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EuropeanEconomistsforanAlternativeEconomicPolicyinEurope
EuroMemoGroup
Europeanintegrationatthecrossroads:Democraticdeepeningforstability,solidarityandsocialjusticeEuroMemorandum2012
SummaryIntroduction1 ThedeepeningcrisisoftheEuropeanUnion1.1 Theeuroareafacesanewanddangerousphase1.2 Austerityasapolicyguideline1.3 ThecontradictionsinEUenlargementandneighbourhoodpolicies1.4 Radicalisinganeomercantilismintradeanddevelopmentpolicies1.5 Adeepeningcomplexcrisistheexamplesofenergyandagriculture2 WrongpoliciesleadtowrongoutcomesAcritiqueofEUpolicies2.1 MacroeconomicPolicies:towardsthesurveillanceregime2.2 Financialsectorreformstymiedbyextensivelobbying2.3 Austerity:ThewrongpolicyfortheillsoftheEU2.4 Enlargementandneighbourhoodpolicieslackapoliticalvision
Box1:EUmigrationpolicyandtheeconomiccrisis2.5 Tradeanddevelopmentpolicies:Wavingthestickandnotthecarrot2.6 Inadequateandinsufficientaction:theexampleoftheCommonAgriculturalPolicy3 StrengtheningdemocracyandsocialjusticeinEurope3.1 Financialandfiscalalternatives3.2 Alternativestoausterityurgentlyneeded3.3 Supportingautonomousdomesticdevelopmentinpartnercountries3.4 Takingresponsibilityintradeanddevelopmentpolicies
Box2:Taxingmatters:TheEUasmodelforLessDevelopedCountries?3.5 SustainabledevelopmentandtheCommonAgriculturalPolicyDeclarationofsupport
ThisEuroMemorandumdrawsondiscussionsandpaperspresentedatthe17thWorkshoponAlter
nativeEconomicPolicy inEurope,organisedbytheEuroMemoGroup,on1618September2011in
Vienna,Austria. The text isbasedon contributions from Joachim Becker,Hermann Bmer, Tanja
Cesen, Rolf CzesklebaDupont, JudithDellheim, Trevor Evans,Marica Frangakis, JohnGrahl,Peter
Herrmann, Roland Kulke, Jeremy Leaman,MahmoodMesskoub,Dominique Plihon,Werner Raza,
DianaWehlauandFriederOttoWolf.
Formore informationon theEuroMemoGroup,pleasecontact theSteeringCommittee (detailsat
endofthisEuroMemorandum)orlookupourwebsiteat:
www.euromemo.eu
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Summary
The euro area crisis threatens the future of European integration,but instead of challenging the
powerof the financial institutionswhicharedriving the crisis, theEuropeanauthoritieshave im
posed austerityprogrammesonGreeceandotherperipheraleuroarea countries, anddeveloped
centralisedpolicies for imposinghighly restrictive fiscaldisciplineonallmember stateswhich risk
underminingthe
democratic
legitimacy
of
the
European
Union
(EU).
RestrictivefiscalmeasureshavedepresseddemandinEurope,andeconomicforecastsfor2012indi
catevirtualstagnation,whichwillexacerbatethedifficultiesdeficitcountries face inservicingtheir
debts.AeuroareasummitattheendofOctober2011decidedthatGreecesdebtshouldbecutby
50%,butpanicsellingbybondholders intensified,alsoaffecting largercountries includingItalyand
Spain.
Austerityprogrammes inEasternEuropean countries (Latvia,RomaniaandHungary)and theeuro
areaperiphery (Greece,Portugaland Ireland),have led toespecially serious recessionsandmajor
fiscalcutshavebeenaccompaniedbydemandsforprivatisationandthederegulationoflabourmar
kets.
TheEUsSouthEasternneighboursandTurkey,manyofwhichweredependentoncapital inflows,
haveallalsobeenhardhitbythecrisis.LikethecountriesofNorthAfrica,thesehadallbeenencour
agedstronglybytheEUtoopentheireconomies.
Growth in severalEU countries, inparticularGermany,hasbenefited from the strong rebound in
worldtradesince2010,buttogetherwiththesurplusesgeneratedbyChinaandJapan,this iscon
tributingtoadangerouswideningofglobalimbalances.LowinterestratesinEurope,andespecially
theUS,have led todestabilising inflowsof capital to severalmiddleincome countries, forcingup
theirexchangerates.
TheFukushimacatastrophehasledGermanytoreinstateitsprogrammetophaseoutnuclearenergy
but thishasnot triggeredawiderEuropeanphasingout.Following the failureof theCopenhagen
conference,theEUhasalsofailedtodevelopanadequateresponse intheareaofclimatechange.
Europeanagriculturalproduction,whichisbasedonafailedmodelofindustrialisation,hasnegative
socialandenvironmenteffectsintheEUandunderminestheabilityofdevelopingcountriestofeed
themselves.
AcritiqueofEUpolicy
TheEUhasfailedtodefineanadequateresponsetotheeuroareacrisis.Theproposedreformsto
theGrowthandStabilityPactarebasedon the fallaciousnotion that,providedpublicdeficitsare
limited,market forceswillensurebalanceddevelopment.PriortothecrisisGermanyhadrunupa
verylargecurrentaccountsurpluses,whilelargedeficitsinsouthernEuropewerefinancedbycapital
inflows.Thefinancialcrisis in2008 ledtoasharpdeclineofprivateexpenditureandnecessitateda
majorexpansion
of
government
spending.
The
EUs
new
legislation
refers
to
policy
co
ordination,
but
theprimaryfocusisonsurveillanceandthreatenstosubjecteconomicallyweakerstatestocompre
hensivetutelageineveryaspectofpublicpolicy.
Europeanbanks,whichface large lossesongovernmentbonds,aredirectlythreatenedbytheeuro
areacrisis.Buttheyhavemountedmassivelobbyingcampaignsagainstfinancialreforms,andmod
estproposals affectingderivatives and the capital requirements forbankswereboth successfully
diluted.TheCommissionhasproposedintroducingafinancialtransactionstax,butthisexcludesfor
eignexchangetransactionsandisopposedbykeystates.
ThecrisishaslaidbarethedivergentproductivestructuresintheEU.Regionalpolicieshavefocussed
onphysical infrastructureand training,butnoattentionhasbeengiven to industrialpolicy,some
thingwhich
the
neo
mercantilist
core
around
Germany
has
no
interest
in
promoting.
EU
policies
have
tended tocement theexistingEuropeandivisionof labour,and imposingausteritypolicieson the
peripheralcountrieswillexacerbatethisyetfurther.
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TheEUsMediterraneanpolicyhasbeencalledintoquestionbythepopularuprisingsinTunisiaand
Egypt;althoughdemocratisationhasbeenwelcomed,theeconomicmodelwhichledtowidespread
povertyandunemploymenthasnotbeenquestionedandtheEUcontinuestopromotefreetrade.
The EUs neighbourhood and enlargement policy is at an impasse; negotiations with Turkey and
countries from former Yugoslavia are making little progress and there is considerable hesitation
aboutfurtherenlargementinmanyEUmemberstates.
EU tradepolicy,whilepaying lipservice to concluding theDohaRound,has shifteddecisively to
wardsnegotiatingbilateralfreetradeagreements.TheEUisincreasingpressureontheAfrican,Car
ibbeanandPacificgroupofcountriestosignEconomicPartnershipAgreements,whichrequirewide
rangingcommitmentstoopentheircountriestoEUtradeandinvestment.
TheEUhasappropriated,wrongly,themilitaryconceptofsecuritytodesignateanillusorywayout
ofdependenceontheworldmarketforenergyandrawmaterials.TheCommissionsnewpaperon
agriculturalpolicymakesanimportantsteptowardssustainablepolicies,butdespiterecognisingthe
socialimportanceofagrarianlabour,paymentswillnotbeconfinedtoactivefarmers.
Alternatives
TheECB
must
act
immediately
as
lender
of
last
resort
in
the
euro
area
bond
market
to
break
the
cycleoffallingpricesandpanicselling.Thenthemajorexpansioninthesizeandpowerofthefinan
cialsectorover the lastthreedecadesmustbedramatically reversed.Commercialand investment
bankingshouldbeseparated;cooperative,publicsectorandothernonprofitbanksshouldbepro
moted toprovide financing for sociallyandecologicallydesirable investmentprojects; investment
banks,hedgefundsandprivateequityfundsshouldbetightlycurtailed.Mostderivativesshouldbe
banned,andallsecuritiesshouldbetradedonpublicplatforms.Afinancialtransactionstaxshouldbe
introducedon all financial transactions, and apubliclyowned European ratings agency shouldbe
established.
Theexistinglevelofpublicdebt,especiallyinGreece,isunsustainable.DebtAudits,aspioneeredin
Ecuador,shoulddeterminewhichdebtsarelegitimate,andwhichinstitutionsshouldbearthewrite
downs.Incountrieswithveryhighpublicdebt,areductionshouldalsobeachievedthroughawealth
taxontheveryrich.Topreventspeculationagainstweakerstates,euroareacountriesshouldswap
remaininggovernmentbondsforjointlyguaranteedeurobonds.
Acommonmonetarypolicyshouldbeaccompaniedbyacommon fiscalpolicy.Thisshouldaim to
promotefullemploymentwithgoodwork.Austerityprogrammeswillmakeitevenmoredifficultto
repaydebt,andgovernmentswithprimarydeficitsshouldbeprovidedwithfinancetofacilitateex
pansion.Astrongprogrammeofpublic investments isnecessary,especially inperipheraleuroarea
countries.FinancingshoulddrawontheEuropeanInvestmentBank,whichisalreadyempoweredto
issuebonds. Inplaceoftheonesidedemphasisoncuts ingovernmentspending,the longtermre
ductioninthetaxationofhigherincomesshouldbereversed.Constitutionalprohibitionsonrunning
governmentdeficits
are
dangerously
restrictive
and
should
not
be
introduced.
A coordinated European wage policy should ensure that the widespread decline of the share of
wagesinnationalincomeisreversed,andthatwagesinstateswithlowerincomesbegintoconverge
on thosewithhigher incomes.A reductionofnormalworking time to30hoursaweek shouldbe
introducedbothtocombatunemploymentandasacontributiontobuildingasocietyinwhichlifeis
notdominatedbywagedwork.
Inplaceofausterityprogrammes,there isaneedforprogrammesthataddressfundamentalstruc
tural problems of capitalism today. Privatisation has been counterproductive, leading to twotier
healthsystems,andtheroleofpublicservicesshouldbereestablished.Lowwagestrategies,sup
posedlyaimedatimprovingcompetitivenessindevelopingregions,havefailed.Developmentshould
insteadbe
based
on
the
adoption
of
modern
technology,
and
European
structural
funds
should
be
used todevelopadvancedproductive sectors.To reduce trade imbalances,member states should
seektoreduceimports,includingthroughtheexpansionofrenewableenergysources.Cooperatives
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canplayanimportantroleinintegratingeconomicandsocialgoals,promotinglocalproductionand
consumption.Flexicurityhas increasedemployment insecurity,and tocounter this full tradeunion
rightsshouldbereestablishedandenforced.Measuresshouldbe introducedtoensurethatenter
prisescannotuse theargumentof competitivepressure fromotherEUcountries tojustify lower
wagesandadeteriorationofworkingconditions.
TheEU
should
address
asymmetries
in
relations
with
neighbouring
countries
by
adopting
asymmetric
arrangements,which favour theneighbouringcountries,and thisshouldbe reflected inanewap
proachtoAssociationAgreements,whichgovernsuchrelations.Freetradeshouldbeabandonedin
favour of sectorally differentiated arrangements with very long transition periods. Neighbouring
countriesshouldretainthepolicyspacenecessarytostrengthentheirproductivestructures,andEU
aidshouldbeorientedtopromotingindustrialdevelopment.
Inplaceofitsmercantilistexportledstrategy,theEUshouldincreasedomesticdemandsoastoab
sorb more imported goods and services. The prevailing model of WTOplus bilateral free trade
agreementsshouldbeabandonedsoas to takeaccountofasymmetriesbetweencountries.Trade
distortingagriculturalsubsidiesshouldbephasedout,anddemands forthe liberalisationofpublic
servicesbytradepartnersshouldbedropped.Developmentpoliciesshouldbereorientedtosupport
theconstruction
of
diversified
local
economies,
and
the
construction
of
state
capacities
in
less
devel
opedcountriesshouldbesupported.
TheEUcouldmakean importantcontributiontoadvancingsustainabledevelopment ifweretoco
ordinatememberstates initiatives forRio II in2012.Thesecould include transnationalgreenjobs
programmes, linking ecological and social concernswith energy saving. The common agricultural
policy could alsobe transformed toachievea compromisebetween thepolitical requirementsof
feedingEuropeanswithhighqualityfoodat lowprices;maintainingactivefarmerswhosustainthe
ecologicalbalanceinthecountryside;andsupportingfairexchangeforagriculturalproductswiththe
restoftheworld.
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Introduction
ThedeepeningcrisisintheeurozonethreatensthefutureofEuropean integration.TheEu
ropeanauthoritieshaveateachstageof thecrisisundertaken theminimumnecessary to
dealwith
the
immediate
situation
and
completely
failed
to
get
on
top
of
the
fundamental
problems.Inplaceofamajorchallengetothepowerofthefinancial institutionswhichare
drivingthecrisis,theEuropeanauthoritieshave imposedpoliciesofausteritythathave led
tohardshipforcountlesscitizensacrosstheUnion.Thesepoliciesnotonlyfailtodealwith
therootcausesofthecrisis;theauthoritarianandhighlyundemocraticway inwhich they
arebeingadvancedalsothreatenstounderminethe legitimacyofthewholeprojectofEu
ropeanintegration.
Thecrisiswasnotcausedbygovernmentdeficits.ItoriginatedintheUSfinancialsystemasa
resultofpolicieswhichtriedtocounterdecadesofstagnatingUSwagesbyallowingwork
ingclass and middleclass households to finance increased consumption by borrowing
againstrising
house
prices.
Policies
adopted
by
the
European
Commission
shortly
after
the
introductionoftheeuroin1999soughttoencourageanintegratedbutlessregulatedfinan
cialsystem inEurope,verymuchmodeledon theUSsystem,andbigEuropeanbanksea
gerlysoughtthehigherreturnsthatappearedtobeavailableintheUS.Thecollapseofthe
bubbleinUShousepricessetoffthefinancialcrisisin2007andwhenthecrisisdeepenedin
September2008majorbanksinboththeUSandEuropewerethreatenedwithcollapse,and
wereonlyrescuedbylargescalegovernmentintervention.Thebankingcrisis,inturn,ledto
acollapseofcreditandamajorslump inoutput in the finalquarterof2008and the first
quarterof2009.OutputinEuropefellbyalmost5%andanevendeeperrecessionwasonly
preventedbygovernmentmeasuretoincreasespendingandcuttaxes.
Thebigjumpingovernmentdebtis,therefore,notacauseofthecrisisbutratheraresultof
measurestakentorescuethebanks,expansionarypoliciestocountertheslump,andasharp
declineintaxrevenues.Butasgovernmentdebthasrisen,theveryfinancialinstitutionsthat
benefited from the rescue seizedon imbalances in theeuroarea, speculatingagainst the
weakestlinks.Sincetheendof2009,aviciouscyclehasdevelopedinwhichfinancialinves
tors and theopinionsofprivate ratings agencieshave interacted todriveup the interest
ratesofperipheraleuroareacountriesbonds,andhasmade itprohibitivelyexpensive for
thesecountriestoraisenew finance.Thisbegan inGreece,whosegovernmentdeficitwas
5%beforethecrisis(principallyduetolowtaxrevenues)butwhichjumpedto15%in2009.
Whilethe
scale
of
support
required
by
Greece,
and
other
smaller
peripheral
countries
is
rel
ativelymodest,speculationhassinceturnedagainstlargercountries,includingSpain(which
actuallyhadagovernmentsurplusbeforethecrisis),ItalyandevenFrance.Infact,govern
mentdeficits intheeuroareaare lowerthan intheUSorBritain,butthesetwocountries
areabletofinancedeficitsthroughtheircentralbanks,apolicywhichatGermaninsistence
is rejectedby theEuropeanauthorities.AsEuropeanbanksonceagainpay largebonuses
andusethetaxpayerasinsurance,Europeancitizensarebeingsqueezedtopayforthecrisis
ofstate financingwhich,asaresult,hasbeen transformed intoadeepsocialandpolitical
crisis.
Thesocialcrisis isdeepest inthecountries inEasternEurope,whichwere forcedtoadopt
strictausterity
programmes
as
acondition
for
balance
of
payments
support
in
2008
and
2009,and intheperipheraleuroareacountrieswhichhavewereobligedtocutwagesand
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governmentspendingasaconditionofeurozonesupport in2010and2011.Austeritypoli
cieshaveledtoawideningsocialcleavage,bothwithincountriesandbetweencountries.As
governmentsstrivetoassurethefinancialmarketsoftheirsoundnessbycuttingspending,
thecitizensofonecountryarebeingsetagainstthoseofother,insomecasesricher,coun
tries.ThisisfertilegroundforantiEUpopulism,whichdisplaysworryingsignsofstrengthen
ingin
several
member
states,
including
former
European
stalwarts
such
as
Finland
and
the
Netherlands.
Thepoliticalcrisis isbeingprovokedbythehighlyundemocraticproposalswhichtheEuro
pean authorities have advanced in response to the crisis,with a dangerous tendency to
wardsauthoritariansolutions.ThenewfiscalproposalsadoptedbytheEuropeanCouncilin
March2011,whileostensiblyaboutpolicycoordinationarelargelyconcernedwithaproce
dureforensuringthattheEuropeanCommissioncan imposepoliciesonrecalcitrantmem
ber states. There have been calls for a common European fiscal policy by JeanClaude
Trichet,at the timepresidentof the EuropeanCentralBank, andWolfgang Schauble, the
Germanfinanceminister,but inbothcasesthishasbeendirectedatensuringagreater fi
nancial discipline, subordinating nationalpolicies to a deeply conservative common Euro
peanpolicy,ratherthanmovingtowardsademocraticallycontrolledEuropeanapproach.In
Greece,Portugaland Ireland,whicharesubjecttoEUrescuepackages,democraticcontrol
overeconomicpolicyhaseffectivelybeensuspendedfortheforeseeablefuture.Andasthe
crisisintheeuroareaintensifiedinOctober2011,controlofpolicymakingwasseizedbyjust
twomemberstatesGermanyandFrancewithGermanyeffectivelymakingtherunning
onthekeypoints.Bycontrast,aGreekproposaltoseekdemocratic legitimacyforgovern
mentpoliciesthroughareferendumwastreatedwithderision.
Inplaceoftheantisocialandundemocraticpolicieswhicharethreateningtounderminethe
wholebasis
for
European
solidarity,
there
is
aneed
for
afundamentally
different
approach.
Theprospectofprotractedausterityandasimplisticfocusonfiscaldisciplinewillundermine
thebasis foreconomic recovery,notonly for thedebtstricken countries themselves,but
alsoforalltheotherstateswhoseprosperityrestsontheEuropeanmarketincludingGer
many.Thecountriesmostdirectlyaffectedbythecurrentdebtcrisiswillonlybeabletore
solve theirproblems throughpolicieswhichpromote economic growthnot austerity.But
thisraisesanevengreaterchallenge.Whileanexitfromthedebtcrisiscallsoutforpolicies
thatpromotegrowth,environmentalsustainabilityrequirestheurgentadoptionofpolicies
thatwillensureamassivereductionintheconsumptionofnonrenewableresourcesandthe
emissionofgreenhousegassesandotherpollutants.
Thepolitical leadersof theEuropeanUnionand itsmember stateshave signally failed to
meet these challenges, but there are voices calling for an alternative.While unions have
soughttofightagainstthe impactofofficialpolicies,newformsofpopularprotest,suchas
the indignados,who firstemerged inSpain,have foundanecho inmanypartsofEurope.
Like theOccupyWallStreetmovement in theUS, theyhaveraised fundamentalquestions
aboutthedistributionofwealthandpowerinoursocieties.
Asinpreviousyears,thisEuroMemorandumseekstosetoutacriticalanalysisofrecenteco
nomicdevelopmentsinEuropeandtopresentthebasisforpossiblealternativepolicies.Itis
intendedasacontributiontothecriticaldiscussion in intellectualandsocialmovements in
Europe,and
in
solidarity
with
all
those
struggling
against
the
impact
of
the
deeply
regressive,
antisocialpoliciesoftheEuropeanauthorities.
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1 ThedeepeningcrisisoftheEuropeanUnion
1.1 Theeuroareafacesanewanddangerousphase
TheEuropeanUnion (EU) issettoregisterasecondconsecutiveyearofmodesteconomic
growth in2011,butoutputfortheEUasawholewillremainbelow itsprecrisis leveland
countriescontinue
to
diverge
strongly,
as
shown
in
table
1.
In
Germany,
and
most
other
core
euroareacountries,outputisexpectedtoriseslightlyaboveprecrisislevelsin2011.Inthe
peripheraleuroareacountries,bycontrast,output isstillbelowprecrisis levelsand,most
disturbingly,recessionshaveactuallydeepened inGreeceandPortugal. InEasternEurope,
althoughcountriesaresettogrowin2011,withespeciallystronggrowthinPoland,output
inmostothercountriesisstillwellbelowprecrisislevels,mostnotablyinRumaniaandthe
Balticregion,whichremainstheworsthitareainthewholeEU.
Thedivergentpatternsofgrowthhavebeenreflectedinthe2011figuresforunemployment
andincome.UnemploymentremainshighthroughouttheEU,andalthoughratesfellslightly
duringthe
year
in
around
half
the
member
states,
they
increased
in
the
other
half,
with
the
largest increases inSpain,GreeceandCyrus.Realwages fell slightly inmany countries in
2011andweremorethan10%belowprecrisislevelsinGreece,Hungary,Romania,Lithua
niaandLatvia.
Inthesecondhalfof2011theeconomicrecoverybegantoslow,andthis lookssettocon
tinueinto2012.1InEurope,demandisbeingdepressedbythewidespreadadoptionofaus
terityprogrammes.ThesearemostmarkedinIreland,Portugaland,aboveall,Greece,which
havebeenforcedtoslashgovernmentspendingandwagesasaconditionoffinancialsup
port.ButwagesandspendinghavealsobeencutinSpain,andgovernmentsthroughoutthe
euro areahavebeen adoptingprogrammesdesigned tomeet EU targets for government
deficitsbelow
3%
of
GDP
by
2013.
The
international
outlook
has
also
deteriorated.
Growth
in theUnitedStatesweakenedmarkedly in2011as the impactofexpansionary fiscaland
expansivemonetarypolicieswaned,andthepolitical impassebetweenDemocratsandRe
publicans in Congress made further expansionary measures such as thejobs plan an
nouncedbyPresidentObamainSeptembermostunlikely.2Furthermore,therapidgrowth
inlargerdevelopingcountriesthathasbenefitedexports,aboveallfromGermany,looksset
to slowdown,with increasing concern inbothChinaandBrazilat rising inflation,and the
InternationalMonetaryFund (IMF)warningof thepossibilityofa rapid reversalofcapital
flowstoAsiaandLatinAmerica.3
Themost
serious
challenge,
however,
concerns
the
debt
crisis
in
the
euro
area
which
had
beentemporarilystabilisedin2010butwhichreemergedinspring2011andwhichentered
whattheIMFdescribedasanewanddangerousphaseinthecourseofthesummer.Atthe
EuropeanCouncilmeetinginMarch2011,EUheadsofgovernmentagreedonthesocalled
EuroPlus Pact, a series of highly undemocraticmeasures designed to give the European
Commissiongreatercontrolovermemberstateseconomicpolicies, includingnewrulesto
enforce stricter fiscaldiscipline.Theyalsoagreed that the440billionEuropeanFinancial
1 InOctober2011,theOECDcutitsforecastforeurozonegrowthin2012from2%toonly0.3%.
2
Inthe
face
of
slowing
growth,
the
Federal
Reserve
is
reputedly
considering
athird
round
of
pumping
moneyintotheeconomythroughlargescalebondpurchases(socalledquantitativeeasing).3 IMF,GlobalFinancialStabilityReport,September2011,pp.3637.
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StabilityFacility(EFSF),whichwascreatedinMay2010butisduetoexpirein2013,should
be replaced in2013byapermanent700billionEuropeanStabilityMechanism.Thenew
fundwillmake loansagainst strict conditionsand,despite some initialopposition,willbe
allowed exceptionally to purchase government bonds. However, at the insistence of a
groupofcountriesledbyGermany,privateinvestorswillberequiredtobearpartofthecost
inthe
event
that
over
indebted
countries
are
unable
to
meet
debt
payments.4
This
measure,
whichtheEuropeanCentralBank(ECB)opposed,wasoneofthefactorsthatcontributedto
reignitingtheeuroareacrisis.Assoonasitbecameclearthatprivateinvestorswouldhave
tobearpartofthecostoffuturelosses,theinterestrateforeuroareaperipheralbondsbe
gantorisesignificantly.Forcountriesthatwereconsideredtobeatrisk,raisingnewfinance
fromprivate investorsbecameprohibitivelyexpensive,and inMayPortugalwasobligedto
turntotheEFSFfor78billion.
Thedeepeningofthecrisiswasalsoduetoadawningrecognitionbyprivate investorsthat
the austerity policies imposedonGreece andother countrieswere leading to deepening
recessionswhichmadeitevenmoredifficultforcountriestomeettheirdebtpayments.The
Greekgovernmenthadintroducedmajorspendingcutswhichsignificantlyreduceditsdeficit
but,asoutputandemploymentfell,thislednotonlytowidespreadsocialhardshipbutalso
toafallintaxrevenues,makingitimpossibletomeetagreedtargets.
Euro area governments responded to thedeteriorating situation at the EuropeanCouncil
meeting inJuly2011.Theyagreedonanew loan forGreeceof109billion,althoughonly
around34billionwouldactuallybeforGreece,andtherestwastoprovideguaranteesfor
acomplicatedschemedesignedtoreduceGreecesdebt.Greecewastosubmittoyetfur
thergovernmentcuts,togetherwithaprivatisationprogrammeoverseenbytheEUauthori
ties.Recognising that thepenal interest rateschargedonprevious loanshadexacerbated
countriesproblems,
the
rate
was
cut
from
3%
to
1%
above
the
funding
costs,
and
this
was
appliedtoloanspreviouslygrantedtoIrelandandPortugalaswell.Theeuroareaauthorities
alsoproposedaseriesofrevisionstothetermsoftheEFSF, including increasing itssizeso
thatitwouldbeabletolendafull440billionandallowingittobeusedtobuygovernment
bonds and to recapitaliseprivatebanksmeasures thathad tobe approvedbymember
statesparliaments.5
Thenew initiativefailedtostemthepressurefromprivate investorsand inAugust interest
rates increasedonbonds issuedbyBelgium, Italy,Spainand, for the first timealbeit toa
lesserextent,France. In response, theECB,whichhadhaltedbondpurchases in January,
resumed intervention in an attempt to stabilise the market, purchasing bonds issued by
Spainand Italy (the rulechangeswhichwouldhaveallowed theEFSF topurchasegovern
mentbondshadnotyetbeenapprovedbymemberstates).At thesame time,withhuge
sumsofmoneynowsetfree,therewasamajordemandforbonds issuedbyGermanyand
theinterestrateonits10yearbondsfellbelow2%,thelowesteverrecordedbytheFederal
Republic (the sameoccurred forUS governmentbonds, leading to the lowest rates in60
years).
4 From2013,alleuroarea governmentbondswillbe required to include collectiveactions clauses,
whichenableasupermajorityofbondholderstoagreeonapartialwritedownofvalueswhen it is
cleargovernments
will
not
be
able
to
repay
the
full
amount.
5 Approvalwascompleted inOctoberafter theSlovakianparliament,which initiallyvotedagainst the
revisions,gaveitssupport.
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Accordingto IMFestimates,byAugust2011,nearlyhalfofthe6,500billionstockofeuro
areagovernmentdebtshowedsignsofheightenedrisk.6Thishashadmajorimplicationsfor
Europeanbanks,whichhaveextensivecrossholdingsofgovernmentbonds.Asbanksfaced
increasingstrains,equitymarketvaluationsofEuropeanbanksbegan todecline, fallingby
55%betweenJanuaryandSeptember.7EstimatesofhowmuchcapitalEuropeanbanksneed
toraise
to
compensate
for
losses
vary.
In
July,
the
new
European
Banking
Authority
(EBA)
publishedtheresultsofstresstestson91majorEuropeanbanks,andonly9failed.Extraor
dinarily,however,thetestsdidnotconsiderthepossibilitythatGreekorothergovernment
bondsmight fail!PreliminaryreportsofrevisedEBAstresstestspublished inOctober indi
catedthatEuropeanbankswouldneedtoraisesome90billion.IMFestimates,madepublic
byChristineLagardeshortlyafterbecomingthenewmanagingdirector,claimthattheshort
fallisaround200billion.
Theauthoritiesmostacuteconcern isthataGreekdebtdefaultcouldsetoffachainoffi
nancial failurescomparable to thatwhich followed the failureofLehmanBrothers inSep
tember2008.ThisconcernissharedbytheUS,theG20,theIMFandtheWorldBankwhich
haveallmadeurgent calls for theeuroarea to takedecisiveaction.However,actionhas
beenhinderedbypoliticalfragmentationwithintheEUaswellassignificantdifferencesbe
tween states,mostnotablybetweenGermanyand Francewho, to the chagrinof smaller
countries,dominatethepolicyprocess.
AtamuchawaitedEuropeanCouncilmeetingat theendofOctober2011,euroareagov
ernmentsagreedthat,inviewofthesharpdeteriorationinGreekfinances,theloannegoti
atedforthecountryinJulyshouldberaisedto130billion,anditbackedaGermancallfor
Greecesoutstandingdebttobewrittendownby50%.8Inordertoconfronttheriskofthe
debt crisis spreading, the meeting also agreed that the capacity of the EFSF should be
enlargedto
around
1,000
billion.9
Because
of
awidespread
unwillingness
to
increase
con
tributionstotheEFSF,thisistobeachievedbyleveragingtheexisting440billion,through
providingguaranteesforthefirsttrancheof lossesonbonds(20%to30%hasbeenconsid
ered) rather thanmaking loans. Inpriornegotiations,Francehadproposed that theEFSF
shouldbeabletoborrowfromtheECB,butthiswasblockedbyGermany.Theheadsofgov
ernment also agreed to back the European Banking Authoritys proposal to increase the
minimumcapitalrequirementsforEuropeanbanksto9%ofassets.Heretootherehadbeen
disagreementbeforethemeeting,withFrancewishingtodrawon theEFSFtorecapitalise
banksandGermanyarguingthatrecourseto theEFSFshouldbea lastresortafterprivate
6 IMF,Global Financial StabilityReport, September2011,p.16.This isbasedon creditdefault swap
rates(i.e.insurance)ofover200basispointsforgovernmentdebtissuedbyGreece(5%oftotal),Ire
land(1%),Portugal(2%),Spain(9%),Italy(25%)andBelgium(5%).7 FinancialTimes,13September2011.TheFrenchBelgiumownedDexiabank,whichhadlargeholdings
ofgovernmentbonds,failed inSeptember2011, leaving100billionofbondstobeheld inanewly
createdbadbank.8 Germanbankshad substantially reduced theirholdingsofGreekgovernmentdebt since2010.The
writedownwas initiallyopposedby France,whosebanksmaintainedmore substantialholdingsof
Greekdebt,andbytheECB,whichwasconcernedthatthiscouldsetoffwiderdefaults. Inorderto
avoidthewritedownprovokingtheratingsagenciesfromdeclaringaformaldefaultbyGreece,banks
mustvoluntarilyexchangeexistingbondsfornewbond.9 Theexactamountisunclearduetouncertaintyabouthowmuchofthefundsresourceswillbeavail
able,andthedegreeofleveraging.Italy,whichisseenasthegreatestsourceofpotentialrisk,hasan
outstandinggovernmentdebtof1,900billion.
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marketsandnationalgovernmentshavebeentapped.Butmanyofthecomplicatedtechni
calissuesabouthowtoimplementtheseproposalshadnotbeenresolvedand,intheafter
mathofthesummit,sellingineuroareabondmarketsintensified.
Table1.
Indicators
of
EU
output,
unemployment
and
wage
growth
Euro area core Euro area periphery
EU
27
EA17
Belgium
Germany
France
Luxemb.
Netherl.
Austria
Finland
Ireland
Greece
Spain
Italy
Portugal
GDP growth2010-11, %* 1.7 1.4 2.3 2.5 1.7 3.3 1.9 2.3 3.6 0.7 -3.2 0.7 1.9 -2.2
GDP growthpeak-2011, %* -0.8 -1.0 1.7 0.8 0.5 0.5 0.0 0.7 -1.4 -9.6 -10.0 -3.1 -3.4 -3.4
Unemploymentrate, 2011, %* 9.5 10.0 7.0 6.1 9.8 4.6 4.1 3.9 7.8 14.4 16.7 21.0 8.0 12.5
Real wage growth2010-11, %** -0.3 -0.3 -0.2 0.5 -0.1 -1.0 0.9 -0.3 -0.5 -1.3 -3.5 -1.7 -1.0 -3.6
Real wage growthpeak-2011, %** -0.4 -0.4 -1.5 0.2 -0.1 -1.2 0.3 -0.3 -0.5 -1.3 -11.1 -3.7 -1.0 -3.7
Other euro area Northern EU Eastern EU
Cyprus
Slovenia
Slovakia
Denmark
Sweden
United
Kingd.
Bulgaria
Czech
Rep.
Estonia
Latvia
Lithuania
Hungary
Poland
Romania
GDP growth2010-11, %* 1.5 1.8 3.5 1.6 4.2 1.6 2.7 2.0 4.2 2.7 4.4 2.6 4.3 1.3
GDP growthpeak-2011, %* 0.7 -4.9 2.5 -3.0 4.4 -2.2 -2.7 -0.2 -11.4 -18.1 -9.3 -3.1 9.8 -7.0
Unemployment
rate, 2011, %*7.0 7.9 13.3 7.3 7.4 8.0 11.5 6.8 12.8 16.2 15.6 10.9 9.5 7.3
Real wage growth2010-11, %** 0.5 -0.2 0.3 -0.8 1.6 -0.1 3.2 0.3 0.8 -1.7 0.2 -1.3 2.0 -4.2
Real wage growthpeak-2011, %** 0.5 -0.2 7.1 -0.8 0.8 -1.6 9.5 1.9 -3.8 -22.9 -17.0 -11.8 4.6 -16.9
Source:*Eurostat(October2011),**Ameco(May2011).Peakishighestpreviousyearsince2007.
1.2 AusterityasapolicyguidelineTheEuropeanCouncilsetitsausteritypoliciesatitsMarch2011meeting,asfollows:Within
thenewframeworkoftheEuropeansemester,theEuropeanCouncilendorsedthepriorities
forfiscal
consolidation
and
structural
reform.
It
underscored
the
need
to
give
priority
to
re
storing sound budgets and fiscal sustainability, reducing unemployment through labour
marketreformsandmakingneweffortstoenhancegrowth.10
EachoftheabovestrandsisfurtherelaboratedbytheEuropeanCommissioninitsreporton
advancingtheEUscomprehensiveresponsetothecrisis(COM[2011]11final),whereby:
Restoringsoundbudgetsandfiscalsustainabilityrequiresannualadjustmentsofthe
structuralbudgetinexcessof0.5%ofGDP,theconventionalbenchmarkoftheStabil
ity andGrowthPact. This is tobe achievedby keepingpublicexpenditure growth
firmlybelowtherateofmediumtermtrendGDPgrowthandincreasingtaxes,espe
10 EuropeanCouncil,24/25March2011,Conclusions,para.2,p.2.
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cially indirecttaxes,consideredtobemoregrowthfriendlythandirecttaxes.Also,
fiscalconsolidationistobesupportedbypensionsystemreforms,suchasincreasing
theageofretirementandprovidingincentivesforcomplementaryprivatesavings.
Inordertoreduceunemployment,governmentsareadvisedtoprovideincentivesto
work,avoidbenefitdependencyandsupportadaptabilitytothebusinesscycle(ibid,
p.6).Also, inorder tobalancesecurityand flexibility, it isrecommended thatgov
ernmentsreduceoverprotectionofworkerswithinpermanentjobs(p.7).
Inrelationtogrowth,frontloadinggrowthenhancingmeasuresarerecommended.
Suchreforms includetheeliminationoftheremaining barrierstotradeandobsta
clestoentrepreneurship,thefull implementationoftheServicesDirective,andtax
harmonisation,althoughthisisdeemedtobeasensitiveissue(p.8).
Overall,themainstrandsofEUeconomicandsocialpolicyconstituteatriptych,consistingof
fiscal consolidation labour market reformmarket liberalisation,where liberalisation
includesprivatisationof state assets,aswellasof social security systems.This triptych is
encapsulatedin
austerity,
as
adefining
element
of
the
present
neoliberal
agenda
and
a
centralpolicyguidelineemployednotonlyby theEU,butalsoby the IMF,ascanbeseen
from the individualEU/IMFProgrammes,whichcomeunder twoheadings, theBalanceof
Paymentfacilityandthenewlyinstituted,albeitofatemporarydurationassetoutinsection
1.1 above,EuropeanFinancial Stability Facility (EFSF) and theEuropean Financial Stability
Mechanism(EFSM).BoththeEFSFandtheEFSMwerebasedonthe loanfacilitysetupfor
Greece.
TheEU/IMFProgrammesI:BalanceofPaymentsfacility
Intheaftermathofthefinancialcrisis,anumberofjointEU/IMFbalanceofpayments(BoP)
Programmeswere
put
into
effect
in
Hungary,
Latvia
and
Romania.
According
to
Art.
143
of
theTreatyoftheUnionandECReg.332/2002,theseprogrammesareaddressedtomem
berstates inbalanceofpaymentsdifficultiesandaim to safeguard the functioningof the
internalmarketand/or the implementationofcommoncommercialpolicy.Theyentailthe
provisionofmediumterm financingon thebasisof conditionality.TheBoP facility isonly
opentomemberstatesthatdonotbelongtotheeurozone.Ithasaceilingof50billion.
Inparticular,theEUactsasaborrower,issuingdebtinstrumentsinthecapitalmarketsand
lendingthefundsthusraisedtotheprogrammecountries.OnthebasisoftheViennaInitia
tivecreatedin2009,otherinternationalfinancialinstitutions,suchastheEBRD,EIBandthe
WorldBank
also
participate
in
these
programmes.
LatviaInDecember2008,LatviawasgrantedaBoPProgramme,expiringinJanuary2012
andamountingto20billion,ofwhich6.5billionwerefromtheEU.Theconditionsofthe
Programme included the following: fiscalconsolidation; fiscalgovernancereform; financial
sectorregulationandsupervisionreform;structuralreforms;andabsorptionofEUstructural
funds for projects cofinanced by the EU.11
In 2007 Latvia had a current account deficit
amounting to22.3%ofGDP,whichwas reduced to0.3%by2011.Therewas,however,a
declineinLatviasrealGDPofmorethan20%between2007and2010whileunemployment
rosefrom6%ofthelabourforcein2007to17.2%by2011.Thelowratesofgrowthforecast
for2011and2012will still leaveoutputmore than10%below the2007 levelandunem
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ploymentover13%.Lastbutnotleast,in2007itspublicdeficitwasonly0.3%ofGDPandits
publicdebt9%ofGDP,risingto4.5%and48.2%respectivelyby2011.Thesefiguresunder
scorethefactthatalthoughLatviadidhaveaprobleminthefaceofthecrisisandasevere
recession, thiswasnotoneofpublic indebtedness; this raises cleardoubtsover theEUs
emphasisonausterity.
RomaniaRomaniawasgrantedtwoBoPpackages:20billion,ofwhich5billionwasfrom
theEU,inMay2009for24monthsand5billion,ofwhich1.4billionwasfromtheEU,in
March2011,alsofor24months.TheconditionsoftheBoPprogrammeswereidenticalwith
those forLatvia,with theadditionof theprivatisationof stateownedenterprises, the re
formofthepublicwagesystemandofthepensionsystem.12
LikeLatvia,Romaniahadacur
rentaccountdeficitin2007(13.6%ofGDP),whichwasreducedto4.4%by2011.However,
itspublicfinanceswerewithintheStabilityPactlimits,whileithadahighgrowthrate(6.3%
in2007).In2007itspublicdeficitwasequalto2.6%ofGDPanditspublicdebtto12.6%of
GDP).By2011,theseincreasedto,respectively,4.7%ofGDP,primarilyduetothecountrys
severerecession(8.3%decline inGDPbetween20082010),and33.7%ofGDP,wellwithin
SGP limits.However, under the impact of the recession, unemployment rose to 8.2% in
2011.
HungaryTheBoPprogramme forHungarywas the first tobegranted, inOctober2008,
andexpiredinNovember2010.Itamountedto20billion,ofwhich6.5billionwascontrib
utedbytheEU.TheconditionsattachedtotheprogrammewerethesameasthoseforLat
viaandRomania.Likethesetwocountries,Hungaryscurrentaccountimprovedfromadefi
citof7%ofGDPin2007toasurplusof1.6%in2011.Overthesameperiod,thepublicsec
torbalanceimprovedfromadeficitof5%ofGDPtoasurplusof1.6%,whilepublicdebtrose
from66%ofGDP to75%.Afterasevererecession inwhichrealGDP fellby6.8% in2009,
outputis
set
to
increase
by
2.7%
in
2011,
although
this
is
insufficient
to
restore
GDP
to
2007
levels. Inaddition,unemploymentdeterioriated from7.4%of the labour force in2007 to
11%in2011.Thelargeinflowsofcapitalbeforethecrisishavenowbecomeasourceofeco
nomic fragility asmultinational corporations repatriateprofits to their richer home coun
tries.
Inallthreecountries,abrutalcorrectionofthecurrentaccountbalancewasbroughtabout
throughabrutalrecession.TheausteritydemandedbytheIMFandtheEuropeanCommis
sionisincompletecontradictiontotheneedsoftheselowincomecountriessufferingfrom
massunemploymentand in contrast to their relatively favourablebudgetary situation (all
threecountrieshavegovernmentdebtratiosandpublicsectordeficitsbelowtheEUaver
age).
TheEU/IMFProgrammesII:TheGreekloanfacility,theEFSFandtheEFSM
TheEU/IMFProgrammesunderthisheadingwereespeciallysetupasaresponsetothepub
licdebtcrisisand,inthecaseofIrelandandPortugal,asaresponsetotheEuropeanbanking
crisis.ThetermsoftheprogrammesaresimilartothoseoftheEasternEuropeancountries,
althoughthefundingdiffered.
TheGreekloanfacilityisa3yearprogramme(20102013)providingatotalof80billionin
bilateralloansfromeuroareacountriesand30billionfromastandbyagreementwiththe
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IMF.TheEuropeanCommission isnotactingasaborrower,butasanadministratorofthe
pooledbilateral loans.Theprogramme isconditionalonmeasures taken toenhance fiscal
consolidationandpensionreform,topromotelabourmarketreforms,toliberaliseregulated
sectorsandtoprivatiselargesegmentsoftheeconomystillinpublicownership.Thefollow
ingtargetsweresetfor2014:thepublicdeficitwastobecutfrom15.4%in2009toat2.6%;
publicdebt,
which
stood
at
127%
in
2009
was
to
set
for
157%.
According
to
the
latest
review
carriedoutbythesocalledTroika(theEuropeanCommission,theECBandtheIMF),these
targetsareunrealisticsincetheyunderestimatetheimplicationsofthedeepeningrecession.
Itisestimatedthatthepublicdeficitwillnotfallbelow3%ofGDPuntil2020,whilethepub
licdebtwill reach186%ofGDP in2013and152% in2020.The reasonsoffered for these
divergencesarethelongerandmoresevererecessionthanexpected(GDPhasdeclinedby
morethan10%sincethestartoftheprogrammeanditwillcontinuetodeclinein2012)and
slippages in policy implementation.13
The policy recommendations remain unchanged,
whileGermanyandFrancesortouttheirdifferencesoverthequestionoftherestructuring
oftheGreekdebt.Inthemeantime,unemploymenthasrisenfrom8.3%ofthelabourforce
in2007
to
nearly
17%
in
2011.
InIreland,whichadopteditsfirstausterityprogrammein2009,athreeyearEU/IMFauster
ityprogrammewasintroducedin2010.ThisinvolvedbilateralcontributionsfromtheBritain,
SwedenandDenmark, from theEFSFand theEFSM,aswellas from the IMFandan Irish
contribution through theTreasurycashbufferand thenationalPensionReserveFunds. It
amountsto85billionintotal,ofwhich35billion(41%)isearmarkedforthedeleveraging
and reorganisationof thebanking sector.Theotherobjectivesof theprogramme include
fiscaladjustmenttobringthedeficitfrom14.3%ofGDP in2009tobelow3%by2015,to
getherandstructural reformsof the labourmarket.According to the latestTroika review,
Ireland
is
expected
to
return
to
positive
growth
in
2011,
estimated
at
0.4%,
after
a
decline
of
morethan10%between2007and2010.14
Theunemploymentratehasrisenfrom4.6% in
2007to14.6%in2011.ThelargenetflowsofprofitsoutofIrelandbyforeignmultinational
corporationshavenotfallenduringthecrisis(althoughsomeoftherecordedflowsmayre
flecttransferpricingbyMNCs)and,asaresult,whileGDPdeclinedby10.2%between2007
and2010,GNPregisteredafallof12.1%.
Portugalisalsosubjecttoa3yearprogramme(20112014).Supportof78billionhasbeen
financedbycontributionsfromtheEFSM,EFSFandIMF.Theprogrammesobjectivesinclude
fiscal consolidation tobring thepublicdeficit tobelow3%ofGDPby2013, structural re
formsto improvecompetitivenessanddeleveragingandrecapitalisationofthebanks.Pro
tugalsreal
GDP
fell
in
2008,
2009
and
2011
and
is
forecast
to
fall
in
2012,
resulting
in
acu
mulativedeclineof6%.Unemploymenthasrisenfrom8%in2009to12.3%in2011.Inspite
of thesedevelopments, theTroika remainsoptimistic thateconomic recoverywill start in
2013,althoughmostofthedifficultchangesstilllieahead.15
Overall,theEU/IMFprogrammesreiteratethetriptychfiscalconsolidationlabourmarket
reformmarketliberalisation,whichisevidentinthegeneraldirectionofEUeconomicand
socialpolicy.TheyhavealsobeeninsistedonbytheIMF.Oneofthemoststrikingelements
13 Statementby the EuropeanCommission, theECB and IMFon the FifthReviewMission toGreece,
Memo/11/684,11
Oct
2011.
14 StatementbytheEC,ECBandIMFontheReviewMissiontoIreland,Memo/11/720/20Oct2011.
15 Memo/11/555/12,August2011.
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oftheEU/IMFprogrammesisthattheyhaveallresultedinsteepdeclinesinoutput.Accord
ingtoannualAMECOdateforGDPdata,thefall inoutputbetweentheprecrisispeakand
the subsequent troughwas20.6% in Latvia, 8.3% inRomania,5.6% inHungary,14.4% in
Greece,10.1%inIreland,and6.0%inPortugal.
1.3
Thecontradictions
in
EU
enlargement
and
neighbourhood
policies
ThegrowthmodelsintheofficialandpotentialEUcandidatecountriesinSouthEastEurope
andTurkeyhavebeenseverelyaffectedbythecurrentcrisis.Inrecentyears,growthinthese
countrieswasmainlybasedoncapital inflows thatwereattractedbyrigidexchange rates
and relativelyhigh interestrates.Asignificantpartof the risingprivatedebtwasdenomi
nated in foreigncurrencyand,asa result, the indebtedmiddle stratawerechained toan
overvaluedexchangerate.Thehighexchangeratehashadseriousdrawbacks:Ithasstunted
industrialdevelopment,especially in the successor statesof former Yugoslavia. In Serbia,
industrialproduction in2008wasonly51%of the level in2001.16
Unemployment isstruc
turallyveryhigharound30%inMacedoniaandBosniaandHerzegovina,andaround20%
inSerbia
and
Montenegro.
In Turkey, theperformanceofmanufacturing hasbeenmorepositive than in the former
Yugoslav republics, but itwasmainly assembly plants that flourished. The exchange rate
policies favoured importsovernationalproductionandexports.The tradeandcurrentac
countdeficitswereextremelyhighintheSouthEastEuropeancandidatecountries,inmany
casesover10%ofGDP.Thecurrentaccountdeficit inTurkeywas lower,butgrewsignifi
cantlybetween2002and2007.Inspiteofhighgrowthrates,employmentinTurkeyhasnot
grownandrealwageshavelaggedfarbehindproductivitygrowthundertheJusticeandDe
velopmentParty(AKP)governments.
Theeconomies
of
(non
EU)
South
East
Europe
and
Turkey
were
severely
hit
by
the
crisis.
CroatiaandMontenegrohave suffered fromaparticularly strongand lasting recession. In
bothcountries,GDPdeclined inboth2009and2010.ThecontractionofGDPwasparticu
larlystrong in2009withafallof6.0%and5.7%respectively.Thepolicychoicesofthetwo
countriesareseverely limited. InCroatia, the levelof foreigncurrencydebts isparticularly
high.Inviewoftheinterestsofthebankingsectorandthoseindebtedinforeignexchange,
theCroatiangovernmenthasoptedfordeflationarypoliciesand istryingtoavoidadepre
ciationofthekunaatanyprice.Incontrasttothisstrategy,Croatiancriticaleconomistshave
called foramoredevelopmentalapproachandaconversionofexistingdomestic foreign
exchangedebtsintonationalcurrencyinordertogainpolicyspace.Montenegrohasacom
pletely
euroised
economy
and
registers
the
highest
current
account
deficit
in
the
region
(26.6%of theGDP in2010).Serbia,BosniaandHerzegovinaaswellasMacedoniaall suf
feredrecessionsin2009,butstabilizedGDPin2010.Policieshavebeenprocyclicalinthese
countriesaswell,oftenunder IMFprogrammes.TheTurkisheconomysuffered fromase
vere recession in2009 (a fall inGDPof4.8%),butexperienceda strong rebound in2010
(+8.9%).However,Turkishgrowth isextremelyreliantoncapital inflows,withacurrentac
countdeficitin2010equalto9%ofGDP,andtherecoveryisthereforeextremelyvulnerable
toareversalofcapitalflows.
TheEasternneighbourcountrieshavealsoprovedtobeveryvulnerable,thoughtheypos
sessastrongerindustrialbasethantheeconomiesofformerYugoslavia.Ukrainianprecrisis
16 M.Uvalic,Serbia'sTransition TheThornyRoadtoaBetterFuture,Palgrave,Macmillan,2008,p.210
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growth was heavily reliant on capital inflows and rapidly increasing indebtedness, and
UkrainianGDPfellby14.8%in2009withalimitedrecoveryin2010.Thecrisiswasmilderin
more statistBelarus,but theeconomy is constrainedby a severe shortageof foreignex
change.
Thecrisisyearshaverevealedthatthecapitalisttransformationstrategieswhichwerepro
motedby
transnational
and
local
business
interests,
national
governments,
the
EU
and
in
ternationalfinancialinstitutionshaveresultedinunviableproductionstructuresintheouter
EastEuropeanperipheryof theEU. In theNorthAfricancountries, thecrisis revealed the
structuralweaknesses of the EUsMediterranean strategy, the latter being primarily ori
ented towards liberaleconomicpolicies.Contrary to theEasternEuropeanperiphery, the
economiccrisishastranslatedintorevolutionarypoliticalprocessesinNorthernAfrica.
Neoliberalpolicieshave likewiseproducedextremelyvulnerableeconomiesandpolarised
societies intheNorthAfricanneighbourcountries. Inthefinancialpress,TunisiaandEgypt
hadbeenpresentedasshowcasesforneoliberalpolicies.Thesetwocountrieswerethepil
lar
of
EU
Mediterranean
policies
in
Northern
Africa.
The
EU
Mediterranean
policy
has
two
maingoals:accesstotheenergyresourcesoftheregionandpoliticalstabilityand, forthe
EU,politicalstabilityhadpriorityoverdemocratisation.
1.4 Radicalisinganeomercantilismintradeanddevelopmentpolicies
Thedeepeningofthefinancialcrisisin2008and2009 ledtoadramaticfallinglobaltrade,
and thishadaparticularlymarked impactonexportorientedEUmember states likeGer
manyorAustria,buttherecoveryoftrade in2010and2011fuelledstronggrowth inGer
manyandothercoreEUcountries.Therecoveryoftheworldeconomywasstrongly influ
encedbythehighgrowthratesofemergingeconomies,particularlyChina.Atthesametime,
although
global
imbalances
were
somewhat
muted
as
a
result
of
the
impact
of
the
financial
crisis, they remainatworrisome levels.Whilemostdeficitcountries, inparticular theUS,
reduced their importsasaconsequenceofweakdomesticdemand,majorexportnations
likeGermanyandJapanhavecontinuedtopursuetheirexportorientedgrowthmodels.This
isalsotrueforChina,whereexportsremainthedrivingforceforgrowth.AlthoughtheChi
nesegovernmentappearstohavetakenthefirststepstowardspromotingagrowthstrategy
basedon strongerdomesticdemand, thiswillonlyhave a serious impact, ifatall, in the
longerterm.
Asecondtrendwithpotentiallydestabilisingeffectswastheappreciationofthecurrencies
ofsomeemergingeconomies.Thiswasbroughtaboutbyinflowsofcapitalfromcorecoun
tries,in
particular
the
US
and
the
Eurozone.
Emerging
economies
like
Brazil,
whose
currency
theRealappreciatedbymore than30%betweenearly2009andmid2011, implemented
measures to halt these inflows, although with limited success. Their governments inter
pretedtheinflowsasaconsequenceofbeggarthyneighbourpoliciesresultingfromlarge
scalemonetaryexpansionintheUS(socalledquantitativeeasing)andineffectivecrisisman
agement in theEurozone,andwarnedof thedangersofaglobalcurrencywar.While the
countriesoftheGlobalSouthlargelymanagedtoavoidtheworstimpactoftheglobalcrisis
in2008and2009,theturbulenceintheEurozonetogetherwiththedeepeconomicandpo
liticalproblems faced in theUSarewidelyseenasacentralcauseof theslowdown inthe
globaleconomyin2011andtheriskofarecessionin2012.
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1.5 Adeepeningcomplexcrisistheexamplesofenergyandagriculture
The complex crisis of economic, ecological and international relationswhich has become
apparentinrecentyears,isnotbeingaddressedseriouslybyestablishedpolicies.Thecatas
tropheofFukushima,whichconfirmedallthedangersofnuclearenergy,haspromptedthe
Germangovernmenttoreinstateanolder,longtermplantophaseoutnuclearenergy,and
thiswillbefollowedeventuallybyBelgium,butithasnottriggeredaEuropeanwidephasing
out.Inoneareaafteranother,adhocmeasuresarebeingtaken,mainlytobuytime,inthe
hopethatspontaneoussolutionswillappear,butwithnosystematicapproachtodevelop
ingserious longtermproposals. Inthecaseofthe lossofbiodiversity,forexample,theEU
hasfailedtofulfilitspromisetodevelopanadequatepolicy,althoughtherampantdestruc
tioncontinuesasinpreviousdecades.
SincetheCopenhagensummitonclimatechangefailedtoachieveanagreementonapost
Kyotoprocess,theEUhasalsoprovedunabletoseizetheopportunityforforminga coali
tionofthewillingwhichcouldgoaheadwithambitiousmeasurestocontrolandreducethe
emissionof
greenhouse
gases.
Instead
it
has
continued
to
maintain
its
illusory
belief
that
this
canbeachieved through technological fixesandmarket instrumentsand itseemsunlikely
thatany seriousbreakthroughwillbeachievedunless socialandpoliticalmovementsare
abletogeneratesufficientpressure.
Theproblemof limitedresourceshasbroadened,even in themoregeneralpublicpercep
tion,frompeakoiltopeakeverything.17
Nevertheless,theEUhasnotevenbeguntode
velop a sustainable strategy for coping with problems of resource scarcity, a policy that
wouldhavetoemphasiseadaptingdemandtosupplyinasociallyjustway.Instead,theEU
continuestopursueastrategybasedon securingprivilegedaccesstoresources forEuro
peanconsumers.Thisisanapproachthatisofonlyshortor,attheverybest,mediumterm
relevance,and,mostdisturbingly, is likely to involvean increasingweight for themilitary
dimensionofpolicy.
Theproblemisespeciallymarkedasregardsenergypolicy:theEUclingstoproblematicen
ergysources(nuclear,oil,gasandcoal),whichareallseverely limited,andthere isnocon
certedEuropeanefforttodevelopastrategythatharnessesthealmostunlimitedpotential
availablefromenergysavingandthedevelopmentofsustainablesourcesofrenewableen
ergy.Infact,EUenergypolicyissettoexacerbateproblemsinagriculture.Itaimstoproduce
up to20%of the fuelused for transport fromagrarian rawmaterials,and thiswillhavea
negative impactonagricultureonaworldwidescale.Asan increasingshareofagricultural
landis
used
for
bio
fuels,
land
prices
will
be
pushed
up.
The
tendency
for
transnational
cor
porations toaccumulate large,worldwideholdingsof landwill increaseand,especially in
SubSaharanAfricaandLatinAmerica,small farmerswillbedeprivedof thebasis for their
existence.
Thereareareas inwhich scientificunderstanding ishighlycontestedornotentirelyclear.
Butgovernmentsmustbecriticisedwhentheyneglecttheknowledgethatisavailable,espe
ciallywhenthereareinstitutionsthatmakeithighlyaccessible,asisthecasewiththeInter
nationalPanelforClimateChange.18
Policyhassufferedfromanuncriticalrelianceoncertain
paradigms ineconomicsandothersocialsciences thathavegainedascendencyduring the
yearsofneoliberalhegemony.Democraticallyelectedgovernmentsshouldnotneglectthe
17 L.Brangschetal.,DenKrisenentkommen.SozialkologischeTransformation,Berlin,2011,p.30ff.
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concernsofthoseaffectedbypolicies,andshouldtakefullaccountofthehistoricalexperi
enceofpublicagenciesandpopularorganisationsinthefieldsatstake,andshouldcertainly
notoverlookpastscientificdebates.18
TheEUsCommonAgriculturalPolicy(CAP)offersaninstructiveexample.EUexpertsappear
tooverlookthehistoricalexperiencesrelatedtotheemergingfoodcrisis,themilkcrisisand
thecrisisofagrarianmobility,andalsoignorethehealthproblems linkedtogeneticallyen
gineered food, thepervasiveuseofmedication inmassanimalproduction,and the resis
tancesinducedbyamassiveuseofantibiotics.Instead,supportedbypowerfullobbygroups
oftheagrarianindustrialcomplex,theseexpertsgoondefendingmodelsforactionandin
stitutionalregulationwhichhaveshownthemselvestobe inappropriate. In itsmostrecent
policypapertheEuropeanCommissiontakesitforgrantedthatincreasedproductionalone
willovercomethepresentpredicamentofworldwidehunger.19
This is,however,quite in
sufficient:Whatisatstakeinhungerisnotonlytheoveralllevelofproduction,butalsothe
questionofwhoproduces forwhom and atwhat prices; and,of course, how profits are
eventuallydistributedalongthechainofprovision,fromtheprimaryproducerstothefinal
consumers.
Anecessaryfirststeptoovercomethisstateofaffairswouldbetoacknowledgethedismal
stateofEuropeanagriculture.A failedmodelof industrialisation inagricultureoftenac
companiedbygeneticengineeringtechnologieswithoutasustainableperspectiveof imple
mentationbeyondafirstroundofshorttermsuccesseshasledtosoildepletion,biodiver
sitydestruction,ruraldegradation,insecureandgloballyinsufficientfood,andreducedrural
employment.Noprofitsaremadeany longer inthesectorwithoutstatesubsidies,while it
has become a paradigmatic case for an aggressive nexus between mass consumption,
massdistributionandmassconformity.Thishasseverelyundercutthepotentialforcreat
ingthe
new
figure
of
the
active
and
aware
consumer
(cf.
the
French
notion
of
consommac
teurorempoweredconsumer).Theclassaspectsofagriculturalconsumptionandproduc
tionseemtohaveentirelyvanishedfromsight:Itisnotonlyaquestionoftherichversusthe
poor,where theecologicalconcernsareunevenlydistributed,and thepooraremorevul
nerabletoeconomicpressures.Globally,theabsenceofbindingregulationsandtheprefer
ence for 'market solutions' based on private property have encouraged the processes of
landgrabbingoutsideoftheEUreferredtoabove.
The EUs agriculturalpolicy has created a very critical situation, externally and internally.
Fromthe1980suptothemiddleofthefirstdecadeofthe2000s,theEUwasaprimemover
intheprocessoffloodingworldfoodmarketswithstronglysubsidizedagriculturalproducts
fromtheindustrializedcountries,generatingadramaticcrashinworldmarketpricesforthis
categoryofgoods.Developingcountrieshavebecomeunable tocompeteandarestillde
pendentoncheapimportedfoodtofeedtheirgrowingpopulations.Manycountriesimport
more foodthantheyproduce.Yet, inordertoachievesustainabledevelopment,countries
needtoexpandtheirownagriculturalproductionandreducetheirdependencyonvolatile
worldmarkets.They thereforeneedadditionalagricultural investment,and thisshouldbe
18 Onthenegativeresultsofgovernment inactionaroundclimatechangeseethemostrecent
overviewby the InternationalEnergyAgency,WorldEnergyOutlook2011, chapter6, Cli
matechange
and
the
450
scenario,
pp.
205
241.
19 Cf. Legal proposals for the CAP after 2013, http://ec.europa.eu/agriculture/cappost2013/legal
proposals/index_en.htm,published12October2011.
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organised insuchawayastocreateemploymentforruralpopulationsandstrengthenthe
broadereconomiccapabilitiesofsmallandmediumfarmers.Even ifcountrieshavethepo
liticalwilltopromoteinvestmentofthistype,itisunderminedbythekindoftradeliberali
sationforagriculturalproductswhichtheEU issupportingonaworldwidescale.Thisten
dencytopromotecompetitivenessatthecostofsustainabledevelopmentisalsoreinforced
bynew
technological
structures
of
dependency,
as
in
the
case
of
the
introduction
of
geneti
callymodified seedswhichcanno longerbe reproducedby the farmerswhohave touse
themintheirownproductionprocesses.
Thestructuralproblemunderlyingthissituation isexemplifiedbytheEU'sstanceonglobal
and European forestry, which has destructive effects on forestry resources, and conse
quently human livelihoods, outside the EU. Themonetary rewards of the EUs Emissions
Trading Scheme (ETS) are encouraging big power companies, such as RWE, Vattenfall or
DONG,toimporthugevolumesofwoodpelletstogenerateelectricityforEuropeancapital
cities,suchasBerlin,LondonorCopenhagenThisisbecausewithintheEU,theincineration
ofwood is rewardedwith CO2 credits earned for spreading the illusion of avoiding CO2
emissionsfromfossilenergysources,althoughinfactraisingCO2emissionsonaglobalscale
asaresultoftheiroperation.20
Internally, the subordinationof agricultural production and rural development to the de
mandsoftheagroindustrialcomplexhasbeenleadingtothedestructionofthepotentialof
smallfarmerstomaintainsustainablemodelsofagricultureandregionaldevelopment.The
subordination of agricultural production to the interests of corporate agrarian enterprise
tendstodestroythe implicitmultifunctionalityoftheagriculturalsector.Theconservation
ofbiodiversity,and its contribution to climateprotection, isnotonlyoftenoverlooked in
publicdebates; it isnotevenaddressedwithin thecontextof therenewedCAPwhichthe
EuropeanCommission
now
seems
to
be
advocating.21
This
can,
again,
be
specifically
exem
plifiedwithregardtoforestrypolicy:astrategyofreducinggreenhousegasemissionsfrom
agricultureand livestockproduction ismoreeffectiveandmore importantthancontinuing
tosupporttheillusionofclimatebenefitsfromastrategyofsubstitutingforestproductsfor
fossilfuels.Thewoodenergyoptionmayleadtoonlyatransformationofforeststoplanta
tions,adevelopmentwhichwouldclearlybeunsustainable.
A similar problematic has developed in the field of bio fuels: The EU directive obliging
memberstatesto increasethepercentageofbiofuels inthetotaluseofenergyto10%by
2020canonlybeimplementedbyimporting50%ofbioethanoland41%ofbiodieseloilto
theEU,mostlyattheexpenseoffoodproductioncapacitiesindevelopingcountries,increas
ingthetendenciestolandgrabbingandthedestructionofprimaryforestsandthehabitats
ofindigenouscommunities.22
20 EuropeanEnvironmentAgencyScientificCommittee,15September2011:OpinionoftheEEAScientific
CommitteeonGreenhouseGasAccountinginRelationtoBioenergy.21
Thepresent lackof integrationandconsistencyof theEUpolicyproposalsmakes itverydifficult to
evaluatethespecificweightoftheproposalscomingfromtheAgrariancommissioneronly. Itshould
belookedat,however,asanimportantsteppingstonetobeusedinadvancingthedevelopmentofa
meaningfulstrategyofEUsustainabledevelopmentwhichdoesnotexistyet.22
Cf.BettinaKretschmer,SophieBennett, AnalysingBioenergy Implementation inEUmemberstates:
ResultsfromtheBiomassFuturesExpertSurvey,InstituteforEuropeanEnvironmentalPolicy,London,
27July2011,www.ieep.eu/assets/827/IEEP_Biomass_Futures_Expert_Survey.pdf
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2 WrongpoliciesleadtowrongoutcomesAcritiqueofEUpolicies
2.1 MacroeconomicPolicies:towardsthesurveillanceregime
Bytheautumnof2011,thecompletefailureofEUleaderstodefineacoherentresponseto
thecrisis
in
Greece
had
not
only
brought
the
eurozone
to
the
verge
of
chaos;
it
even
men
aced theworldeconomywithacatastrophiccollapse.At thesame time,such longerterm
reforms intheeurozoneashavebeen formulatedbytheCommissionarenotonly irrele
vanttothecurrentemergency,theythreatentoturntheEU intoahegemonicstructure in
whicheconomicallyweakerstateswouldloseallpoliticalautonomyandbesubjectedtothe
permanenttutelageofthestrongerstatesandoftheEUinstitutionsundertheircontrol.One
aspectoftheproposedchangeswasadirectassaultonsocialmodelsand labourstandards
inthecountriesofthesocalledperiphery.
TheincreasinglyselfdefeatingnatureoftheEU/IMFinterventionsinGreece,andtheconse
quentthreats
to
other
countries
and
to
the
financial
system,
are
dealt
with
elsewhere
in
this
memorandum.Intermsofmacroeconomicpolicyitmustberememberedthatlittleornoth
ingisbeingdonetocorrectamajorsourceoftheimbalancesbehindthecrisistheexport
pressure from the stronger economies and fromGermany in particular. The Commission
itself forecasts thatGermanysvastcurrentaccountsurplus in2011 (4.7%ofGDPor123
billion)willbeunchangedin2012(4.6%ofGDPor124billion)whilerealwagesinGermany,
inspiteofforecastgrowthof1%in2012,willremainbelowtheirlevelin2000.Inthesecir
cumstances,balancedrecoveryintheweakereconomiesisimpossible.
RevisionstotheStabilityPact
Therules
of
the
Growth
and
Stability
Pact,
supposed
to
govern
the
budgetary
policies
of
all
EUmembersand tobeobligatory formembersof theeurozone,werebasedon the falla
ciousnotionthat,providedpublicsectordeficitswerelimited,marketforceswouldensurea
balanceddevelopmentoftheeconomy.Inreality,thelimitedgrowthachievedoverthelast
decade (theyearsof theLisbonstrategy)dependedonwidening imbalances: in2007,just
priortotheoutbreakofthefinancialcrisis,Germanypostedacurrentaccountsurplusequal
to7.6%ofGDP;thecounterpartofthissurplus,generatedbyirresponsiblemacroeconomic
policies inGermanytogetherwithaveritableassaulton lowerpaidGermanworkers,were
hugedeficits,ofover10%,insuchcountriesasCyprus,Greece,PortugalandSpain.Farfrom
bringingaboutbalanceddevelopment,marketforceshadpermittedanunsustainablelossof
competitivenessacross
the
periphery
(Irelands
current
account
deficit,
although
in
single
figuresat5.6%,wasalsounsustainablefiguresinIrelandaredistortedbymassiverecorded
outflowsofprofit,partlyreal,partlythereflectionoftransferpricingbythemultinationals.)
Until2008,thesegrowingimbalanceswerefinancedbybigcapitalinflowsintothecountries
affected. InSpainand Irelandthesewere flows intotheprivatesector,especiallythecom
mercialbanks;inPortugal,andespeciallyGreecewherethereareseriousproblemsinraising
taxrevenue, the inflowsweremainlyabsorbedby thepublicsector.The financialclimate,
encouragedbythederegulatorystanceoftheEuropeanCommission,theECBandmostna
tionalgovernments,wasoneofexcessiveconfidence leadingtospeculationand increasing
fragilityinthebankingsystem.Itshouldberemembered,however,thatwithoutthesecapi
talflows
the
employment
performance
of
the
eurozone
would
have
been
even
worse.
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The financialcrisisof2008,whichprovokedarapiddecline inprivatesectorexpenditures,
necessitatedsubstantialpublicsector injectionsaround theworld.TheCommissionhad to
recognisethatmuchwiderpublicsectordeficitswereneededtemporarily,butbylate2009
itwasalreadydemandinganearlyexitfromthesemoresupportivebudgetarypolicies.At
thesametimeitmadeproposalstomaketheStabilityPactrulesonpublicsectorborrowing
anddebt
much
more
restrictive
and
to
introduce
new
rules
on
macroeconomic
imbalances.
Theofficialrationaleforthesechangesiscouchedintermsofbothcoordinationandsur
veillance.Buttheydonothingtopromotecoordination.Genuinecoordinationwouldre
quirefirstlythespecificationofanoverallmacropolicyfortheeurozoneandthenthespeci
ficationofdifferentiatednationalpoliciescompatiblewiththeoverallmacrostance.Thereis
nothingofthisintheproposedamendments.Inreality,theprimaryfocusofthesemeasures
isonthesurveillanceof individualmemberstatesand,althoughthis isnotstated,thecon
cern isonlywith theweakermemberstates towhose indiscipline thecurrentcrisis isat
tributed.Thus thewholepackageneglects thecentralproblemofcoordinationthehuge
imbalancesincurrentaccounts.
The legislative package must be seen in the context of a comprehensive attempt to
strengthen economicgovernance in theEU.This term,however,no longerhas thesame
meaningaswhen itwas firstusedby theEuropean labourmovementorevenby Jacques
Delorswhowerearguing fortheassertionofsocialcontrolovertheEuropeaneconomy. It
now signifies reinforced efforts toweaken social controlsover labourmarkets, to reduce
expenditureonpublicservicesandwelfarebenefitsandtobringerrantmemberstatesinto
linewith theseobjectives.Otheraspectsof thedrive for thenew economicgovernance
include:
theEurope2020Strategy,successortotheLisbonStrategy,focusedonfurtherstruc
turalreformsandexpressedintheintegratedpolicyguidelines;
the EuroPlusPact,agreed inMarch2011, inwhichtheeurozonecountriesandsix
otherscommitthemselvestopursuecompetitiveness,employment,sustainabilityof
publicfinancesandfinancialstability;
ThePactwillbetranslated intoNationalReformandStabilityProgrammeswith im
plementationmonitoredbytheCommission.
Economicgovernanceinallitsformsemphasiseslabourmarketreforms,including:there
viewofwagesettingarrangements;decentralisationofwagebargaining;reviewof indexa
tionmechanisms;
subjection
of
public
sector
wages
to
the
needs
of
competitiveness;
reform
ofemploymentcontractstopromoteflexicurity.Otherkeythemesare:raisingthepension
age;adaptingtheregulatoryframeworktotheneedsofsmallandmediumenterprises;and
promotingabusinessfriendlyenvironment.
ThereformoftheGrowthandStabilityPactconsistsofsixpiecesof legislation,whichhave
nowpassedthroughtheEuropeanParliamentwithveryfewchanges.Thefirstfourtighten
the requirementsof the existing stability pact and its enforcement through the socalled
excessivedeficitprocedure.Theother two introducean excessive imbalanceprocedure
which introducessimilar legalconstraintsonotheraspectsofmacroeconomicpolicy; they
areobviouslyinspiredbythefactthatinIrelandandSpaincrisishadnothingtodowithpub
licsector
deficits
but
relates
to
capital
inflows
into
the
private
sector.
The
main
features
of
thislegislationincludethefollowing:
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21
TighteningtheStabilityPact:
1. Newdefinitionsofthestabilitypactrulesemphasiseexcessivelevelsofpublicdebtas
wellaswellasannualdeficits;discretionarymeasureshavetobetakentocorrectboth
andthespeedofcorrection isspecified.Theonlypermittedexceptionshaveastrongly
deregulatorycharacteramemberstatemayrundeficitstointroduceafundedpension
scheme,butnot,forexample,tofinanceasocialhousingprogramme.23
2. Stronger surveillance is to take place through the annual submission of stability pro
grammes(includingstructuralreforms)whichmustembodyamediumtermbudgetary
objective topermit theCouncil toverify prudent fiscalpolicies.Evencountrieswithin
theprescribed referencevaluesmustnot increasepublicexpenditure faster thanGDP
(thus anymove by other countries towards Scandinavian socialmodels becomes ille
gal).24
3. Reinforced penalties involve first compulsory deposits and then fines for eurozone
members.Sanctionsaretobecomemoreautomaticsinceatmanystagesoftheexces
sivedeficit
procedure
aqualified
majority
in
the
Council
will
be
needed
to
block
penal
tiesratherthantoimposethem.25
4. MemberstatesmustestablishasatisfactoryBudgetaryFramework.Thiscoversaccount
ing systems, statistics, fiscal relationswith regional and local government, forecasting
practices(althoughtheCommissionsownforecastingislessthanimpressive),budgetary
proceduresandfiscalrules.Itisstronglyrecommendedthatthelatterinvolvenumeri
callimits,inspiteoftherepeateddifficultiesthatsuchrulesprovoke,mostrecentlywith
publicfinanceintheUStoday(andnodoubtGermanyinthenearfuture).26
TheExcessiveImbalanceProcedure:
5. Ascoreboardcomprisingalimitednumberofeconomicandfinancialindicatorsistobe
established.Indicativethresholdswillbesetforthese;iftheyarecrossedinvestigative
proceduresmaybe launched;howevertherewillnotbeanautomaticalert; economic
judgementshouldensurethatallpiecesofinformation,whetherfromthescoreboardor
not,areputinperspectiveandbecomepartofacomprehensiveanalysis;thiswilliden
tifymemberstatestobesubjecttoanindepthreview;thiswillinvolveenhancedsur
veillancemissionsandadditionalreportingbythememberstateconcerned.27
6. Penaltiesdonotfollowrightaway.Whenexcessiveimbalancesaredefinitelyidentified,
recommendationswillbemade to themember state. Its response shouldbe timely;
shoulduse
all
available
policy
instruments
including
fiscal
and
wage
policies,
labour
markets,productandservicesmarketsandfinancialsectorregulation.Eventually,how
ever,iftheresponseprovesinadequate,sanctionscompulsorydepositsandfineswill
23 Amendment of Regulation (EC)No 1466/97 on the strengthening of the surveillance of budgetary
positionsandthesurveillanceandcoordinationofeconomicpolicies.24
AmendmentofRegulation(EC)No1467/97onspeedingupandclarifyingtheimplementationofthe
excessivedeficitprocedure.
25
Regulationon
the
effective
enforcement
of
budgetary
surveillance
in
the
euro
area.
26 Directiveonrequirementsforbudgetaryframeworksofthememberstates.
27 Regulationonthepreventionandcorrectionofmacroeconomicimbalances.
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22
be imposed.Equity inpenalties istobeassuredbyexpressingtheseasapercentageof
theGDPoftherecalcitrantstate.28
Thereis,ofcourse,somethingabsurdaboutthisattempttoconstructajuridicalframework
formacroeconomics,asanyoneremotelyfamiliarwiththatdisciplinewillrecognise.Butthe
project isalso sinister: it threatens to subjecteconomicallyweakermembersand those
alonetoacomprehensivetutelage involvingeveryaspectofpublicpolicy. It isclearthat
themain indicatorsusedwillreflectaviewof competitivenesswhichmakes itaproblem
only for the less competitive, not for the more competitive, economies. Criticism in the
EuropeanParliamentandbysomeEUgovernmentshasledtotheremovalofexplicitrefer
encetowagesinthelegislation.Butthewagelevelsandsocialmodelsoftheweakerstates
remainthetargetsofthisproject.
Manytypesofimbalancewillbeoutsidethescopeofthenewprocedures.These include:
thecoexistenceofimmenseprivatefortuneswithpublicsectorscrippledbydebt;thefailure
ofwagegrowthintheEUtomatchproductivitygrowthovernowthreedecades;theremu
nerationof
financial
and
corporate
leaderships
out
of
all
proportion
to
typical
incomes.
The package is embedded in a reinforced setof administrative procedures known as the
Europeansemesterwhichwilltakeplaceinthefirsthalfofeachyearandleadtothedefini
tionof two setsofpolicies,oneconcernedwithmacroeconomicpolicy (the stabilitypro
grammes) and the other (the national reform programmes) concerned with structural
reformsintheCommissionsusualsenseofreducedprotectionforemployees,privatisation
andthederegulationofbusiness.Thefirstsuchexercise,whichtookplacein2011,indicates
whatistobeexpectedfromtheseprocedures:neithertheCommissionsrecommendations
forGermanynorGermanysownprogrammes recognisedanyproblemwith thecountrys
hugetradesurplus.Theentireprocessfocusesonfurtherfiscalconsolidation,labourmarket
reforms,andsupplysidemeasuressupposedlytopromotegrowthbylargepriceandcost
adjustmentsintheweakereconomiesinotherwords,bydeflation.
Theconsequencesofthisstanceareaswouldbeanticipatedbyanyonescepticalaboutthe
notionofgrowthpromotingdeflation.BySeptembertheCommissionwascompelledtore
visedownwards itsalready lowpredictions forgrowth in2011and2012. Itdeclared that
the downward revisions concern all themember states under review, suggesting both a
commonfactorandarecouplingofgrowthdynamics.
Onecommonfactorisofcoursetheconstantpressureforrestrictivepoliciescomingfrom
theCommissionand frompolitical leaders inmostmemberstates.Another is the looming
financialcrisis
stemming
from
repeated
failures
to
resolve
the
crisis
in
Greece.
The
rediscov
eryof recoupleddynamicspoints togenuine coordinationproblemsneglectedby those
same leadershipswhohavepreferred toattempta virtually colonial subordinationof the
weakestmembercountries.
2.2 Financialsectorreformstymiedbyextensivelobbying
Thedeepeningoftheeuroareacrisishas ledtoacrisisforEuropeanbanks,raisingachal
lenge for the entire European financial architecture.As private financial institutions have
sought toprofit frommassive speculation,politicianshave struggled togeton topof the
28 Regulation on enforcementmeasures to correct excessivemacroeconomic imbalances in the euro
area.
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23
immediateeffectsofthedebtandbankingcrisis,whilecompletelyfailingtoimplementthe
majorstructuralreformsthatareneededtocontrolthefinancialsystem.Followingmassive
lobbyingbythefinancialsector,reformshavebeenblocked,watereddownor,asinthecase
ofchangestotheMarketinFinancialInstrumentsDirective(MiFID),postponed.Evenwhen
urgent shortterm actionhasbeennecessary,EU stateshavebeenunable toagree,as in
August2011
when
some
governments
refused
to
participate
in
aban
on
short
selling.
Inthecourseofthe2010,attemptstoreformtheEUfinancialsystemwerelaunchedforthe
derivativesmarketandbigbanks. Inbothcases, theEUproposalswereevenweaker than
thosethathavebeenintroducedintheUS.
Derivativesmarket
In July2011 theEuropeanParliamentvotedonadraft legal text for theEuropeanMarket
InfrastructureRegulation (EMIR).EMIRwilldealwithsomeof theproblems in thederiva
tivesmarket,inparticularoverthecounter(OTC)derivatives,butfailstofundamentallycall
ahalttothisfinancialcasino.EMIRattemptstodealwithamajorproblemthatarosebe
foreand
during
the
financial
crisis
in
2007
2008,
namely
that
nobody
knew
who
was
trading
whatkindofriskyfinancialproductswithwhom.Thislackoftransparencywasespeciallythe
case forOTCderivatives thatwere traded inprivatedeals (over thecounter)andnoton
publicexchanges.ThemainelementsofEMIRarethatmostOTCderivativesshouldbere
ported to the authorities to improve transparency, and that more financial speculation
shouldbeinsuredagainstdefault.Thefinanciallobbymountedahighlysuccessfulcampaign
towaterdownthelegislationbecausetheOTCderivativesbusinessisanimportantsourceof
incomeforbig(investment)banksandinstitutionalinvestors,andrelatedtohighbonuses.
TheEMIRtexthasmajorloopholes.Forinstance,pensionfundscanbeexemptedfromclear
ingtheir
OTC
hedging
derivatives
trade
for
3years
or
more;
similarly,
non
financial
counter
partiesdonothaveanobligationtoclearthehedgingactivitiesrelatedtotheircommercial
activity.Furthermore,nolimitsarebeingimposedontheoverallamountofOTCderivatives
thatmaybetraded.ThereisanurgentneedtoreducesharplythesizeofOTCtransactions,
sincemostarepurelyspeculative.This isverystriking in thecaseofcreditdefaultswaps,
whichareplayingakeyroleintheeurocrisis,sincethebuyerveryoftendoesnotholdthe
bondwhichisbeinginsured.However,followingpressurefromthefinanciallobby,thenew
regulationsfailtoestablishsuchlimits.
Bankreforms
Thelack
of
major
bank
reforms
in
the
EU
has
left
banks
vulnerable
to
shocks
from
the
sover
eigndebtcrisis,theeurocrisisandstockmarketvolatility.InJuly2011,theCommissionpre
senteditsproposalsforamajorbankreform.Thisbankreform,knownasthe4threviewof
theCapitalRequirementDirective(CRDIV),shouldimprovebankscapitalbuffers,bankgov
ernanceandsupervision.TheEUParliamentstartedthediscussionofCRD IV inSeptember
2011anditissupposedtomovetoaplenaryvoteinJuneorJuly2012.TheCRDIVconsists
ofasetoftwodifferentEU laws.The first lawdealswith theregulationonstrictercapital
reserves,incorporatingthenewBaselIIIstandardsintoEUlaw.Thesecondpieceoflegisla
tionisaDirectivetoimprovethesupervisionandgovernanceofbanksandinvestmentfirms,
especiallyregardingriskassessment.
Thebanking
sector
has
again
lobbied
heavily
to
reduce
the
scope
of
the
legislation,
arguing
that theadditional capital requirementswill reduce its competitiveness,andwill result in
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24
banksreducingthesupplyofcredit,especiallytosmallandmediumenterprises(SMEs).Su
pervisors,academicsandregulators,includingtheCommission,havebeenshowingthrough
differentimpactassessmentsthattheseclaimsareunfounded,andthattheseproblemscan
beavoidedbychangingbankingbusinessmodels.Furthermore,manydoubtsremainasto
whether thisnewEU legislationwhich it isnotplanned to implement fullyuntil2019!
comprisesthe
appropriate
measures
to
deal
with
the
problematic
behaviour
and
instability
oftheEuropeanbanks.TheCommissionsbankreformproposalscanbeconsideredtobefar
fromsufficientnotonlybecausetheuseofcapitalbuffersasamajorinstrumentofbanking
regulation isproblematic,orbecause the introductionofa leverage ratioand liquidity re
quirements is being delayed, but also because the Commissions proposals have major
weaknesses.Theproposals:
Donotseparateretail/commercialbankingfrom investmentbanking,nor limittheir
linkageswithfinancialmarketssincebankscanstillengageinderivativestrading;
Failto limitthesizeofthetotalbalancesheetandoffbalancesheetofbanks;thus
banksand
financial
conglomerates
can
still
be
too
big
to
fail;
Donotprohibitbanks fromspeculatingwiththeirowncapital (proprietarytrading
whichisforbiddenbytheVolkerruleintheUSDoddFrankActofJuly2010);
Donotreformtheusebybanksoftheirownriskassessmentmodels,whicharefre
quentlybasedonerroneousassumptions(Greekbondshavea0%risk!).
TheFinancialTransactionsTaxdirective:abreakthroughbutnotquiteavictory
TheEuropeanCommissionpresentedadraftdirectivefortheimplementationofaFinancial
TransactionTax (FTT) inSeptember2011.This isasignificantbreakthrough foraproposal
that
has
been
advocated
for
many
years
by
civil
society,
in
particular
Attac,
and
which
has
morerecentlyalsogained thesupportof theFrenchandGermangovernments.TheCom
missionsdraftdirectivehastakenupmanyoftheelementsthatcampaignershavesought,
includingthetaxationofoverthecounter(OTC)derivatives,theresidenceprincipletopre
vent taxavoidanceand,aboveall,the intentionnotonlytogeneraterevenuesbutalsoto
havearegulatory impactonspeculation, inparticularonhigh frequencytrades.Neverthe
less, theproposalalsocontainssignificant limits.Twomajorcriticismsstandout.First, the
proposedFTTdirectivedoesnotprimarilyaimatfightingspeculationandreducingthevol
umeoffinancialtransactions.Thiscanbeseeninthetaxbase,astheCommissionproposes
toexcludecurrencytrades.Thetaxratesforderivativesarealsomuchtoolow.Thesecond
limitis
that
the
directive
is
disturbingly
vague
on
the
issue
of
how
the
tax
revenues
should
beused.Akey featureof thecampaignbycivilsocietywas thatasignificantshareof the
revenuesshouldbedeployed intherealmsofdevelopmentandtheenvironment,butnei
therofthese ismentioned intheCommissionsproposal.Finally,themarkedreluctanceof
Britain,SwedenandtheNetherlandstointroduceaFTTcouldyetprovetobeaseriousob
stacletoitsimplementation.
2.3 Austerity:ThewrongpolicyfortheillsoftheEU
Austerity isbeingpursuedbytheEUgovernments,asageneralcureallrecipe.Thousands
are demonstrating in the streets of an increasing number of European cities protesting
againstausterity
because
it
is
radically
reducing
their
living
standards
and
offering
no
hope
forthefuture.UNCTADsTradeandDevelopmentReport2011isalsohighlycriticaloffiscal
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EuroMemorandum2012
25
tightening and the IMFs policy recommendations, pointing out that fiscal space is not a
static variable. Inaddition, the rushbyanumberofEuropean countries topaybackhigh
levelsofprivatedebt inthecrisiswillfurtherdampensdemand if it isnotcompensatedby
increasedpublicsectordebt.
In