Yesterday the European Commission gave its annual
recommendations for the member states’ economic policies. Barroso said, that
“Europe must move beyond the crisis.” Policy proposals focus on growth, rather
than austerity, allowing several member states to take more time to cut their
deficits. The EU’s executive celebrated the reduction of countries suffering
from severe deficits from 24 to 16 since 2011, calling on Germany to consider
wage increases to boost domestic demand. Wow, it seems like the crisis is about
to pass! Of course, at the same time the OECD reduced the eurozone’s growth
forecase to -0.6% this year, down from -0.1% six months earlier.
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| Barroso seems lost |
The Commission is panicking, and it has got every reason
to. The EU’s strategy to combat the crisis is failing, and calling the
Commission’s proposals “a shift from austerity,” as EurActiv does, seems almost
cynical. Giving the member states a few extra years to cut their deficits
cannot seriously be called a policy shift, particularly as the proposal is met with
resistance from the EU’s largest member state. Austerity should not be weakened
a bit, as this would mean a mere extension of the policy – it has to be
abandoned altogether. It is 2013, and austerity has been in place for four
years without success. It seems necessary to spell out once more why austerity
is a misguided, dangerous and hopeless policy that will lead Europe into an
abyss that it might not recover from.
This post is the first of a series of blog posts
discussing the fallacies of austerity. It draws heavily on an article by Robert
Boyer on the subject. One of the major reasons for why austerity cannot work is
because it is based on a false diagnosis of the roots of the crisis – Europe’s
policy-makers are administering antibiotics against a virus. The underlying assumption behind austerity
is that the crisis is caused by irresponsible public spending, when it has
really the result of a private credit boom in the US.
The deregulation of the banking sector in the 1980s
allowed for toxic subprime loans to be securitized by mixing them with high
quality loans. It was thought that this would spread out the fallout risk of
these loans to a minimum, allowing for a surge of private lending to the
poorest fraction of Americans. Banks felt relieved of the responsibility
related to the need for the careful selection of their debtors, and the real estate
bubble was allowed to grow. The untaxed free global trade with financial
products enabled these loans to be spread out to Europe in particular, and when
the bubble burst, several EU member states became afflicted with excessive debt
burdens as a result of having to bail out their ruined banks. The crisis is not
the result of irresponsible public spending, but of a deregulated financial
market. Spain even ran a budget surplus before the shock of 2008 as a result of
its own booming real estate market.
Underlying Causes
of Financial Deregulation
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| Growing inequality in the US in the late 20th century |
The story of the crisis begins after WWII. Keynesian
policies were adopted, allowing for a steady and sustainable growth pattern in
the capitalist world over the post-War decades. Productivity and the mean
incomes per household were rising. In the US of the late 1970s, the increase in
productivity began to slow down, causing the wages for low-skilled labour to
stagnate. Wages for in the services sector and in the high-tech industries on
the other hand continued to increase, initiating the growth of the income gap. Initially
governments were able to compensate for this trend by the establishment of extensive
welfare systems, which were based on the solidarity of those with high
salaries. In the 1980s, this assumed solidarity was quickly met with
resistance, and governments began to finance their welfare system with cheap
credit from their central banks. This caused public debt to grow radically.
Public debt may thus be seen as the attempt to states to balance out the rising
inequality in their societies.
The increasing importance of the financial sectors was
due to the rising dependence of governments on debt, as well as to the use of
the financial industries to compensate for the slowing growth figures of the
manufacturing sector. Economic growth and high public spending could only be
sustained by innovation in the financial sector – the deregulation of the
financial ‘industry’ was seen as the most effective method to ensure its
continuing growth. It is that deregulation that ultimately allowed for the
emergence of the financial crisis of 2008 which triggered the implementation of
austerity policies.
Structural
Problems within the Eurozone
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| Polarization of trade surpluses/deficits in Europe |
The finance-based growth of the post-1970s was exacerbated in
Europe by the introduction of the euro. The introduction of a common currency
under strict anti-inflationary regulations disallowed the member states from
devaluing their currencies. When the euro was designed, policy-makers did not
think of a compensating mechanism for this problem, and it was assumed that the
price transparency linked to the common currency would drive the participating
economies to convergence. Reality was quite different. Even before the
introduction of the euro banknotes in 2002, the eurozone had begun to divide.
Still faced with the effort to compensate for the rising inequality within
their societies, the member states adopted different strategies to finance
their welfare systems without increasing exports by devaluing their currencies.
Germany adopted a deflationary low-wage policy, which has the same effect as a
currency devaluation. This drove up Germany’s exports. Having no strong
manufacturing sectors of their own, other member states focused on an imaginary
credit-led growth, leading to the vast growth of their financial industries.
When the real-estate bubble burst in 2008, these countries were particularly
vulnerable.
Austerity is
Fighting the Wrong Malady
The myth of irresponsible public spending is extremely
superficial, and falls apart upon a minimum of close examination. As long as
the European Commission does not fundamentally change its discourse and its
policy recommendations on the crisis, Europe cannot recover. The re-regulation
of the financial markets, and the establishment of a permanent European
solidarity mechanism is of paramount importance to economic recovery and to the
success of European integration. Austerity is not only destroying the economy,
but it is translating the economic divisions of Europe into the hearts and
minds of Europe’s citizens.
Harald Köpping
Also read: Boyer, R. (2012). The four fallacies of contemporary austerity policies: the lost Keynesian legacy. Cambridge Journal of Economics. 36. 283-312.
