only that – as the number of tasks to be tackled in concert grows, the size of the EU budget is shrinking. In recent years it has failed to reach levels well within the realm of the possible. In times of crisis, however, the community policies were the decisive anchor that made a forward-looking solution to the various problems possible. 

    Torn between ideology and reality?

    In order to be able to react to a crisis appropriately the first thing one has to do is be clear about its causes. The reaction has to address these causes.

    Both the EU and the individual states see the causes of the economic crisis in the financial system. This view marked the first phase of EU interventions, above all during the preparations for the G20 meeting in November 2008. The regulation of financial markets was considered crucial. This view was not far off the mark, but was too narrow. In fact, the financial markets are an expression of the high degree of nationalisation that the capitalist economy has achieved. The financial market permitted a mobilisation of all social resources in the interests of reproducing the capital ratio. No sector remained unaffected by this. The apparently boundless growth that took place on this basis was seen as the ultimate legitimisation of the course laid down in Lisbon and Maastricht. The strict adherence to the course of privatising public services was justified by this promise of growth. The financial crisis has now revealed that private capital is utterly incapable of guaranteeing sustainability and effectiveness on its own. Against this background the answer offered by the designers of the Lisbon strategy is understandable: the crisis was caused by irresponsible conduct of individuals and the false regulation of the market. The free movement of capital and freedom of the market are, however, cornerstones of the Lisbon strategy. The removal of the obstacles to the free movement of capital was also a key element of the deregulation policy pursued by the individual member states in recent decades. Freedom of the market and the free movement of capital were supposed to trigger unbridled economic dynamism. Instead they have led to a worldwide economic crisis. Both the EU and its member states are now being driven by this contradiction. The first thing they decided was to try and rescue the financial markets by subjecting them to cautious regulation and giving them enormous injections of cash while preserving their basic structures. In the run-up to the G20 summit the EU formulated five requirements for the regulation of the financial markets. What was wanted was “transparency without over-regulation”. This was followed by guidelines for dealing with “bad loans” and other detailed regulations. But success remained elusive. The reactions to the de Larosière Report were vague on key issues. If the provisions of Basel II on equity cover are now to be reformed, this may bring a possibility of market stabilisation in bookkeeping terms, but it will not really get us out of the existing situation. The financial lobby has also succeeded in evading the planned tightening of the rules on equity-backed securitisations. Thus resources continue to flow, both at national and EU levels, into a financial system which, though weakened, continues to function as it did in the past. Securitisation continues while derivatives and other speculative securities continue to be issued. The causes of the crisis are being kept in place.

    Even after what are virtually national bankruptcies in Ireland, Hungary, Latvia and now Rumania there are no signs of new thinking or a change of course. All that is being attempted is to use loans to keep these countries more or less stable at least politically. What these loans are ultimately covered by is becoming increasingly dubious as the economic crisis progresses. The prevailing hope is that things will somehow get better. 

    This takes us to the second phase of EU interventions in the course of the crisis. 

    It is true that the crisis originated in the financial sector. However it was clear by November 2008 that it had spread to the whole of the rest of the economy. Since March 2008 industrial production in the EU 27 sank from month to month. By October 2008 industrial production had fallen 5.3% in relation to October 2007. The level of incoming orders was 17.9% below that of October 2007. Car production fell 21% between November 2007 and November 2008. It is now estimated that 30% of the capacity in the car industry is standing idle. These obvious facts played no visible role in the staking out of positions for the G20 summit.

    Why this seeming blindness to obvious facts?

    The reasons are to be found in the EU’s and its member states’ view of themselves as an institutional framework. The crisis is putting fundamental assumptions to the test – above all the viability of the Lisbon strategy and the economic resilience of the euro zone. If it turns out that the Lisbon Treaty and the conditions of the euro zone are among the causes of the crisis, this would call into question the legitimacy of the EU itself.

    The transformation of the financial crisis into an economic crisis is mainly attributable to the fact that a process of over-accumulation took place in many sectors of the economy over a long period. This became evident when large areas of the financial sector began to collapse. The EU tried to react to this with the European Economic Recovery Plan (EERP)1 in November 2008 (EERP, 800 final, p. 3 and 10). It is interesting that this initiative places a strong emphasis on social stability through the European Globalisation Adjustment Fund and the European Social Fund. The proposals are systematically geared to the coordination of the four priority areas of the Lisbon Strategy (people, business, infrastructure and energy, research and innovation)2. They also state: “The EERP is part of the Lisbon Strategy for Growth and Jobs in the current crisis.” The structural problems that were already becoming evident at this point were not addressed. The dogma of the markets’ ability to correct themselves still dominates political action. This is admittedly in crass contradiction to the plight of the car industry and its suppliers, and increasingly to that of the chemicals and steel industries. But as late as March 13 European Commission President Jose Barroso declared:

    “There is no doubt that financial regulation needs an overhaul. But you cannot conclude from this that other sectors of the economy need the same treatment. We should not, as you say, throw the baby out with the bathwater.”3

    Against this background the attempt by the EU Commission to stimulate the economy4 by intervening directly in the energy and communications infrastructure was bound to fail for two reasons. First, a structural policy that disregards the interests clearly defined in the community policies obviously has no intellectual foundation, and, secondly, the package in no way met the requirements of the East European member countries. 

    Nor do the ten actions laid down in the Enforcement and Emergency Response Programme (EERP) include any strengthening of public control over the renewal processes that are after all taking place in the course of the crisis. These renewal processes are being publicly financed on a grand scale by government loans, guarantees and subsidies. But what companies are doing with this money is closed to public scrutiny. We may assume that hidden from the public eye many companies are working on alternative development concepts. In the car industry, for example, decisions with far-reaching consequences are being taken that have nothing to do with a consistent strategy of switching to environmentally friendly cars and will be hard to reverse later. It is doubtful if they even take proper account of such things as the climate crisis. Instead the reproduction of a certain type of international division of labour with all the problems it entails is being continued.5 The inconsistency of EU policy bears the seeds of the next economic crisis. Seen in the cold light of day, the EU’s attempts at a consistent financial and structural policy for the crisis have so far failed. It has neither been able to find effective instruments for reorganising the financial sector, nor to create a framework for devaluating the relative surplus of capital. Also, its efforts to prepare the European economy for the period after the crisis can only be described as weak. 

    What scope for action remains? The social sphere and the function of maintaining political stability. Thus the Proposal for the Joint Report on Social Protection and Social Inclusion 2009 defines the following task:

    “The European Social Fund should be used to its full potential in a flexible and timely way to alleviate the social impacts of the crisis by supporting rapid labour market re-entry of the unemployed and focusing on the most vulnerable. Simplified implementation of Structural Funds and improved coordination with social policies will help. The Commission will issue a regular bulletin to monitor social trends. Reports from Member States could facilitate exchange of information and policy experiences in the Social Protection Committee.”6

    But this again is more a continuation of old strategies than a new approach. The recommendations formulated by the EU Commission in February following a study of the reports of various countries on important aspects of their budget policy make this very clear.# They concentrate on the budget deficit per se, call for the continuation reforms in pensions and health care (basically a continuation of the privatisation course) and only urge the adoption of a stimulus package that is limited in time. Above all the privatisation requirement is also laid down in the current proposal for the Joint Report on Social Protection and Social Inclusion 2009.7

    Any measures that are taken, therefore, will be assessed exclusively from the point of view of their compatibility with the aims of the Lisbon strategy.8 Even the social-stabilisation measures will have to meet the Lisbon requirements. Not only that – the privatisation requirement feeds the financial market and consequently entails a risk of further crises.

    With its Lisbon strategy the EU created a joint pro-cyclical framework that has helped to trigger the crisis. The attempt to resolve the crisis within the framework of this strategy and using the instruments of this strategy is wildly unrealistic if the stability of the EU, above all its social stability, and the ideology of the free market are not to be sacrificed. 

    More of the same?

    If one were to draw up a provisional balance sheet of the EU’s response to the crisis, it might look like this: over time the EU member states have created a large number of procedures and institutions that link the crises in the individual countries together while preventing the generation of stimuli to combat the crises. The possibilities of a consistent stimulation policy created by the euro and the various community policies and programmes are forced by the Lisbon strategy into a corset that keeps giving rise to new internal contradictions. Social cohesion and a “free” market stand in irreconcilable contradiction to each other. How are competing regions to jointly develop crisis-solving strategies which amount to a devaluation of the capital invested in them? 

    The dilemma is particularly clear in the relations between the EU’s “old” member states and the East European member countries, which in many – if not all – sectors of the economy are dependent on the “old” member countries. They have practically no independent banking system, their industry is mainly geared to customers in the “old” countries, and their budget policy is subject to a course of consolidation and privatisation at all costs. Loans are generally in euros, which increases the pressure on these states in the crisis phase. Social movements which might prevent the ill effects of the crisis being passed on to large sections of the population or even organise broad resistance are largely absent. At the same time, however, the degree of interrelatedness is already so great that the crisis in this region is becoming a problem for the EU as a whole. Austria, for example, has been badly hit by the consequences of the crisis in this region. Germany will also have to decide what to do about the drop in exports to it.

    This contradiction is finding expression in debates about real or alleged protectionism. In a press article Mirek Topolanek, the Czech Prime Minister and current EU Council President, wrote: “In my opinion, instead of groping helplessly in the dark and feeling our way forward with mistakes and failures, we must maintain discipline and keep a clear head. This involves fiscal rules (the stability pact), a free market without barriers, and fair competition without protectionism and without indiscriminate, uncontrolled subsidies.”9 We may leave aside the question of what illusions Topolanek associates with these things for the Czech Republic. All he is ultimately concerned with is shifting the problems from one country to another. If, as is often said nowadays, Germany’s trade surplus is the problem, it must of course be clearly pointed out that with the Lisbon strategy the EU member states together created the framework that made this predominant position possible and is now challenging it. A common market in the sense of the Lisbon strategy has precisely this effect. The relationship between Germany and the other member states is then reproduced without anyone complaining by the common will of this EU vis-à-vis other regions such as the Third World. It is this inner logic of the EU strategy that is the problem. If you want a free market, this free market will lead to the supremacy of one participant – if you don’t want that, a free market is at best an ideological conceit. If there is an extreme asymmetry of economic power, in times of crisis the burden will be shifted onto the shoulders of the weakest – in this case the East European accession states. That the latter are now trying to beat the “old” member states with their own weapons is understandable but unlikely to be very successful. Above all, however, it is no solution to the problem.

    In one sense, however, Topolanek has put his finger on the problem, which is that basic questions of the EU’s sense of its own identity have still to be clarified. Do we want a uniform social and economic space or an alliance of states? Is there to be a common strategy or, ultimately, total competition? Are we prepared to dispense with social welfare to save the economies?

    In response to this question voices are raised demanding a new quality of regulation, better coordination between the supervisory bodies, and the creation of new supervisory bodies or even of a European economic government. Common to all these proposals is that they envisage a “top-down” solution. Given the EU’s own inner constitution these would all be bodies based on the government machinery of the member countries. But would they be able to constitute and represent an overall EU interest on this basis? This would necessitate finding solutions to the fundamental conflicts of interest mentioned at the outset. The fact is that we already have enough coordinating bodies. That they do not have the desired effect at the macro-economic is not attributable to their powers per se. If we take account of the divergent interests and the power relations in the EU, we again find ourselves faced with the question as to how decisions can be enforced against individual members. Thus, without a change of attitude on the part of the individual member states a strengthening of the coordinating role of the EU, however desirable, is impossible. How can one bring about such change given the weakness of the left-wing parties and movements? Only one thing is clear: It is unlikely that a return to the pre-euro past would solve any problems. On the contrary. It could be the beginning of a more radical roll-back, especially in the social sphere. At the present moment there are many signs that the overcoming of the crisis in the EU will be a very painful process.

    This situation offers limited opportunities for forcing the EU or any of the member countries to budge. One such opportunity might arise out of the necessity of redefining the relationship between globalisation, centralisation and regionalisation. The crisis has made it obvious that the EU’s policy has basically weakened the resources of the regions for tackling crises. It might be possible to form alliances that could force the EU to pursue a different course.

    Realistic alternatives? 

    The crisis has drawn attention to a problem that has beset left-wing movements in all the years of the “European idea”, namely that they have never found anything to put up against it. There is no EU-European, let alone a European left-wing identity. To be sure, areas of debate are discernible that have to be addressed in all countries, but areas offering opportunities for genuine united action are hard to identify. The crisis will make this more difficult, as it breeds local nationalisms.

    The crisis in the EU is thus also a test for the left, as it points up a contradiction in the nationalisation process that future strategies will have to solve: How can one without loss of dynamism design an economy that excludes the need for mass shut-downs of productive capacity? This raises basic questions concerning the driving forces of a future society – and what our way of life in the near future will look like. 

    A key question – and one that left-wing movements persistently evade – will be that of the democratisation of budget policy. This affects all levels of the EU. The EU member states’ fixation on a balanced budget whatever the cost was the crucial factor that triggered the economic crisis, while the short-sighted community policy of capping the EU budget is an obstacle to further integration. The first step would be to set priorities for the budgets of the EU and its member states on the basis of jointly adopted cohesion and conversion goals. These priorities, not the goal of budget consolidation per se, would have to form the basis for decisions on joint actions by the EU. In this sense, the aim would be to achieve harmony between community policies and budget policy under democratic, public control. 

     

    Notes

    1. A European Economic Recovery Plan. Communication From the Commission to the European Council, Brussels, 26.11.2008 COM (2008) 800 final, p.3 and p.10
    2. See also Communication for the Spring European Council, Driving European recovery, Brussels, COM (2009) 114 p.11
    3. Brussels, 13 March 2009 Speaking points, José Manuel BARROSO, President of the European Commission, Launch of the 9th CER Lisbon Scorecard, How to emerge from the wreckage,  http://ec.europa.eu/commission_barroso/president/pdf/speech_20090313_en.pdf (17.3.09)
    4. See: The Commission proposes ?5 billion new investment in energy and internet broadband infrastructure in 2009-2010, in support of the EU recovery plan, IP/09/142
    5. Wirtschaftswoche March 2, 2009. p. 48ff.
    6. Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Proposal for the Joint Report on Social Protection and Social Inclusion 2009 Brussels, 13.2.2009 COM (2009) 58 final p. 3
    7. COM (2009) 58 final, p. 6
    8. COM (2009) 114, p.9–10
    9. Topolanek, M. (2009): Rettet den Binnenmarkt. In: Financial Times Deutschland, March 11, 2009, p. 24