euromemorandum_2012

8/2/2019 euromemorandum_2012

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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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2

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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3

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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4

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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EuroMemorandum2012

5

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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6

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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EuroMemorandum2012

7

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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EuroMemorandum2012

8

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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EuroMemorandum2012

9

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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EuroMemorandum2012

10

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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EuroMemorandum2012

11

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

11 http://ec.europa.eu/economy_finance/eu_borrower/balance_of_payments/index_en.htm


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EuroMemorandum2012

12

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

12 http://ec.europa.eu/economy_finance/eu_borrower/balance_of_payments/index_en.htm


13/43

EuroMemorandum2012

13

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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EuroMemorandum2012

14

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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EuroMemorandum2012

15

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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EuroMemorandum2012

16

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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EuroMemorandum2012

17

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.


18/43

EuroMemorandum2012

18

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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EuroMemorandum2012

19

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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EuroMemorandum2012

20

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:


21/43

EuroMemorandum2012

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.


22/43

EuroMemorandum2012

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.


23/43

EuroMemorandum2012

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


24/43

EuroMemorandum2012

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

euromemorandum_2012

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