EU responses to the crisis: From inadequate explanations to inefficient policy solutions?

The debt crisis saga continues, further demonstrating the inability of the European Union and its leaders to come to grip with solutions that could put an end to the devastating consequences it is having on the European Economy and by implication on workers’ welfare. In the second quarter of 2011, overall unemployment stood at 10.3% for the Eurozone while it reached a staggering 21.7% for 15-24 years old [1]. This country average hides important cross national disparities with Greece’s overall unemployment rate being at 18.8%, Ireland 14.6%, Portugal 12.8% and Spain 22.5% in September 2011 [2].

In October 2011, 23.5 million workers were unemployed in EU27. Yet we are told that the way forward is more contractionary fiscal policy, both through cutbacks in the Public sector, curtailment of existing welfare state benefits, and additional moderation of wages throughout Europe. This despite mounting evidence that the current strategy has not worked. Indeed, it will come as no surprise that against this backdrop the debt picture has not improved. While the Euro area inflation rate [3] stayed stable at 3% in November 2011, general government deficit as a % of GDP for the Euro area in 2010 had reached 6.2% compared with 2.1% in 2008.
Now the IMF itself believes that the continuous declines of Greek GDP means initial debt reduction targets agreed with the Troika will not work.[4] Somewhat ironically, this follows the entry into force on the 13th of December of the so-called ‘six-pack’ portrayed as a reinforcement of the Stability and Growth Pact. This will entail the possibilities to impose financial penalties on Member States who fail to realign their budget deficits[5].

Explanatory formats of the crisis
The utter failure of EU policy making process to come up with a sensible, let alone coherent, strategy to deal with the crisis is mirrored by similarly flawed readings of the crisis. Several faulty narratives underpin the current direction of policy[6].
The first emphasizes the weakness of human nature, where instincts, greed and delusion mix together to produce corruption on the part of politicians, as well as unreasonable debt exposure by public and private actors alike. This echoes the view that saw the subprime crisis as being caused by greedy and immoral bankers. In this scenario, more rules and regulations, particularly of a supranational nature, are called for. This reading partly informs the ‘six pack’.
Second, one can identify institutional failures where regulators failed in their oversight of Member States’ deficits or rating agencies provided inadequate ratings of the debt situation in EU countries. Again, this notionally equivalent to the purported inability of regulators to monitor shadow banking and the systemic risks that it generated. Thus, in this view, more thorough monitoring of Member States’ macroeconomic and budgetary imbalances’ is warranted.
These two readings both point to the role of government profligacy as the source of the problem. However, debt is either money we owe to ourselves – making a distributional issue – or stems from trade deficits which are offsets by inflows of capital often redirected into the bond market[7]. In any case, a significant amount of debt resulted from the financial crisis rather than caused it, and some of the countries currently under the spotlight (Spain, Ireland and Italy) had a sound fiscal stance before the crisis[6].
In a third reading of the crisis, some argue it is the ideological and theoretical failure such as neoliberalism or the Efficient Market Hypothesis [9] that is embedded in it, that is responsible for the situation we now fail. The more heroic among social democrats therefore advise us: Return to Keynesianism and all shall be good. But policy makers tell us that there is no scope for further fiscal expansion and neoliberal ideology rises from its ashes with economics Nobel prize winner Paul Krugman has termed the ‘confidence fairy’[10]. This refers to the faith that tightening will result in ‘expansionary austerity’ whereby the contractionary effects of austerity would be offset by increased confidence on the part of private investors. There is in fact substantial evidence that fiscal policy works [11]and could be undertaken provided the ECB takes a more pro-active role in the European primary bond markets (which is currently ruled by its statutes).
Last but not least, cultural explanations also sprang up where we were told that Southern European problem were essentially due to the intrinsic lazyness of their workers and the fiscal incontinence [12] of their governments. Not much can be done in this case, save for infusing the sinners with the virtuous culture of Northern Europe. This of course is hard to reconcile that with the fact that the numbers of hours that Greek workers dedicate to their jobs is one of the highest in Europe[13].
The missing link: Wages, coordination and the European Monetary Union
What has been almost – though not entirely – absent from the debate is the question of wages as a cause and potential solution to the crisis. The wage share as a % of GDP which measures the amount of wealth produced in a given year that is distributed in the form of wages to workers has been falling in the past three decades in the OECD. The drivers of this trend are by now well documented and include weakening union power, globalization of trade and capital, and the opening of capital accounts.
The implications of this phenomenon will not shock those acquainted with Marxian analyses of the internal contradictions of capital accumulation whereby it breeds the seeds of its own demise by undercutting the aggregate demand on which growth crucially depends. As early as the 1970s, James O’Connor emphasized the contradictory functions of the State in promoting capital accumulation by moderating wages and legitimation by expanding welfare state benefits and redistributive policies to mitigate the adverse impacts that capitalism has on workers[14]. In a world where capital mobility increases and most of the tax revenues from income, this generates an obvious contradiction in form of more expenditures but constrained revenues that can only be resolved through emitting more public debt. Indeed, social pacts emphasized in the neo-corporatist literature explicitly traded higher wage moderation for lower taxes and/or more welfare state benefits. This was followed by what Colin Crouch has called ‘privatised Keynesianism’ where public debt was replaced by individuals’ debt,with the consequences that we know.
The way forward is therefore to address imbalances but through both improved wage coordination and revalued wages at the EU level, as has been called for by the European Trade Union Confederation as early as December 2009 in its ‘Resolution on the Guidelines for the coordination of collective bargaining in 2010’75. In a recent ILO paper, Patrick Belser and Sangheon Lee have argued that a ‘wage led growth’ strategy can generate better and more sustainable economic outcomes. A starting point for such a strategy would be establish EU-wide ‘relative’ minimum wages, where the minimum wages of each member state are set as a percentage of their national median wage[16]
While ensuring that wages at the bottom, which often serve as an anchor for the other wages of an economy, are set at an appropriate, are sufficiently high, it also is consistent with the current diversity of standard of livings across the EU. Wage coordination between trade unions and employers across the European Monetary Union (EMU) is also required to tackle the fundamental imbalances that a common currency with national wage coordination systems generates. Indeed with a common EMU interest rate results in a low real interest rate in low inflation countries such as Germany and a high real interest rates in high inflation countries such as Greece. In a such a context, the differential in real interest rates of the high and low inflation countries feed inflation divergence further between EMU members[17].
The inflationary divergence that EMU generates feeds into different competitiveness levels which exacerbates trade imbalances within EMU. To the extent that trade deficits are offset – or indeed mirrored in the case of current account deficits – by capital inflows, this inflationary divergence eventually results in low inflation countries (e.g.: Germany) buying debt in high inflation countries (e.g.: Greece). Note that this result is almost structurally driven, not easily altered by the will of the countries involved in the process. Undertaking a strategy of enhanced wage coordination and higher wages has the added advantage that it has the potential to increase legitimacy of the EU through more equitable social outcomes and a stronger involvement of European Social partners. Anything short of that would fail to revive the European Project.
**This article was first published in GRASPE (Reflection Group on the Future of the European Civil Service), February 2012, pages 55-59.

[1] Eurostat
[2] OECD stats
[6] This follows loosely from David Harvey’s talk which can be accessed at:
[9] This hypothesis was most forcibly posited by Professor Eugene Farma who is
dubbed as the “father of modern finance” – for more on this, see:
[12] The term was borrowed from Willem Buiter, previously Chair in European
Political Economy at the European Institute of the London School of Economics.
[14] The Fiscal Crisis of the State (1973) New York, Saint Martin Press.
[16] This was for instance discusse in a recent European Trade Union Institute
Policy Brief which can be accessed at:
[17] For more on this and other wage bargaining dynamics induced by EMU, see:
Johnston and Hancke (2009) Wage inflation and labour unions in EMU. Journal
of European Public Policy, 16:4, pages 601-622.

Support the Basic Income Earth Network

“About Basic Income
A basic income is an income unconditionally granted to all on an individual basis, without means test or work requirement. It is a form of minimum income guarantee that differs from those that now exist in various European countries in three important ways:
it is being paid to individuals rather than households;
it is paid irrespective of any income from other sources;
it is paid without requiring the performance of any work or the willingness to accept a job if offered.
Liberty and equality, efficiency and community, common ownership of the Earth and equal sharing in the benefits of technical progress, the flexibility of the labour market and the dignity of the poor, the fight against inhumane working conditions, against the desertification of the countryside and against interregional inequalities, the viability of cooperatives and the promotion of adult education, autonomy from bosses, husbands and bureaucrats, have all been invoked in its favour.
But it is the inability to tackle unemployment with conventional means that has led in the last decade or so to the idea being taken seriously throughout Europe by a growing number of scholars and organizations. Social policy and economic policy can no longer be conceived separately, and basic income is increasingly viewed as the only viable way of reconciling two of their respective central objectives: poverty relief and full employment.
There is a wide variety of proposals around. They differ according to the amounts involved, the source of funding, the nature and size of the reductions in other transfers, and along many other dimensions. As far as short-term proposals are concerned, however, the current discussion is focusing increasingly on so-called partial basic income schemes which would not be full substitutes for present guaranteed income schemes but would provide a low – and slowly increasing – basis to which other incomes, including the remaining social security benefits and means-tested guaranteed income supplements, could be added.
Many prominent European social scientists have now come out in favour of basic income – among them two Nobel laureates in economics. In a few countries some major politicians, including from parties in government, are also beginning to stick their necks out in support of it. At the same time, the relevant literature – on the economic, ethical, political and legal aspects – is gradually expanding and those promoting the idea, or just interested in it, in various European countries and across the world have started organizing into an active network” 

Representing Middle class interest

Jared Bernstein has a couple of Graphs that are worth a thousand words. The first graph displays the evolution of real median familly income  over the past two decades. The second plots real median income growth in two periods: from 1992 to 2000 and between 2002 and 2007. 
What this shows is that rule by the democratic party has been much more successful at advancing workers’ wages. So, it does make a difference who is in power and the Republicans have been either unwilling or unable to promote real income growth.