Locking in Austerity

A useful input into the current debate on the EU referendum might be to consider what Britain could contribute to Europe if it was more fully engaged in its policy-making. This might include an alternative view of leadership to the current German one, and a much more pragmatic view of economic policy. Disengagement is unlikely to improve matters - here or elsewhere.

The present drive to reshape socio-economic systems, especially in the weaker countries, so that they pursue ‘competitiveness’, via lower wage costs, lower taxation on business and reduced social protection, as the only way out of their crises, is most definitely orchestrated in Berlin. One can ask how the German government was able to assume, almost unchallenged, its present hegemonic position. One part of the answer lies in the economic problems in France which have led to a breakdown of the previous Franco-German axis and left the field clear for a single state to take the lead. The minimalism of the British works in the same direction. Most of the new, post-Soviet or post-Yugoslav, member states accept the competitiveness formula and rely on their low wages and their integration into German supply chains to secure economic advance, while Greece and the Latin countries of the South are unable to service their debts and depend on emergency finance orchestrated by Germany.

The intellectual origins of the present drive to use legal means to rule out Keynesian policies and impair redistributive welfare systems are not clear. Hayek is often cited, and it is true that he was very much in favour of restricting the scope for discretionary interventions by democratic governments. But Hayek was concerned with rules in the abstract, and making sure that this framework was protected from populist pressures, not in imposing legislation. The German ordo-liberals are also invoked, and it is true that this school of thought also argued for a strong framework of rules within which the market economy was to function. However, one feature of the ordo-liberals was a deep distrust of big business; it is hard to find such an attitude among EU elites today.

The attempt to fit capitalist economies into a Procrustean bed of numerical limits rests on two premises. The first is that market systems are so stable and self-equilibrating that they can balance themselves even when governments impose arithmetical rules on the issue of money or the level of government borrowing. Both historical and recent experience indicate that this is erroneous. The second premise is a very deep fear of democracy: stronger democratic control over fiscal policy could rationally be seen as a threat to those who might lose out from a more just distribution of income and wealth.

Since the financial crisis, a range of ‘structural’ measures have been imposed across the EU, all of which seek to in some way enshrine competitiveness and fiscal policy into law. The changes have come in five main waves.

The first of these was the Pact for the Euro (Competitiveness Pact). The idea behind this was to co-ordinate ‘competitiveness policies’ (i.e. lowering wage costs) by writing them into national law. Next came two packages of EU-level legislation - the ‘six-pack’ and the ‘two-pack’. The ‘six-pack’ tightened definitions of ‘excessive’ public sector debts and deficits and reinforced the penalties for failing to stay within the specified limits. It prescribed procedures to be followed by member states in drawing up government budgets and gave the Commission powers to oversee those procedures. (Although the notion of an ‘excessive imbalance’ to some extent recognised that the Stability Pact’s exclusive focus on government borrowing had been a mistake, in practice the new imbalances have come down to one thing - competitiveness.)

There followed the ‘two-pack’. This requires members of the eurozone to submit their draft budgets to the Commission (an unelected body) every October, before presenting them to their own parliaments. The Commission then responds in November and may recommend changes. These are not mandatory in themselves, but for countries already tied up in excessive deficit procedures (currently nine), surveillance of budget procedures and reporting obligations are more strict, and member states in receipt of emergency loans from the Troika (European Commission, ECB and IMF) lose nearly all control of their own budgetary policies.

The fourth element in this tightening of the screw was the Treaty on Stability, Coordination and Governance (also known as the Fiscal Compact). This prescribes fiscal limits to be legislated by the signatory states, if possible with ‘constitutional status’. Many states have now adopted these rules - another alarming step towards giving a highly questionable economic doctrine constitutional status.

Finally, there is the treatment of the member states which have requested emergency finance from the Troika. Since the Troika are acting as creditors, they are not constrained by any aspect of the EU Treaties, and the ‘Memoranda of Understanding’ they have imposed recognise no limits in their intrusion into the economic and social systems of the governments concerned. Although member state governments are not directly present in the Troika it is clear that they are strongly influencing its decisions, through the Eurogroup - the committee of ministers from the Eurozone member states.

The outcome of all this is not just the imposition of dysfunctional budgetary policies, attacks on trade unions and massive damage to welfare states: these measures seek to disarm, in advance, any movement for an alternative.

This is an edited version of John Grahl’s article in Soundings 62.