Europe finds itself in the midst of a very severe crisis. If this crisis cannot be overcome, both the political project of European integration and the European and global economies will be heavily damaged, not to mention the extent of social destruction the crisis has already caused in the countries of the European periphery.

For years, European policy has been short-sightedly aimed to gaining time. Since the outbreak of the great crisis in 2007/2008, all member states of the EMU (European Monetary Union) have been in crisis mode, although in different ways. Even in 2013, the global economy is moving on a very hesitant path of development, with Europe still being miles away from where it was before the crisis – in terms of both the Eurozone and the EU as a whole. What is more, solving the crisis by an austerity policy built into the system through its institutions only exacerbates the crisis constellation. Misguided developments are being intensified, with massive programmes of cutbacks deepening social inequality, which in turn weakens the reproductive process both in the economy and in society.

Yet all this is not only about the consequences of ‘fiscal dictatorship’ in the EU but also and simultaneously about the consequences of ‘radical restructuring’ in US budgetary policy, which is trying to achieve a balanced budget by saving in expenditures and raising  more revenue. The scant hope for a new constellation of growth, triggered by the coincidence of European and US ‘austerity policy’, is certainly also not spurred on by the new approaches to crisis management policy in Japan. Since the real estate and asset bubbles burst in 1989/90, the situation in Japan has been characterised by deflation, or declining inflation. By implementing massive recovery plans, the governments have continually tried to break out of this blockaded accumulation dynamic, but so far without success.

Still, in Japan it is not the consolidation of public finances which is the focus of policy; rather the government has launched a new initiative to supplement the low-interest-rate policy and the strategy of cheap money from the central bank (BoJ) by increasing public expenditures. The most extensive public stimulus measures since the outbreak of the crisis at the end of the 1980s are to create investments in public infrastructure, assistance for small companies and incentives to private capitalist investments.

An end to the Great Crisis of the 21st century is not yet in sight. It is still entirely unclear how the process of debt relief or of ‘deleveraging’ is to succeed in this constellation without deflationary consequences, how the relative de-coupling of the financial and real economies can be reversed and the ‘infernal triangle’ of public debt crisis, bank crisis and recession be broken.

Structural reforms in the Eurozone

It is absurd to want to force structural adjustments of national economies in the Eurozone by a policy of wage reductions and austerity policies leading to nothing but depression. Europe needs economic growth and at the same time a structural change in its accumulation regimes. Germany’s leading role, which consists so far in a massive carrying out of austerity regimes, must be overcome by the hegemonic power abandoning an economic policy oriented towards current account surpluses and striving for a more equal balance of trade. Yet, it is of course to be expected that such a political paradigm change will be rejected by the economic and political elites. The core problem by now is the far-reaching destruction of the political arena.

In the EU calls for a ‘policy of growth’ are increasingly frequent. Even the heads of government tell us that the debt and fiscal crises can only be overcome by growth. Yet, there is nothing politicians and ‘experts’ are more at odds on than the question of where the growth is to come from. Since the 1970s growth rates in the rich industrialised countries have been more or less steadily on the decline; this trend would have to be reversed. In the 1990s it seemed for a while as though this could be done; but what then mostly grew were the financial sector and the indebtedness of private households. However, growth alone will not suffice for paying the high debts. The entire debts on the capital market amount to 350 % of global GDP, while this 62 billion US-dollar GDP is accompanied by credits and debts of 200 billion US dollars. Reducing debt only through higher growth rates would be a long-drawn-out process; other forms of financial repression (such as debt conversion) must be adopted. What is then required is a sensible mix of debt relief and qualitative growth, by which the excessive importance of the financial sector is simultaneously reduced. 

If since the beginning of the debt crisis in the Eurozone the focus in the economic debate has been on the consolidation of national budgets, the call for growth initiatives can now be heard more and more loudly. The president of the EU-Council, Herman Van Rompuy, contends that the weight needs to be gradually shifted to the stimulation of growth and employment, with the consolidation of the budget being the ‘foundation stone’ on which a comprehensive strategy of growth would have to be built. Van Rompuy wants this to be the topic of the EU Summit at the end of May.

The head of the European Central Bank, Mario Draghi, is also speaking out in favour of a ‘growth pact’, as a supplement to the Fiscal Pact, that imposes financial discipline on the Euro-states and further EU-countries. The policy of structural reform and budget consolidation is to be supplemented by investments stimulating growth, for example, in cross-border infrastructure projects.

What has contributed to the change of mood are first of all the dreary results of austerity politics. Even the alleged model students of debt relief – Ireland and Portugal – had to be conceded a time extension needed for restructuring. In addition, there is the vicious circle of consolidation in countries such as Spain, Greece and Italy: Cuts in expenditures and tax hikes deepen the recession in the short run, and in turn hamper the consolidation of the budget.

However, except for low interests and a loose monetary policy, what other instruments does the economic-policy toolbox contain? Politicians in governments favour stimulating growth on the supply side, that is, structural reforms such as the liberalisation of the job markets, downsizing of the public sector, pension reforms or the dismantling of obstacles to competition. These structural reforms – or so their adherents claim – would lead to the consolidation of public budgets and an increase of competitiveness; eventually an economic upswing would take place in the wake of increasing exports. That kind of political approach is always given full support by the EU Commission and the Council of Ministers. Yet, its implementation is sluggish and the outcomes modest, because improved competitiveness needs more time and must be integrated into a global economic opening of the different markets, which has in recent years stopped altogether.

A different approach is suggested by Keynesian-oriented economists who consider the policy of austerity counterproductive and therefore advocate it be rescinded and replaced by state-stimulated demand. In the Eurozone an extension of deficit targets has gradually become accepted: Italy, France, but also Spain, Portugal and the Netherlands will not reach the agreed reduction of state deficits for 2013. But watering down the savings targets does not result in the implementation of additional public investments. A comprehensive infrastructure programme coordinated Europe-wide – and comparable to the volume of investments in Japan – would increase both public and private demand significantly and stimulate new capital investments, but would also be accompanied by an increase of deficits, which in most of the countries are still considerably high, and thus a rise in the debt-to-GDP ratio. In the Eurozone the debt had in 2011 already reached an all-time high of 87.2 % since the beginning of the monetary union. That is why in spite of their inclination to expanding public investments those in power have so far rejected ‘an old-style Keynesian approach on the demand side’ as an ‘illusory concept’.  

Currently, the prospects of suspending the consolidation of public finances, as laid down by the Fiscal Pact, are minimal. At the same time, this misguided economic policy has intensified the downward trend in the entire European economic space: ‘This falling in line with the austerity course of ever more countries of the EEC, massively curbed economic recovery in the Eurozone and – contrary to the present aspirations of the Troika consisting of the ECB, EU Commission and IMF – led to the further burdening of public budgets and an increase of the debt-to-GDP-ratio. The countries concerned only reacted by further toughening austerity policies.’1

A look back at the development of recent months clearly shows: The austerity course in no way contributes to solving the economic and financial problems. On the contrary, cuts in public funds weaken the economy and only increase the debt-to-GDP-ratio. ‘The debts most drastically increased in those Euro countries most affected by the financial crisis and which had implemented the most radical austerity programmes. […] Stabilising measures on a suitably large scale, for example, a targeted strategy of growth for weak Euro countries, are still not envisaged. Therefore the present development is an illustration of the already failed economic policy.’2

Empirically, it is continually clearer by now that pure consolidation is an anti-growth strategy. Meanwhile, several years have gone by without the emergence of a common understanding around a growth strategy. On the contrary, the Fiscal Pact pre-programmes a downward spiral. ‘Since January 2013 the Fiscal Pact has been in force. Its implementation in a situation in which most EU countries find themselves in a recession or at least stagnation could delay or even prevent an upswing and thus also dampen medium-term economic development. This danger does not arise from the basically sound goal of curbing public debt, but from the path through which this goal is to be reached. This path is constituted by two rules: 

• Each Contracting State is only allowed to run a structural (cyclically adjusted) deficit of a maximum of 0.5 % of the GDP (deficit rule).
  
  
• Each year the public debt must be reduced by one twentieth of the difference between the current debt ratio and the agreed target value of 60 % (debt rule).

[…] While the debt rule will become effective only three years after the state has brought its headline deficit below 3%, the new deficit rule applies permanently.’3

Alternatives

The elements of an alternative are well-known: What is required is a mixture of growth incentives and restructuring measures for public finances; in addition, we need strategies to counter the internal imbalances in Europe and Germany’s enormous current account surplus. In concrete terms this means pay raises in Germany and an industrial policy increasing both exports and productivity in the national economies of the countries on Europe’s periphery. The failure of the strategy pursued so far is obvious: The internal devaluation, i.e. the compulsory reduction of wages and prices, has increased the debt burden of households, enterprises and governments. ‘If austerity is enforced, people lose their jobs, because nobody buys the products they make. But the debt burden does not go down when jobs are lost; it rises. It is possible to avoid this trap, but only if we take austerity policy – that is, higher taxes and lower expenditures – off the table and start talking about debt-friendly fiscal stimuli: that is, further increases in taxation together with an increase in public expenditure. In this way, the debt ratio will fall, because the denominator (economic performance) will rise and not because the numerator (the total public debt) will shrink. This kind of enlightened economic stimulus comes up against strong prejudice.’4

The core problem of persistent depression in the EU is insufficient social demand. Enterprises do not invest enough in new plants or equipment and therefore create a too low salary income or simply too few jobs. Therefore we can understand the alternative to the policy of consolidation as a political decision to boost society’s consumption and consequently the economy. This has nothing to do with continuing the debt management policy. It is about interfering with the distribution ratios and, ultimately, about selective increases in taxation in times of economic hardship. Europe needs structural reforms, but not the ones the defenders of consolidation policy demand. The alternative to consolidation amounts to financing goods and services that are inadequately provided by the private capitalist sector – things such as better social security, education, healthcare and public infrastructure – through raising taxes on higher incomes, investment income and large accumulated assets.

What this therefore means is a policy of tax-financed expenditures: The Confederation of German Trade Unions, for example, has proposed a Marshall Plan for Europe according to which additional investments would be made amounting to 260 billion Euros (about 2 % of the GDP) per year in a period of ten years (DGB 2012). A European Future Fund would issue bonds guaranteed by all participating member-states. Revenue from a tax on financial transactions would be used for paying off debt. The seed capital for the funds would be generated from a one-off capital levy. 

We should take as a starting point the reestablishment of the relative independence of financial markets from value creation in the real economy in order to initiate a structural change of the total social reproduction process by changing the distribution ratios. In the USA and many other countries, in a number of sectors capital and corporate incomes as a share of GDP has reached its highest ratio in decades. The incomes of economic elites and social upper classes have for a long time been detached from the developments in total production and employment growth. While the demand for luxury goods is booming, the demand for goods and services for low-wage groups is falling. With the exception of the countries immediately hit by the crisis, all this is happening in a time of extreme loosening in monetary policy and close to zero interests. The structural concentration of incomes at the top is accompanied by cheap money and the chase after ever higher returns, which thus drives up stock prices.

Despite the widespread concern for, indeed fear of, poverty, unemployment, inequality and the extreme concentration of income and wealth, the political and social support for an alternative model of restructuring and growth remains modest. However, without radical socio-economic reforms, GDP growth in the major capitalist countries will at best recover very slowly, while the political systems remain blocked. The political alternative lies in limiting wealth and power, distributing economic profits, so that strong impetus is given to growth of the real incomes of the poor, and in safeguarding macro-economic stability. The obstacles to the implementation of such a restructuring of wealth lead to renewed detachment of the financial and stock markets from the social process of value creation. The widening gap between the booming financial markets and the daily life experience of the majority of citizens could widen still further. If the soaring of asset prices far above reality is not stopped by society, another sudden shock of value decline will make visible the real basis of production. 

The lack of logical thinking in dominant European policy has once again become obvious in the consultations over the budget framework for the next years. The EU budget is the instrument for investment and growth in Europe. Although there has been a redeployment of funds toward tackling youth unemployment, the resources remain modest and are embedded in a logic of cutbacks. For stimulating growth, for example, by creating new jobs, promoting competitiveness and research and development, the upcoming year’s EU budget only provides 59 billion Euros – less than in the current budget year. According to the Committee on Budgets the volume of the EU budget for 2013 is 2 % lower than the current year’s expenditures. This corresponds to 0.99 % of the GDP of the 27 EU countries. In the current year the ratio of EU budget to member-state GDPs still amounts to only 1.05 %. Contrary to their pan-European rhetoric, here too the fans of cutbacks and austerity policies have come out on top.

The dominant policy of debt brake, fiscal pact and austerity neglects economic growth and is manoeuvring Europe into a cul-de sac. There are feasible alternatives to this failed approach. But the precondition for political change is an immediate suspension of austerity policy and the comprehensive embedding of the economic and social-policy reform in broad civil involvement. The by now oft-demanded renationalisation of economic and monetary policies would, it is true, allow the countries of the periphery to devalue their currencies, but they would find it more difficult afterwards to serve their Euro debts. External deflation is no panacea for a rapid improvement in competitiveness. Eventually, turbulence on the financial markets would trigger an incalculable domino effect also for the member-states. Also in this respect, a strategy to counter the inner-European imbalances and Germany’s enormous current account surplus would make more sense. In any case, the alternative to the race for competitive advantages consists in agreeing on an economic division of labour and an industrial policy which promotes both exports and productivity in the national economies at the European periphery. 

Notes

1. IMK Report 80, March 2013; http://www.boeckler.de/pdf/p_imk_report_80_2013.pdf
2. Ibid.
3. Ibid.
4. Robert J. Shiller, Debt-Friendly Stimulus, 20 March 2013; http://www.project-syndicate.org/commentary/balanced-budgets-without-austerity-by-robert-j--shiller/.