When, earlier this year, Germany and France proposed a ‘pact for competitiveness’ which included provisions for eliminating salary indexation schemes and overhauling national pension provisions, the acting Belgian premier Yves Leterne responded angrily: “We must not let our social model be undone.” As the European Central Bank has been quietly transformed into a lender of last resort for Eurozone member states, it has expanded its reach into national fiscal policies by advocating deep, socially divisive austerity measures.
Italy is a case in point. When the country wavered recently, with prime minister Silvio Berlusconi saying that politics is about winning votes, not just cutting deficits, international markets responded strongly, raising the borrowing costs for Italy’s government and adding to its language the term attaco speculativo. The ECB intervened by buying up Italian government bonds at a cheaper rate, but sent a letter to Rome stating that its help was a quid pro quo for a quick and efficient implementation of Italy’s austerity budget.
The Eurozone crisis has revealed many of the inequities buried deep within Europe’s political economy. But it would be wrong to see the EU as the neoliberal menace to Europe’s social democratic legacy. ‘Social Europe’ emerged on the back the defeat of this legacy, not its extension to the European level. We have seen in the current crisis a deepening of pre-existing anti-social trends within Europe.
The agent of all of this is not the EU but national governments themselves. These governments have sought to preserve the Eurozone as it stands out of deference to powerful banking interests and also because life outside the Eurozone is inconceivable for its members. The Euro is not just a currency, it’s also a distinctive kind of policymaking where responsibility for decisions is diffused across a dizzying array of actors, committees and institutions, and where national governments are shielded from challenges emanating from their domestic populations.
We can trace the idea of ‘Social Europe’ back to Jacques Delors. As finance minister in the first Mitterrand government in the early 1980s, Delors presided over the failed Keynesian re-launch of the French economy. Believing that social democracy needed to reconcile itself to the market and also re-cast itself at the European level, Delors pursued this goal when he became president of the European Commission in 1985. Though he was able to introduce some redistribution at the European level via the structural funds, this period was marked by the historical defeat of organized labour across Europe.
The post-war Keynesian model had focused on full employment and granting working classes a greater share of the national wealth through rising wages. This was gradually dismantled and replaced with an alternative that prioritized price stability over jobs and focused on wage moderation and labour market reform as the main route to maintaining competiveness.
In some cases, such as in Italy and in Germany, this change in direction was pursued through the corporatist arrangements of the Keynesian era. In other cases, most notably Britain, change came via a direct clash between organized labour and the state. Yet common to all was the use made of ‘Europe’ as a route via which the social bonds and obligations of the Keynesian ‘Golden Age’ were given up. Privatization policies and the liberalization of financial markets across Europe all came about as a result of decisions by national governments. Yet these policies were subsequently implemented under the aegis of the European Single Market and with the help of the European Commission in order to limit the possibilities for opponents to mobilize at the national level.
Social Europe’s leaders
Looking at the leaders of ‘Social Europe’, such as Germany and the Netherlands, the figures show how these countries have made use of anti-social growth models. In Germany, the ability of the government to secure wage moderation from the unions representing its exporting industries has been critical to the country’s success since the downturn of the early 2000s. Similar policies have been pursued in the Netherlands, the country with the lowest unemployment in Europe but also with the highest proportion of workers on fixed (i.e. not permanent) term contracts.
This growth model has propped up the Eurozone’s average annual GDP figures but has created conflicts between those member states able to achieve these kinds of internal competitive devaluations and those, in the Eurozone’s periphery, where credit-fuelled growth has led to wage inflation. We see these asymmetries reflected in the figures for household disposable income as a percentage of annual growth provided by the OECD. The average for the 2000-2008 period in Germany is 0.6%, in the Netherlands the figure is 1%. In Spain, it is 3.1%, in Ireland (for the period 2003-2008) it is 3.8%.
The project of European monetary union was an extension of this anti-social Europe: by preventing countries from using currency devaluations as ways of regaining competiveness, all the pressure for adaptation was transferred to labour markets. With fiscal resources tied up in bank bailouts, the reality of this transfer has begun to bite. Labour market reform is the main tool available to policymakers today, with predictable consequences both politically and socially. Protests in European capitals, from Athens to Madrid, have become a regular feature of European news in 2011, whilst policymaking at the European level, isolated from the protests and complaints of national populations, has intensified.
Why have governments in the Eurozone been so determined to preserve the currency union as it stands? It is because politics matter most. From the perspective of private investors, a Greek exit from the Eurozone would make some sense: representing less than 3% of the total GDP of the Eurozone, and yet threatening to bring down the whole currency bloc through the effects of contagion, a strong case can be made for a Greek exit. It wouldn’t be pretty but nor would mean a deathblow to the global banking system, as George Soros (exaggeratedly) put it.
What stands out is the attachment of national policymakers to Eurozone membership. Looking at the actions and words of Papandreou, Merkel, Sarkozy and Berlusconi, it is clear that none of them can imagine life outside of the Eurozone. This is because membership of the common currency area has become a defining feature of how these governments rule over their own societies, namely through external frameworks of rules and norms. When Italy faced higher borrowing costs due to doubts over its ability to implement spending cuts, Berlusconi criticized France and Germany for wanting to retain political control over the ECB’s decisions to intervene in the bond markets. Only by giving the ECB independent power to engage in bond buy-backs at its own discretion, what Berlusconi called proper “communitarian governance”, would markets be won over. For a leader not shy of playing the national-populist card, Berlusconi’s reaction in this moment was instinctively to an external authority.
But external authorities are not being empowered in the course of this crisis. The powers of the ECB and of other bodies such as the European Financial Stability Fund are better understood as part of a deeper and more long-standing development, of which the EU itself is the best expression. This is the preference national governments have for exercising their powers indirectly via independent bodies. The idea of imposing limits upon what national governments can do, through national budgetary rules that have constitutional force or through strengthening the budgetary oversight powers of the European Commission, has become the only way in which political action can be understood today in Europe.
This is the legacy of the dismantling of the Keynesian consensus in the late 1970s and 1980s: a loss of faith in national economic strategies was accompanied by a broader collapse in the belief in the efficacy of collective political responses to international economic forces. At the time, the turn to external support was a conscious and contingent strategy to undermine the power of organized labour; over time, it has become an eternal truth about the limits of public policy in a globalized and turbulent world.
The problem is that this takes responsibility away from national governments and invests it in disembodied and abstract rules. If the crisis were to deepen further, who exactly would be to blame? It is because Eurozone membership so effectively dissolves political responsibility into a myriad of private meetings, committees and institutions that it is so popular with national leaders. The dynamics driving the Eurozone crisis have been a combination of a deepening of anti-social Europe and an ongoing evasion by national governments of their own authority and power.
The Eurozone crisis in dates
November 2009 – The PASOK government in Greece announces the budget deficit for the year is much higher than previously thought, standing at 12.7% of GDP
April 2010 – Greece turns to the EU and the IMF for a 110 billion Euros bailout
May 2010 – Eurozone governments announce a 750 billion Euros rescue package (500 billions Euros from the EU and 250 billion Euros from the IMF). The ECB begins to buy up Greek government bonds.
October 2010 – At an EU summit, Eurozone member states decide on a permanent fund to be used to support troubled Eurozone economies. The EU’s powers of oversight over national budgets are also expanded.
November 2010 – Ireland turns to the EU for a bailout deal amounting to 85 billion Euros
March 2011 – the failed Franco-German Pact for Competitiveness is followed by a more successful Pact for the Euro, to be overseen by the Commission rather than by national governments. The lending capacity of the European Financial Stability Fund is raised to 440 billion Euros and funds for the European Stability Mechanism will amount o 500 billion Euros
May 2011 – Portugal reaches a bailout deal with the EU to the tune of 78 billion Euros
June 2011 – ECB exposure to debt of Portugal, Ireland, Greece and Spain estimated at 444 billions Euros (Open Europe figures)
July 2011 – a second bail-out package for Greece is agreed, amounting to 109 billions Euros for Greece. The plan also saw a reduction in the interest rates charged on emergency loans to Greece and some private sector involvement in the plan (involving a private sector loss of around 20% on its loans to Greece)
August 2011 – the European Central Bank responds to rising borrowing costs on Spanish and Italian bonds by intervening and buying up some of these countries’ bonds itself, raising further its exposure to Eurozone government debt.