The European Commission published a report in which it presents five scenarios for the EU’s future: carrying on with the current agenda, focusing just on the single market, allowing some countries to move faster than others toward integration, narrowing down the agenda, and pushing ambitiously for uniform and more complete integration (see here). A lot has been made of the Commission’s view that “form will follow function,” meaning that political integration will (and should) follow economic integration. The truth of the matter is that ‘Europe’ has always been built on a ‘functionalist’ agenda: there was economic change (not always ‘integration’) and as much political integration as needed to implement it. The European project has always been about integrating capitalist economies. It became neoliberal in the late 1970s when, after the fall of profitability in the mid 70s, capital was eager to transcend national rules, show the unions their place and beat the left in general (see here and here). The new political scale they created gave them a decisive advantage. It was far from a new strategy. Roosevelt ‘federalised’ social welfare in the 1930s. Reagan, in the 1980s, ‘decentralised’ parts of social welfare back to the states, many of which fought a budget crisis (see here). Many economists and technocrats thought Europe’s governments had become too interventionist. Deep economic integration and a single currency would discipline the state (see here and here). The imbalance between economic and political integration and the absence of social integration was there by design. The right wing and the technocrats saw the European project as the development of a free trade zone. It could, of course, have been different. Europe could have allowed a common social model to develop alongside economic integration. This would have required integrating not only markets but also social policies, labour-market institutions, and fiscal arrangements (see here). Instead, we got Maastricht, the euro and German wage moderation.
German wage moderation
The dominant narrative about the euro zone crisis is that there is none and if, indeed, Germany is doing better than anyone else, all others should learn their lesson, work as hard and efficient as the Germans and stop whining. The narrative does of course not add “and for lower wages.” Aside from that, it is not true that the Germans work so hard and that they are so efficient. There has, therefore, to be something else that explains the gigantic imbalances in the euro zone. It is German wage moderation. In 2010 the German current account surplus was 5.5% of GDP, now up to 8.3%. Such persistent current account surpluses of that magnitude are de facto mercantilism.
Heiner Flassbeck has argued on many numerous occasions that Germany is the key wrongdoer and violator of the European macroeconomic architecture (see here and here and many articles on this site and at Makroskop). Flassbeck showed that, in the long run, inflation is more closely correlated to nominal unit labour costs than to anything else. The claim that, in order to properly function, the most important rule for a monetary union is that all members need to stick to the inflation target is a consequence of that crucial insight.
Figure 1: ULC’s and Inflation (Source: Flassbeck and Lapavitsas, 2016 (here)).
Why is it so important to know that nominal unit labour costs, rather than any monetary aggregates, are the closed correlate to inflation? It constitutes proof that Germany has been delinquent because of its extraordinary wage restraint. It is true that the peripheral countries also diverged from the ECB target and the Golden Wage Rule (wages have to follow productivity growth plus 1.9% inflation), in the opposite direction. They lived beyond their means. But Germany lived far under it. It was Germany’s policy that has had truly disastrous implications for the EMU, because the size of its economy and the persistence of its divergence (see here).
Figure 2 shows that there has been nothing “outstanding” about the German performance. In this regard, the decisive comparison, as Flassbeck has often said, is France, another core EMU country. France has been far more disciplined than Germany in meeting the ECB inflation target. Its labour productivity is higher than Germany’s in absolute terms. The evolution of productivity has been very similar in both countries since 1999. It did not help the French. Today, it is France that has to “adjust.”
Figure 2: Productivity in Germany, the “model,” and France, which has to “adjust”. (Source: Flassbeck and Lapavitsas, 2016 (here)).
The real secret of the German success is its eye-watering wage restraint, through which it has secured an absolute advantage in competitiveness that has grown over time. The stupendous increase in Germany’s export share in GDP and its rising export surplus reflect an unprecedented and unrepeatable explosion of competitiveness through wage restraint. Germany has effectively “beggared” its neighbours, essentially robbing them of significant market shares in regional and global trade. And this was only possible because, first of all, German workers were “beggared.” For years, wages remained flat, so that productivity gains went entirely to capital (in concrete terms, to the German export industry) and, secondly, because in Europe no country had the courage to stand up to the German imperialism and go for retaliation. In Germany itself, domestic demand remained flat for several years reflecting stagnation in real wages. Its saving grace was its extraordinary success in international trade, which buttressed employment in spite of the weakness of domestic demand. The policy failed, but Germany was rescued by “beggaring” its neighbours and exporting its own unemployment (see here).
Figure 3: Industrial output in Germany, France, Italy and Spain (Source: OECD).
Sadly, up till this very day, nothing has changed. German wage moderation rules and if these days the Commission is so good to be lenient about some of its economic governance rules, this is not due to a change of course – they did not see the light – but out of fear of the extreme right back clash.
The EU’s “answer:” economic governance meant austerity and downward adjustment of wages
The 1992 Treaty of Maastricht led the basis for the euro. The Maastricht rules specify maximum and minimum targets for the public budget balance, inflation and public debt. Governments are instructed to not have public sector deficits of more than three percent of GDP. The treaty does not specify an upper limit, the (fatal) implication being that a surplus can never be too large (see here). This is irrational beyond words: any surplus will always be someone else’s deficit. If Germany accumulates enormous surpluses, the deficits of others will rise above the 3% rule. Then the EU comes in: austerity has to be implemented. Its “reforms,” in turn, stifle growth and end up increasing the budget deficit. There is nothing in Maastricht about counter-cyclical government interventions. On the contrary, the debt rule enshrined in the Maastricht Treaty makes fiscal stimulus policies practically impossible.
Even more fundamental criticism can be formulated against Maastricht. John Weeks argued that the Maastricht Treaty has specified a technically wrong measure of fiscal policy that includes a component that cannot be adjusted (see here). The 2% inflation target is also a problem. As Weeks explains, the benefits of a capitalist economy come from its dynamism, the continuous reallocation of resources in response to technical change and shifts in consumer preferences. These allocations occur through price adjustments. The 2% inflation target is in practice deflationary, achieved by suppressing price adjustments that are essential to economic growth. But the most obvious blunder of all in Maastricht is the rule that the public debt should not exceed 60% of GDP (see here). Where does this nonsensical figure come from? There is no scientific basis for this or any other such figure (such as the one from Reinhart and Rogoff, which came later). The theoretical foundation of austerity has always been wrong.
Not only was Maastricht a theoretical blunder and a practical fiasco, EU economic governance hardened over time. The ‘excessive deficit procedure’ was given more teeth with the so-called ‘Six-Pack’ of 2011, the EU Treaty on Stability, Coordination and Governance. The Six Pack introduced, among other things, a reverse majority in the Council: if the Commission decides to fine a member state, there has to be a qualified majority against from other member states to block it (see here).
This is not the only example of increasing severity. In 2013, France – a country which, as said, adhered to the Golden Wage Rule, going neither below or above it – was ‘asked’ to meet its deficit targets ‘by comprehensive structural reforms’ in line with recommendations from the Council in the context of the European Semester: more liberalisation of markets, especially labour markets. In the same year, the recommendations of the European Semester became binding. Countries had to implement the economic governance packages. If a member state is under the deficit procedure, it has the obligation to accept an ‘Economic Partnership Programme’ that includes structural reforms. If the implementation of the program is unsatisfactory, the Commission has the power to apply sanctions in the amount of billions of euro (see here and here for a recent OECD appraisal of potential sanctions).
The European Semester is not the only way in which the EU is pushing wages down (see here). The Macroeconomic Imbalance Procedure (MIP), which was implemented soon after the euro crisis exploded, allows the Commission to monitor the economic development of the member states. The key indicator is the evolution of unit labour costs. If wages do not adjust downwards, the Commission has the power to impose fines. Employers all over Europe have been jubilant about these reforms. It is a prime example of how capitalism impedes itself.
The Six-Pack changed nothing about the asymmetry of Maastricht – deficits cannot be excessive, but surpluses are not a problem. The Six-Pack adds another nonsensical rule to European economic governance: a lower limit of a structural deficit of 0.5% of GDP (1.0% of GDP for member states with a debt ratio significantly below 60% of GDP). As Weeks writes, the key concept of a ‘structural deficit’ is theoretical nonsense. It ignores all cyclical effects and defines normal capacity as the level of output at which the rate of unemployment implies stable inflation. Weeks commented that
“The EC bureaucrats reveal their ideology by taking inflation not output or unemployment as the measure of economic health” (see here).
This has been the case for a long as the EU or, previously, the EC, existed: the fight against unemployment has never been a priority. The rule is also ideological nonsense because it applies a static analysis to a dynamic process. For example, if an economy operates below normal capacity with, say, a fiscal deficit of 2.5%, while, were it at normal capacity, the fiscal deficit would be, say, 1.5%, the government of this country has to take steps to reduce expenditure so that if the economy were at full capacity, the hypothetical deficit would be 0.5%. As John Weeks writes:
“This ‘what if’ calculation by statisticians is used by an undemocratic bureaucracy to force elected governments to implement contractionary economic policies. (…) To render the rule Kafkaesque, after the EC (Commission) bureaucracy calculates that a government will not meet the hypothetical target, it then mandates contractionary policies that guarantee that the target cannot be achieved. The problem is imaginary and the solution contradictory’’ (see here).
And if there is ‘deviant’ fiscal behaviour, correction mechanism should ensure automatic action. Incredibly, compliance should be monitored by ‘independent’ institutions … that work for the European Commission (see here)!
The reaction: a completely wrong diagnosis and no strategy
The Brexit started as a grand plan of David Cameron to silence the euro skeptics in his own party, to damage Labour and to win over UKIP voters. Everybody – this includes May and Johnson as well as Corbyn – thought that the Remain side would win. When it turned out otherwise, some on the Left were jubilant. As Elise Hendrick wrote:
“The extent of the analysis, such as it is, has been ‘The EU is shit; therefore, leaving is good no matter what the circumstances’. One could just as reasonably argue that, since Ryanair is crap, the only thing for it is to jump out of the plane 30,000 feet over Yeovil without a parachute. This is strategic incompetence on a positively epic scale” (see here).
Bill Mitchell wrote that: ‘Now that the Brexit is a fact (…) neo-liberalism is gone in Britain.’ And: ‘A new economic paradigm is called for based on its new found sovereignty (…) nationalisation has to return as a key industry policy plank for any aspiring progressive political party’ (see here). It seems that the only thing we need to do in order to bring back prosperity is to leave the EU. Suddenly, and truly miraculously, everything would fall in place (see here).
Mitchell quoted – approvingly, one can assume (no need to think it through, if it sounds bad for the EU it is good enough) – from an article that Stiglitz wrote after the Brexit: “Free migration within Europe … (leads to) … depressed wages and higher unemployment, while employers benefit from cheaper labour” (see here).
This, however, is pure nonsense. No serious study (I know about) has ever come close to proving that free migration leads to depressed wages and higher unemployment. The noxious social dumping discourse – foreigners are taking your work – is nothing but a racist fantasy (see here). Social dumping is being defined as:
“the practice, undertaken by self-interested market participants, of undermining or evading existing social regulations with the aim of gaining competitive advantage” (see here).
It has, indeed, been argued that
“the creation of the internal market and EU enlargement to the east and to the south have made social dumping more pertinent, by providing market participants with new strategic opportunities to contest social norms” (see here).
To makes this concrete, read ‘employers’ instead of ‘market participants’ and ‘social entitlements’ instead of ‘social norms.’ Social dumping, if anything, is a reason for the left to defend immigrant workers. Social dumping only exists because employers are breaking laws and rules – EU rules among them – by not paying people the minimum wage, forcing them to do unpaid overtime, refusing sick leave and holidays etc, while national member states fail to take action against social dumping (see here). No one does anything about it, for the simple reason that no one is going to win votes defending foreign workers. In order to push their Brexit, the Brexit left saw no problem in doing exactly what should be absolutely avoided: setting up the workers of Europe against one another – making all of them even a little bit more powerless. It was one of these many issues that they just did not consider.
Bill Mitchell ends by reminding his readers that the United Nations Human Rights Commission’s Committee on Economic, Social and Cultural Rights on June 24, 2016 released its Concluding observations on the sixth periodic report of the United Kingdom of Great Britain and Northern Ireland. The UN text amounts to an incredibly severe indictment of the absolutely scandalous manners in which government departments have been abusing people. And what had the EU to do with that? Was it the EU that was in charge of the Department of Work and Pensions in the UK? Was it the EU which pushed anti-welfare bills through the House where they were then approved by a great majority: all major parties – including a large majority of Labour – voted for them, just as a large majority of Labour voted for the Trident renewal (140 of its MPs)?
According to Mitchell and Keen and others leaving the EU makes all the difference because from the moment that the EU “obstructions” no longer exist the future looks bright: the Keynesians will run central banks, socialist parties will nationalise industries, there will be growth, prosperity, equality, social mobility and everything else. It is exactly this illusion that stands in the way of a serious strategy against EU governance and against the extreme right in Europe (see here).
The EU is nothing else but a reflection of hundreds upon hundreds of lobbies effectively influencing and sometimes dictating policy. The EU is a reflection of the corporate power within the member states. It is a reflection of global financial capital. It is, sadly, also a reflection of national political preferences as laid out by national electorates – right wing government sending right wing policy-makers to Brussels. That these policy-makers are in the business of the usurpation of democracy is not in doubt. It is also a reflection of the economic hegemony of Germany within Europe. Will austerity and all the misery that the EU creates evaporate when the euro zone disappears? What is the great Lexit plan to bring back democracy in Europe, to curtail corporate power, their influence, their lobbies, indeed, what is the strategy to win elections? Is it Corbyn’s strategy of supporting the Brexit together with the Tories (see here)?
The depth of the analysis of these intellectuals equalled the typical John Wayne western: shoot the corrupt sheriff and peace in town will come back. There is no analysis of power relations on the several political scales and how they are intertwined. As a result, they risk making the powerful even more powerful. This risk is not hypothetical. It happened in the meantime. The ‘debate’ has regressed to a shouting match between those who argue that the Brexit harms the UK economically and those who say that it is fabulous. In the meantime, Theresa May is in power. She leads the most right wing government in the UK since the end of the Second World War. The European Convention of Human Rights is gone in the UK and hundreds of thousands of EU immigrants live in a legal limbo – all aspects, some professor assured me right before the referendum, that would never happen and have nothing to do with anything. He knew.
Picture 1: Theresa May in better days, when she was in (Source: Google Images).
The May government is going to cut more social welfare so destitution, food banks and homelessness will further increase, but who speaks about that in political Britain? Labour is too busy losing votes, there is no efficient opposition to the Tory onslaught and no one speaks up for the homeless and the poor anyway.
Why the Brexit is not good for Britain – the leftist case
Two days ago, “Why Brexit is Best for UK: the Leftist case” appeared, in The New York Times (see here). This article contains a good number of one-liners. Here is one: as a Parliament staff member said “The only people who listen to Members of the European Parliament are the interpreters” (see here). This is probably even true. Who is to blame for that? National parties have been sending MEPs to the EP for the last 38 years. There have of course been speeches. The truth is that, for 40 years, no party or group in the EP has stood up and said ‘We are not taking this any longer. We refuse to be treated like this.’ Is it then not the case that these people are co-responsible for the peripheral position of the EP?
It is a dark secret that, often enough, MEPs are not the finest political material – they are considered too light for the national arena – where things really count, or they are old horses or too critical or whatever it is, in one word, these are not the sort of people who are going to protest when no one listens to them, except the interpreters, and certainly not if they make approximately 6.600 euro a month after taxes.
The opponents always sing the same song: the European Commission is appointed, not elected. The European parliament is “not a real parliament.” The board of governors of the ECB is not elected. The EU is a real oligarchy!
It is true. The EU is an oligarchy. There is, however, no shred of evidence that supports the thesis that the political systems of the core countries in the EU – and not the nebulous, abstract “the nation state” they fixate upon – are any less undemocratic than those of the evil EU. In fact, it is pure hypocrisy to attack the one and not the other. Criticizing the EU is trivial and you can make name for yourself as a genuine defender of democracy, etc.
There are two sources of democratic legitimacy in the European Union: the European Parliament and the Council of the European Union (the council of ministers), together with the European Council (the heads of national governments). The European Commission is appointed by these two bodies. Much negative has to be said about the EP and with ample reason, but the truth is still very much different from how the Euro-bashers have it. The EP they hate so much is hardly different from the national parliaments they revere. In theory, the members of national parliaments have the power to propose legislation. In the EP this is not the case, it can only make amendments. However, in national parliaments on average less than 15% of legislative initiatives from individual members of parliament become law (see here). Very few members of parliament (or none at all) will ever propose legislation that has not been approved beforehand by their party and/or which is not the product of negotiations with coalition partners. This, once again, shows that the disease is not only located at the level of the European institutions, it is a disease all over Europe, including national, regional and parliaments. This is why the oligarchy, which defends its interests on all political scales, in all political institutions, needs to be attacked everywhere.
The EU institutions are an empty box if the national governments are not backing up European policy-making. Voting in the Council happens either by qualified majority voting or by unanimity. All these decisions are made by national politicians or national representatives. The same is true for the executive board of the European Central Bank. There is a president, a vice-president and four other members. All of these members are appointed by the European Council. The decisions of the ECB are made by these six members plus the governors of the national banks of the 19 euro zone countries. The link with the national level is always clear.
Picture 2: Fighting the oligarchy everywhere will not be for tomorrow (Source: Google Images).
The situation within the Commission, it is true, is worse. The Commission has a president, who is being elected by the EP. This means nothing. The last (and the first) time the president got elected, Juncker’s name was the only one on the ballot. The other 27 commissioners are un-elected, meaning that their position is also a result of negotiations between national governments. Over the years, it became custom to adopt legislation in a single reading. Crucial new economic governance packages, such as the Fiscal Treaty, the Six-Pack, the Two-pack and the European Semester were adopted in fundamentally undemocratic fashion. This is indeed very bad, but how is it different from legislation in most national parliaments in Europe? Everywhere, austerity and neoliberal reforms have been debated in parliaments until they were approved majority against minority – excluding a lonely defector here and there. Not a single national government in Europe fell as a consequence of the introduction of austerity. This, again, shows that the problem is not exclusively located at the European level. Indeed, without the macabre neoliberal obsession with monetarism, competitiveness, mercantilism and ‘structural reforms’ at the national level, the EU would be powerless to push it.
‘Taking back control’
“Though the Leave slogan was mocked, Brexit really was about “taking back control.”” writes Alan Johnson in The New York Times (see here). Which control did you gain? You have now the most conservative government in power since the end of World War II – more to the right than Cameron, more to the right than Thatcher. May has been elected by no one. If, as Johnson says, democracy needs a demos, I, for one, am not interested. As for the (this?) demos building “a social framework around the hot core of capitalist profit making,” this is something the author can make others believe in, but not me. I do not believe that this demos will lead to democratic protection, popular rule, local autonomy, collective goods and egalitarian traditions” (see here), on the contrary, I think that the EU is a mirror image of what they are themselves. I ultimately prefer to be governed by Juncker instead than by the liberals who sing their “The EU is evil – let us govern the nation-state” operette. There has been no Brexit debate worthy of this name. Professor Dougan from Liverpool University characterised it as ‘dishonesty on an industrial scale’ (see here). It remains an absolute scandal that the leftist leaning pro Brexit camp has ignored the blatant racism of the campaign. It could at least have stated the obvious: that it has been completely dishonest of prominent Leave campaigners to claim that there is an unconditional right to move to and settle in another Member State. It could have said that there is no right to ‘benefit tourism’ under EU law. It could have said that EU migrants pay far more into the country in work and taxes than they take out in public benefits or services. It could have mentioned that, with regards to the Eastern European migrants, the UK was one of only three Member States (together with Ireland and Sweden) that chose not to impose transitional restrictions on the rights to free movement of new EU citizens during the enlargement of 2004. It could have made clear that the accession of future Member States requires the unanimous agreement of the 27 governments plus their national ratification processes. They said nothing. There has always been a sense of clownish infantilism, a celebration of nihilist emptiness at the heart of the Brexit. How far did we regress when Farage smilingly admitted on television that he ‘has no clue’ what will happen after the Brexit? The sad thing is that this nihilism was mirrored in the blind anger of the Brexit left – now is our chance to kick the EU, let’s do it, we’ll make a plan later on – or not even that (the Tories can win the next election – they will).
I would have voted for the Brexit myself if, at least, the Left would have come up with something concrete (before the referendum, not ten months later), such as advocating public services perhaps, higher wages, more investment and employment, less inequality and social exclusion, the Brexit as part of a strategy to oppose the privatisation of the NHS, oppose the TTIP, increase manufacturing, decrease the trade deficit, make education less unaffordable, decrease homelessness, tackle tax evasion and fraud. I was never interested in hearing that after the Brexit neo-liberalism will be finished (Mitchell), that a left leaning Keynesian will lead the Bank of England (Keen) (see also here). Many people notice this emptiness. Yesterday, Frances O’Grady from TUC wrote a contribution in Social Europe: “What do working people want now that Article 50 is being triggered?” Her answer is nothing they did not have before the Brexit (see here). “Why has the white working class abandoned the Left?” asks Bo Rothstein in another contribution (see here). Because the Left betrayed them (see here).
There is a completely different strategy. It is simple and straightforward. From the moment that there would be a leftist majority in the European Parliament, the EU executive branch can no longer work. In any democratic system, it is ultimately not the government that is sovereign, it is the parliament. If a democratically elected parliament votes laws that the executive branch refuses to implement, it is the executive branch that has to go. Furthermore, in contradistinction to a lexit, reforming the institutions also immediately and automatically changes the power relations within the member states. As Habermas said when reflecting on the Brexit, in danger and distress the middle road leads to death. Do it well and EU economic governance can then finally be thrown out to where it belongs – to the dustbin of history. Do it wrong and EU governance will be recycled and even upgraded on the national scale.
The blindness is getting worse
It is not surprising that this sort of liberal Left now supports or is at least being enchanted by the “new politician” Emmanuel Macron. The good news from France is that Marine Le Pen seems to be losing support. The bad news is that Macron is gaining momentum. There is no doubt that if Macron would win, France would embark on a neoliberal reform process, similar to Germany’s in 2003 under Gerhard Schröder. The regression has gone so far that the Left considers this good news – because, at least, Le Pen won’t win. A Macron presidency would create a much more cooperative relationship between France and a newly elected German government, which in turn would relieve the excessive austerity in the eurozone and erode support for Italy’s Five Star Movement, writes Kaletsky in Social Europe (see here). Really.
In the meantime, Macron travels through France, “admitting” he is not a socialist (he was minister under Hollande), educating the French that “Le problème actuel de la France est l’égalitarisme.” (“The current problem in France is egalitarianism”). This excellent site gives a lot of information about rising inequality in France. To Macron, a bit more inequality would not hurt. The liberals, who call themselves the left these days, like him a lot.
The PRIME proposal: time for an alternative
PRIME and the Rosa Luxemburg Foundation in Brussels published a joint report on the 24th of March. It is titled Bringing democratic choice to Europe’s economic governance. The EU Treaty changes we need, and why we need them (see here). It is written by Jeremy Smith and John Weeks. In the announcement, one can read that PRIME and the Rosa Luxemburg Foundation
“share the European idea, and (that the report) express(es) our aspiration to work for a European Union which in the coming decades is truly a force for peace, prosperity, democracy and social progress” (see here).
The main problem, as the authors see it, is EU economic governance. The subject-matter of the Treaties has expanded over the decades since 1957, and they now form – as has been stated by the European Court of Justice – a “constitutional order” for the Union, its Member States, and citizens. However, says PRIME and Rosa Luxemburg,
“the Treaties in their present form are entirely unsuited to this constitutional role, since – in the economic sphere in particular – they impose a particular, and highly contested, ultra-liberal (or “ordoliberal”) economic ideology and policy framework which prevents democratic choice, and contain many detailed provisions which are wholly inappropriate in a document of a constitutional nature” (see here).
I will let the announcement speak for itself. I doubt that Dr. Pettifor will object. The report ends with a list of ten proposals of changes that need to be made:
“The global financial crisis, followed swiftly by the ongoing Eurozone crisis, underlined the problems caused by the EU Treaties as they relate to economic and related issues. The structure and operation of the Euro, especially when confronted with financial and economic crisis, have given rise to the most severe difficulties. These crises have demonstrated to millions of EU citizens that the economic policy assumptions on which decisions have been based are damaging and wrong.
And because so much of the economic policy of the EU is embedded in its Treaties, which can normally only be changed if all member states agree, there is a growing frustration that the democratic will of Europe’s people simply cannot be expressed if on any point it differs from that set out in the Treaties. We are convinced that much recent popular discontent is based on the refusal of the Union’s leaders to accept that its economic philosophy and policies are in many respects harmful, and its determination to reject out of hand any alternative.
To respond in a positive way to these serious problems caused by the accretion of Treaty provisions, the Rosa Luxemburg Stiftung Brussels Office and Policy Research in Macroeconomics (PRIME) have today co-published a study which proposes a set of Treaty amendments which, if implemented, would enable a far greater degree of democratic choice in the economic sphere – and provide a foundation to develop better economic and social policies, and therefore better outcomes, for Europe’s citizens.
We are aware how hard it is to change the Treaties, but a sustained, broad-based and widely-supported campaign across Europe in support of a specific set of well-targeted changes to the Treaties can help to change the political environment and encourage a necessary “paradigm shift” in economic thinking. We hope, taking the 60th anniversary as a starting-point, to persuade a broad range of Europeans, working in different political groupings or none, not only that There Is A Real Alternative (TIARA not TINA!), but that the present Treaty rules and policies on economic issues are leading Europe into danger.
The report’s authors are Jeremy Smith, co-director of PRIME and a barrister with wide experience in Brussels, and in relation to the EU Treaties, and John Weeks, Emeritus Professor in Economics, SOAS.
The proposed Treaty changes are set out under 10 headings, which cover:
The overall economic, employment and social protection objectives of the Union; its general economic policy provisions; the European Central Bank’s role and mandate; ensuring that trade is beneficial; managing capital mobility; rebalancing the over-emphasis on liberalisation; restoring some state aid discretion to national governments; harmonising corporate profit taxation and action against tax havens and tax base erosion; strengthening industrial and investment policies; protecting and strengthening public services.
- Redrafting theoverall economic objective of the Union, by placing full and high quality employment and social protection at its heart, and making the internal market a means of achieving the objective, not an end in itself:
The Union shall work for the sustainable development of Europe based on balanced economic growth and prosperity, full and good quality employment, reasonable price stability, social progress and a high level of protection and improvement of the quality of the environment, within the framework of a society based on a dynamic mixed economy and which ensures effective social protection and public services.
Likewise, the objective of the economic and monetary union, with the euro, would also be “to further the achievement of the Union’s objectives”.
- Ending the highly damaging focus on government deficits and debt to the exclusion of other more important economic factors. The global financial crisis and euro crisis were largely caused by private debt build-up and other imbalances, with government debt and deficits being consequences, not causes. We therefore propose a more balanced “dashboard” of economic factors be monitored, including private debt levels, and excessive trade and current account balances (whether surplus or deficit).
- Rejecting the misconceived“ debt brake”or “balanced budget” mantra, now also embedded in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (2012).
- Changing the role and mandate of the European Central Bank – in relation to its monetary policy remit, the ECB should have a dual mandate for balanced economic growth and full employment as well as for reasonable price stability:
“In relation to monetary policy, the primary objectives of the European System of Central Banks, hereinafter referred to as “ESCB”, shall be to promote balanced economic growth and full employment, and to maintain reasonable price stability. Without prejudice to these objectives, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.”
The ECB should also have an explicit financial stability role, and be able to act as lender of last resort. It should have stronger democratic accountability and wider representation, while preserving operational independence in monetary policy.
- On trade, the current Treaty commitment to ending all restrictions on trade would be qualified so as to promote
“the progressive abolition of unjustified restrictions on international trade, while maintaining environmental, social and health-related standards.”
- On capital mobility, it is proposed to repeal the current Treaty requirement to remove all controls on movement of capital between the EU and third countries. The unconstrained free movement of footloose speculative capital around the world has been a source of danger, not benefit, and the ultra-liberalised Treaty provisions are increasingly out of touch with the need to enable governments to manage such capital flows. The Treaty provisions for liberalisation of banking and insurance services would be made expressly subject to the need to regulate in the public interest, and other Treaty-imposed duties to liberalise would be curtailed.
- On state aid, member states would recover the power to provide such aid as is
“required in order to compensate for severe economic disadvantages or impacts caused by industrial, sectoral or other major structural change or by sharp economic fluctuations or disturbances (including those resulting from any impact of trade with third countries)..”
This provision is based on the power given by the Maastricht Treaty but only to Germany, at the time of reunification. We aim to consult more widely on broadening the range of state aid powers at member state level.
- On taxation, we put forward new provisions to enable the Union to harmonise corporate profit taxation, by providing for a minimum rate. In addition, it is proposed to require the Union to act to deal with tax havens, and tax base erosion and profit shifting.
- It is proposed to strengthen the Treaty provisions on industrial policy and investment, by broadening the objectives and scope of action, including helping the transition to the future “green” (non fossil fuelled) economy.
- Finally, the study recommends new Treaty provisions to deal with the highly unsatisfactory and uncertain position, under the Treaties, in relation to public services. In particular, we propose a new article to enable member states to define which of their public services are of a non-commercial character, and should therefore not be subject to the Treaty provisions on competition, state aid and the internal market” (see here).
How getting there?
This sounds like a perfectly sensible and defendable position. How will PRIME achieve it? Complicated studies reached the amazing conclusion that EU economic governance cannot be overhauled without winning elections. How will you do it?
Perhaps I may be forgiven for making a suggestion. In the South of country where I originally come from, social democracy has “always” been in power (it is to say, since the end of WWII). Not any longer. There is more. For the very first time, the party left of social democracy does better than the social democrats in Wallonia! What happened is simple to understand. Irish Labour got less than 7% of the vote in 2015. Dutch Labour got less than 6% of the vote in 2017. Remarkably, social democracy wins as soon as it moves to the left. If it does not move, it is being swallowed by the right and the left simultaneously (cf. the Dutch election – Wilders won 5 seats compared to 2012, the Green left won 10 new seats). Either social democracy will move to the left or it is going to become insignificant and irrelevant. Moving to the right is not an option. Are you up to it? That is the question that needs to be answered, not in words, but in practice.