EuropeanEconomistsforanAlternativeEconomicPolicyinEurope EuroMemoGroup Democraticdeepeningforstability,solidarityandsocialjustice

Europeanintegrationatthecrossroads:
EuroMemorandum2012

Summary Introduction

1 1.1 1.2 1.3 1.4 1.5

ThedeepeningcrisisoftheEuropeanUnion Theeuroareafacesanewanddangerousphase Austerityasapolicyguideline ThecontradictionsinEUenlargementandneighbourhoodpolicies Radicalisinganeomercantilismintradeanddevelopmentpolicies Adeepeningcomplexcrisistheexamplesofenergyandagriculture WrongpoliciesleadtowrongoutcomesAcritiqueofEUpolicies MacroeconomicPolicies:towardsthesurveillanceregime Financialsectorreformstymiedbyextensivelobbying Austerity:ThewrongpolicyfortheillsoftheEU Enlargementandneighbourhoodpolicieslackapoliticalvision Box1:EUmigrationpolicyandtheeconomiccrisis Tradeanddevelopmentpolicies:Wavingthestickandnotthecarrot Inadequateandinsufficientaction:theexampleoftheCommonAgriculturalPolicy StrengtheningdemocracyandsocialjusticeinEurope Financialandfiscalalternatives Alternativestoausterityurgentlyneeded Supportingautonomousdomesticdevelopmentinpartnercountries Takingresponsibilityintradeanddevelopmentpolicies Box2:Taxingmatters:TheEUasmodelforLessDevelopedCountries? SustainabledevelopmentandtheCommonAgriculturalPolicy

2 2.1 2.2 2.3 2.4 2.5 2.6

3 3.1 3.2 3.3 3.4 3.5

Declarationofsupport ThisEuroMemorandumdrawsondiscussionsandpaperspresentedatthe17thWorkshoponAlter nativeEconomicPolicyinEurope,organisedbytheEuroMemoGroup,on1618September2011in Vienna, Austria. The text is based on contributions from Joachim Becker, Hermann Bmer, Tanja Cesen, Rolf CzesklebaDupont, Judith Dellheim, Trevor Evans, Marica Frangakis, John Grahl, Peter Herrmann, Roland Kulke, Jeremy Leaman, Mahmood Messkoub, Dominique Plihon, Werner Raza, DianaWehlauandFriederOttoWolf. For more information on the EuroMemo Group, please contact the Steering Committee (details at endofthisEuroMemorandum)orlookupourwebsiteat:

www.euromemo.eu

EuroMemorandum2012
Summary The euro area crisis threatens the future of European integration, but instead of challenging the power of the financial institutions which are driving the crisis, the European authorities have im posed austerity programmes on Greece and other peripheral euro area countries, and developed centralised policies for imposing highly restrictive fiscal discipline on all member states which risk underminingthedemocraticlegitimacyoftheEuropeanUnion(EU). RestrictivefiscalmeasureshavedepresseddemandinEurope,andeconomicforecastsfor2012indi catevirtualstagnation,whichwillexacerbatethedifficultiesdeficitcountriesfaceinservicingtheir debts.AeuroareasummitattheendofOctober2011decidedthatGreecesdebtshouldbecutby 50%,butpanicsellingbybondholdersintensified,alsoaffectinglargercountriesincludingItalyand Spain. Austerity programmes in Eastern European countries (Latvia, Romania and Hungary) and the euro area periphery (Greece, Portugal and Ireland), have led to especially serious recessions and major fiscalcutshavebeenaccompaniedbydemandsforprivatisationandthederegulationoflabourmar kets. TheEUsSouthEasternneighboursandTurkey,manyofwhichweredependentoncapitalinflows, haveallalsobeenhardhitbythecrisis.LikethecountriesofNorthAfrica,thesehadallbeenencour agedstronglybytheEUtoopentheireconomies. Growth in several EU countries, in particular Germany, has benefited from the strong rebound in worldtradesince2010,buttogetherwiththesurplusesgeneratedbyChinaandJapan,thisiscon tributingtoadangerouswideningofglobalimbalances.LowinterestratesinEurope,andespecially the US, have led to destabilising inflows of capital to several middleincome countries, forcing up theirexchangerates. TheFukushimacatastrophehasledGermanytoreinstateitsprogrammetophaseoutnuclearenergy but this has not triggered a wider European phasing out. Following the failure of the Copenhagen conference,theEUhasalsofailedtodevelopanadequateresponseintheareaofclimatechange. Europeanagriculturalproduction,whichisbasedonafailedmodelofindustrialisation,hasnegative socialandenvironmenteffectsintheEUandunderminestheabilityofdevelopingcountriestofeed themselves. AcritiqueofEUpolicy TheEUhasfailedtodefineanadequateresponsetotheeuroareacrisis.Theproposedreformsto the Growth and Stability Pact are based on the fallacious notion that, provided public deficits are limited,marketforceswillensurebalanceddevelopment.PriortothecrisisGermanyhadrunupa verylargecurrentaccountsurpluses,whilelargedeficitsinsouthernEuropewerefinancedbycapital inflows.Thefinancialcrisisin2008ledtoasharpdeclineofprivateexpenditureandnecessitateda majorexpansionofgovernmentspending.TheEUsnewlegislationreferstopolicycoordination,but theprimaryfocusisonsurveillanceandthreatenstosubjecteconomicallyweakerstatestocompre hensivetutelageineveryaspectofpublicpolicy. Europeanbanks,whichfacelargelossesongovernmentbonds,aredirectlythreatenedbytheeuro areacrisis.Buttheyhavemountedmassivelobbyingcampaignsagainstfinancialreforms,andmod est proposals affecting derivatives and the capital requirements for banks were both successfully diluted.TheCommissionhasproposedintroducingafinancialtransactionstax,butthisexcludesfor eignexchangetransactionsandisopposedbykeystates. ThecrisishaslaidbarethedivergentproductivestructuresintheEU.Regionalpolicieshavefocussed on physical infrastructure and training, but no attention has been given to industrial policy, some thingwhichtheneomercantilistcorearoundGermanyhasnointerestinpromoting.EUpolicieshave tended to cement the existing European division of labour, and imposing austerity policies on the peripheralcountrieswillexacerbatethisyetfurther.

EuroMemorandum2012
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 trade policy, while paying lipservice to concluding the Doha Round, has shifted decisively to wardsnegotiatingbilateralfreetradeagreements.TheEUisincreasingpressureontheAfrican,Car ibbeanandPacificgroupofcountriestosignEconomicPartnershipAgreements,whichrequirewide rangingcommitmentstoopentheircountriestoEUtradeandinvestment. TheEUhasappropriated,wrongly,themilitaryconceptofsecuritytodesignateanillusorywayout ofdependenceontheworldmarketforenergyandrawmaterials.TheCommissionsnewpaperon agriculturalpolicymakesanimportantsteptowardssustainablepolicies,butdespiterecognisingthe socialimportanceofagrarianlabour,paymentswillnotbeconfinedtoactivefarmers. Alternatives The ECB must act immediately as lender of last resort in the euro area bond market to break the cycleoffallingpricesandpanicselling.Thenthemajorexpansioninthesizeandpowerofthefinan cial sector over the last three decades must be dramatically reversed. Commercial and investment bankingshouldbeseparated;cooperative,publicsectorandothernonprofitbanksshouldbepro moted to provide financing for socially and ecologically desirable investment projects; investment banks,hedgefundsandprivateequityfundsshouldbetightlycurtailed.Mostderivativesshouldbe banned,andallsecuritiesshouldbetradedonpublicplatforms.Afinancialtransactionstaxshouldbe introduced on all financial transactions, and a publiclyowned European ratings agency should be established. Theexistinglevelofpublicdebt,especiallyinGreece,isunsustainable.DebtAudits,aspioneeredin Ecuador,shoulddeterminewhichdebtsarelegitimate,andwhichinstitutionsshouldbearthewrite downs.Incountrieswithveryhighpublicdebt,areductionshouldalsobeachievedthroughawealth taxontheveryrich.Topreventspeculationagainstweakerstates,euroareacountriesshouldswap remaininggovernmentbondsforjointlyguaranteedeurobonds. A common monetary policy should be accompanied by a common fiscal policy. This should aim to promotefullemploymentwithgoodwork.Austerityprogrammeswillmakeitevenmoredifficultto repaydebt,andgovernmentswithprimarydeficitsshouldbeprovidedwithfinancetofacilitateex pansion.Astrongprogrammeofpublicinvestmentsisnecessary,especiallyinperipheraleuroarea countries.FinancingshoulddrawontheEuropeanInvestmentBank,whichisalreadyempoweredto issuebonds.Inplaceoftheonesidedemphasisoncutsingovernmentspending,thelongtermre ductioninthetaxationofhigherincomesshouldbereversed.Constitutionalprohibitionsonrunning governmentdeficitsaredangerouslyrestrictiveandshouldnotbeintroduced. A coordinated European wage policy should ensure that the widespread decline of the share of wagesinnationalincomeisreversed,andthatwagesinstateswithlowerincomesbegintoconverge on those with higher incomes. A reduction of normal working time to 30 hours a week should be introducedbothtocombatunemploymentandasacontributiontobuildingasocietyinwhichlifeis notdominatedbywagedwork. Inplaceofausterityprogrammes,thereisaneedforprogrammesthataddressfundamentalstruc tural problems of capitalism today. Privatisation has been counterproductive, leading to twotier healthsystems,and the roleofpublicservicesshouldbereestablished.Lowwagestrategies,sup posedlyaimedatimprovingcompetitivenessindevelopingregions,havefailed.Developmentshould insteadbebasedontheadoptionofmoderntechnology,andEuropeanstructuralfundsshouldbe used to develop advanced productive sectors. To reduce trade imbalances, member states should seektoreduceimports,includingthroughtheexpansionofrenewableenergysources.Cooperatives

EuroMemorandum2012
canplayanimportantroleinintegratingeconomicandsocialgoals,promotinglocalproductionand consumption. Flexicurity has increased employment insecurity, and to counter this full trade union rightsshouldbereestablishedandenforced.Measuresshouldbeintroducedtoensurethatenter prises cannot use the argument of competitive pressure from other EU countries to justify lower wagesandadeteriorationofworkingconditions. TheEUshouldaddressasymmetriesinrelationswithneighbouringcountriesbyadoptingasymmetric arrangements, which favour the neighbouring countries, and this should be reflected in a new ap 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 agreements should be abandoned so as to take account of asymmetries between countries. Trade distorting agricultural subsidies should be phased out, and demands for the liberalisation of public servicesbytradepartnersshouldbedropped.Developmentpoliciesshouldbereorientedtosupport theconstructionofdiversifiedlocaleconomies,andtheconstructionofstatecapacitiesinlessdevel opedcountriesshouldbesupported. TheEUcouldmakeanimportantcontributiontoadvancingsustainabledevelopmentifweretoco ordinate member states initiatives for Rio II in 2012. These could include transnational green jobs programmes, linking ecological and social concerns with energy saving. The common agricultural policy could also be transformed to achieve a compromise between the political requirements of feedingEuropeanswithhighqualityfoodatlowprices;maintainingactivefarmerswhosustainthe ecologicalbalanceinthecountryside;andsupportingfairexchangeforagriculturalproductswiththe restoftheworld.

EuroMemorandum2012

Introduction
ThedeepeningcrisisintheeurozonethreatensthefutureofEuropeanintegration.TheEu ropean authorities have at each stage of the crisis undertaken the minimum necessary to deal with the immediate situationand completely failed to get on top of the fundamental problems.Inplaceofamajorchallengetothepowerofthefinancialinstitutionswhichare drivingthecrisis,theEuropeanauthoritieshaveimposedpoliciesofausteritythathaveled tohardshipforcountlesscitizensacrosstheUnion.Thesepoliciesnotonlyfailtodealwith therootcausesofthe crisis;theauthoritarianandhighlyundemocraticwayinwhichthey arebeingadvancedalsothreatenstounderminethelegitimacyofthewholeprojectofEu ropeanintegration. Thecrisiswasnotcausedbygovernmentdeficits.ItoriginatedintheUSfinancialsystemasa resultofpolicieswhichtriedtocounterdecadesofstagnatingUSwagesbyallowingwork ingclass and middleclass households to finance increased consumption by borrowing againstrisinghouseprices.PoliciesadoptedbytheEuropeanCommissionshortlyafterthe introductionoftheeuroin1999soughttoencourageanintegratedbutlessregulatedfinan cial system in Europe, very much modeled on the US system, and big European banks ea gerlysoughtthehigherreturnsthatappearedtobeavailableintheUS.Thecollapseofthe bubbleinUShousepricessetoffthefinancialcrisisin2007andwhenthecrisisdeepenedin September2008majorbanksinboththeUSandEuropewerethreatenedwithcollapse,and wereonlyrescuedbylargescalegovernmentintervention.Thebankingcrisis,inturn,ledto a collapse of credit and a major slump in output in the final quarter of 2008 and the first quarterof2009.OutputinEuropefellbyalmost5%andanevendeeperrecessionwasonly preventedbygovernmentmeasuretoincreasespendingandcuttaxes. Thebigjumpingovernmentdebtis,therefore,notacauseofthecrisisbutratheraresultof measurestakentorescuethebanks,expansionarypoliciestocountertheslump,andasharp declineintaxrevenues.Butasgovernmentdebthasrisen,theveryfinancialinstitutionsthat benefited from the rescue seized on imbalances in the euro area, speculating against the weakestlinks.Sincetheendof2009,aviciouscyclehasdevelopedinwhichfinancialinves tors and the opinions of private ratings agencies have interacted to drive up the interest ratesofperipheraleuroareacountriesbonds,andhasmadeitprohibitivelyexpensivefor thesecountriestoraisenewfinance.ThisbeganinGreece,whosegovernmentdeficitwas 5%beforethecrisis(principallyduetolowtaxrevenues)butwhichjumpedto15%in2009. WhilethescaleofsupportrequiredbyGreece,andothersmallerperipheralcountriesisrel ativelymodest,speculationhassinceturnedagainstlargercountries,includingSpain(which actuallyhadagovernmentsurplusbeforethecrisis),ItalyandevenFrance.Infact,govern mentdeficitsintheeuroareaarelowerthanintheUSorBritain,butthesetwocountries areabletofinancedeficitsthroughtheircentralbanks,apolicywhichatGermaninsistence is rejected by the European authorities. As European banks once again pay large bonuses andusethetaxpayerasinsurance,Europeancitizensarebeingsqueezedtopayforthecrisis of state financing which, as a result, has been transformedinto a deep social andpolitical crisis. ThesocialcrisisisdeepestinthecountriesinEasternEurope,whichwereforcedtoadopt strict austerity programmes as a condition for balance of payments support in 2008 and 2009,andintheperipheraleuroareacountrieswhichhavewereobligedtocutwagesand
5

EuroMemorandum2012 governmentspendingasaconditionofeurozonesupportin2010and2011.Austeritypoli cieshaveledtoawideningsocialcleavage,bothwithincountriesandbetweencountries.As governmentsstrivetoassurethefinancialmarketsoftheirsoundnessbycuttingspending, thecitizensofonecountryarebeingsetagainstthoseofother,insomecasesricher,coun tries.ThisisfertilegroundforantiEUpopulism,whichdisplaysworryingsignsofstrengthen inginseveralmemberstates,includingformerEuropeanstalwartssuchasFinlandandthe Netherlands. ThepoliticalcrisisisbeingprovokedbythehighlyundemocraticproposalswhichtheEuro pean authorities have advanced in response to the crisis, with a dangerous tendency to wardsauthoritariansolutions.ThenewfiscalproposalsadoptedbytheEuropeanCouncilin March2011,whileostensiblyaboutpolicycoordinationarelargelyconcernedwithaproce dureforensuringthattheEuropeanCommissioncanimposepoliciesonrecalcitrantmem ber states. There have been calls for a common European fiscal policy by JeanClaude Trichet, at the time president of the European Central Bank, and Wolfgang Schauble, the Germanfinanceminister,butinbothcasesthishasbeendirectedatensuringagreaterfi nancial discipline, subordinating national policies to a deeply conservative common Euro peanpolicy,ratherthanmovingtowardsademocraticallycontrolledEuropeanapproach.In Greece,PortugalandIreland,whicharesubjecttoEUrescuepackages,democraticcontrol overeconomicpolicyhaseffectivelybeensuspendedfortheforeseeablefuture.Andasthe crisisintheeuroareaintensifiedinOctober2011,controlofpolicymakingwasseizedbyjust twomemberstatesGermanyandFrancewithGermanyeffectivelymakingtherunning onthekeypoints.Bycontrast,aGreekproposaltoseekdemocraticlegitimacyforgovern mentpoliciesthroughareferendumwastreatedwithderision. Inplaceoftheantisocialandundemocraticpolicieswhicharethreateningtounderminethe wholebasisforEuropeansolidarity,thereisaneedforafundamentallydifferentapproach. Theprospectofprotractedausterityandasimplisticfocusonfiscaldisciplinewillundermine the basis for economic recovery, not only for the debtstricken countries themselves, but alsoforalltheotherstateswhoseprosperityrestsontheEuropeanmarketincludingGer many.Thecountriesmostdirectlyaffectedbythecurrentdebtcrisiswillonlybeabletore solve their problems through policies which promote economic growth not austerity. But thisraisesanevengreaterchallenge.Whileanexitfromthedebtcrisiscallsoutforpolicies thatpromotegrowth,environmentalsustainabilityrequirestheurgentadoptionofpolicies thatwillensureamassivereductionintheconsumptionofnonrenewableresourcesandthe emissionofgreenhousegassesandotherpollutants. The political leaders of the European Union and its member states have signally failed to meet these challenges, but there are voices calling for an alternative. While unions have soughttofightagainsttheimpactofofficialpolicies,newformsofpopularprotest,suchas the indignados, who first emerged in Spain, have found an echo in many parts of Europe. Like the Occupy Wall Street movement in the US, they have raised fundamental questions aboutthedistributionofwealthandpowerinoursocieties. Asinpreviousyears,thisEuroMemorandumseekstosetoutacriticalanalysisofrecenteco nomicdevelopmentsinEuropeandtopresentthebasisforpossiblealternativepolicies.Itis intendedasacontributiontothecriticaldiscussioninintellectualandsocialmovementsin Europe,andinsolidaritywithallthosestrugglingagainsttheimpactofthedeeplyregressive, antisocialpoliciesoftheEuropeanauthorities.
6

EuroMemorandum2012

1
1.1

ThedeepeningcrisisoftheEuropeanUnion
Theeuroareafacesanewanddangerousphase

TheEuropeanUnion(EU)issettoregisterasecondconsecutiveyearofmodesteconomic growthin2011,butoutputfortheEUasawholewillremainbelowitsprecrisisleveland countriescontinuetodivergestrongly,asshownintable1.InGermany,andmostothercore euroareacountries,outputisexpectedtoriseslightlyaboveprecrisislevelsin2011.Inthe peripheraleuroareacountries,bycontrast,outputisstillbelowprecrisislevelsand,most disturbingly,recessionshaveactuallydeepenedinGreeceandPortugal.InEasternEurope, althoughcountriesaresettogrowin2011,withespeciallystronggrowthinPoland,output inmostothercountriesisstillwellbelowprecrisislevels,mostnotablyinRumaniaandthe Balticregion,whichremainstheworsthitareainthewholeEU. Thedivergentpatternsofgrowthhavebeenreflectedinthe2011figuresforunemployment andincome.UnemploymentremainshighthroughouttheEU,andalthoughratesfellslightly duringtheyearinaroundhalfthememberstates,theyincreasedintheotherhalf,withthe largest increases in Spain, Greece and Cyrus. Real wages fell slightly in many countries in 2011andweremorethan10%belowprecrisislevelsinGreece,Hungary,Romania,Lithua niaandLatvia. Inthesecondhalfof2011theeconomicrecoverybegantoslow,andthislookssettocon tinueinto2012.1InEurope,demandisbeingdepressedbythewidespreadadoptionofaus terityprogrammes.ThesearemostmarkedinIreland,Portugaland,aboveall,Greece,which havebeenforcedtoslashgovernmentspendingandwagesasaconditionoffinancialsup port.ButwagesandspendinghavealsobeencutinSpain,andgovernmentsthroughoutthe euro area have been adopting programmes designed to meet EU targets for government deficitsbelow3%ofGDPby2013.Theinternationaloutlookhasalsodeteriorated.Growth in the United States weakened markedly in 2011 as the impact of expansionary fiscal and expansivemonetarypolicieswaned,andthepoliticalimpassebetweenDemocratsandRe publicans in Congress made further expansionary measures such as the jobs plan an nouncedbyPresidentObamainSeptembermostunlikely.2Furthermore,therapidgrowth inlargerdevelopingcountriesthathasbenefitedexports,aboveallfromGermany,looksset to slowdown, with increasing concern in both China and Brazil at rising inflation, and the International Monetary Fund (IMF) warning of the possibility of a rapid reversal of capital flowstoAsiaandLatinAmerica.3 The most serious challenge, however, concerns the debt crisis in the euro area which had beentemporarilystabilisedin2010butwhichreemergedinspring2011andwhichentered whattheIMFdescribedasanewanddangerousphaseinthecourseofthesummer.Atthe EuropeanCouncilmeetinginMarch2011,EUheadsofgovernmentagreedonthesocalled EuroPlus Pact, a series of highly undemocratic measures designed to give the European Commissiongreatercontrolovermemberstateseconomicpolicies,includingnewrulesto enforce stricter fiscal discipline. They also agreed that the 440 billion European Financial
1 2

InOctober2011,theOECDcutitsforecastforeurozonegrowthin2012from2%toonly0.3%. Inthefaceofslowinggrowth,theFederalReserveisreputedlyconsideringathirdroundofpumping moneyintotheeconomythroughlargescalebondpurchases(socalledquantitativeeasing). IMF,GlobalFinancialStabilityReport,September2011,pp.3637. 7

EuroMemorandum2012 StabilityFacility(EFSF),whichwascreatedinMay2010butisduetoexpirein2013,should be replaced in 2013 by a permanent 700 billion European Stability Mechanism. The new fund will make loans against strict conditions and, despite some initial opposition, will be allowed exceptionally to purchase government bonds. However, at the insistence of a groupofcountriesledbyGermany,privateinvestorswillberequiredtobearpartofthecost intheeventthatoverindebtedcountriesareunabletomeetdebtpayments.4Thismeasure, whichtheEuropeanCentralBank(ECB)opposed,wasoneofthefactorsthatcontributedto reignitingtheeuroareacrisis.Assoonasitbecameclearthatprivateinvestorswouldhave tobearpartofthecostoffuturelosses,theinterestrateforeuroareaperipheralbondsbe gantorisesignificantly.Forcountriesthatwereconsideredtobeatrisk,raisingnewfinance fromprivateinvestorsbecameprohibitivelyexpensive,andinMayPortugalwasobligedto turntotheEFSFfor78billion. Thedeepeningofthecrisiswasalsoduetoadawningrecognitionbyprivateinvestorsthat the austerity policies imposed on Greece and other countries were leading to deepening recessionswhichmadeitevenmoredifficultforcountriestomeettheirdebtpayments.The Greekgovernmenthadintroducedmajorspendingcutswhichsignificantlyreduceditsdeficit but,asoutputandemploymentfell,thislednotonlytowidespreadsocialhardshipbutalso toafallintaxrevenues,makingitimpossibletomeetagreedtargets. Euro area governments responded to the deteriorating situation at the European Council meetinginJuly2011.TheyagreedonanewloanforGreeceof109billion,althoughonly around34billionwouldactuallybeforGreece,andtherestwastoprovideguaranteesfor acomplicatedschemedesignedtoreduceGreecesdebt.Greecewastosubmittoyetfur thergovernmentcuts,togetherwithaprivatisationprogrammeoverseenbytheEUauthori ties. Recognising that the penal interest rates charged on previous loans had exacerbated countriesproblems,theratewascutfrom3%to1%abovethefundingcosts,andthiswas appliedtoloanspreviouslygrantedtoIrelandandPortugalaswell.Theeuroareaauthorities alsoproposedaseriesofrevisionstothetermsoftheEFSF,includingincreasingitssizeso thatitwouldbeabletolendafull440billionandallowingittobeusedtobuygovernment bonds and to recapitalise private banks measures that had to be approved by member statesparliaments.5 ThenewinitiativefailedtostemthepressurefromprivateinvestorsandinAugustinterest rates increased on bonds issued by Belgium, Italy, Spain and, for the first time albeit to a lesser extent, France. In response, the ECB, which had halted bond purchases in January, resumed intervention in an attempt to stabilise the market, purchasing bonds issued by Spain and Italy (the rule changes which would have allowed the EFSF to purchase govern ment bonds had not yet been approved by member states). At the same time, with huge sumsofmoneynowsetfree,therewasamajordemandforbondsissuedbyGermanyand theinterestrateonits10yearbondsfellbelow2%,thelowesteverrecordedbytheFederal Republic (the same occurred for US government bonds, leading to the lowest rates in 60 years).
4

From 2013, all euro area government bonds will be required to include collective actions clauses, whichenableasupermajorityofbondholderstoagreeonapartialwritedownofvalueswhenitis cleargovernmentswillnotbeabletorepaythefullamount. Approval wascompleted inOctober afterthe Slovakianparliament, which initially voted against the revisions,gaveitssupport. 8

EuroMemorandum2012 AccordingtoIMFestimates,byAugust2011,nearlyhalfofthe6,500billionstockofeuro areagovernmentdebtshowedsignsofheightenedrisk.6Thishashadmajorimplicationsfor Europeanbanks,whichhaveextensivecrossholdingsofgovernmentbonds.Asbanksfaced increasing strains, equity market valuations of European banks began to decline, falling by 55%betweenJanuaryandSeptember.7EstimatesofhowmuchcapitalEuropeanbanksneed to raise to compensate for losses vary. In July, the new European Banking Authority (EBA) publishedtheresultsofstresstestson91majorEuropeanbanks,andonly9failed.Extraor dinarily,however,thetestsdidnotconsiderthepossibilitythatGreekorothergovernment bondsmightfail!PreliminaryreportsofrevisedEBAstresstestspublishedinOctoberindi catedthatEuropeanbankswouldneedtoraisesome90billion.IMFestimates,madepublic byChristineLagardeshortlyafterbecomingthenewmanagingdirector,claimthattheshort fallisaround200billion. TheauthoritiesmostacuteconcernisthataGreekdebtdefaultcouldsetoffachainoffi nancial failures comparable to that which followed the failure of Lehman Brothers in Sep tember2008.ThisconcernissharedbytheUS,theG20,theIMFandtheWorldBankwhich have all made urgent calls for the euro area to take decisive action. However, action has beenhinderedbypoliticalfragmentationwithintheEUaswellassignificantdifferencesbe tween states, most notably between Germany and France who, to the chagrin of smaller countries,dominatethepolicyprocess. At a much awaited European Council meeting at the end of October 2011, euro area gov ernmentsagreedthat,inviewofthesharpdeteriorationinGreekfinances,theloannegoti atedforthecountryinJulyshouldberaisedto130billion,anditbackedaGermancallfor Greecesoutstandingdebttobewrittendownby50%.8Inordertoconfronttheriskofthe debt crisis spreading, the meeting also agreed that the capacity of the EFSF should be enlargedtoaround1,000billion.9Becauseofawidespreadunwillingnesstoincreasecon tributionstotheEFSF,thisistobeachievedbyleveragingtheexisting440billion,through providingguaranteesforthefirsttrancheoflossesonbonds(20%to30%hasbeenconsid ered) rather than making loans. In prior negotiations, France had proposed that the EFSF shouldbeabletoborrowfromtheECB,butthiswasblockedbyGermany.Theheadsofgov ernment also agreed to back the European Banking Authoritys proposal to increase the minimumcapitalrequirementsforEuropeanbanksto9%ofassets.Heretootherehadbeen disagreementbeforethemeeting,withFrancewishingtodrawontheEFSFtorecapitalise banksandGermanyarguingthatrecoursetotheEFSFshouldbealastresortafterprivate
6

IMF, Global Financial Stability Report, September 2011, p. 16. This is based on credit default swap rates(i.e.insurance)ofover200basispointsforgovernmentdebtissuedbyGreece(5%oftotal),Ire land(1%),Portugal(2%),Spain(9%),Italy(25%)andBelgium(5%). FinancialTimes,13September2011.TheFrenchBelgiumownedDexiabank,whichhadlargeholdings ofgovernmentbonds,failedinSeptember2011,leaving100billionofbondstobeheldinanewly createdbadbank. German banks had substantially reduced their holdings of Greek government debt since 2010. The writedown was initially opposed by France, whose banks maintained more substantial holdings of Greekdebt,andbytheECB,whichwasconcernedthatthiscouldsetoffwiderdefaults.Inorderto avoidthewritedownprovokingtheratingsagenciesfromdeclaringaformaldefaultbyGreece,banks mustvoluntarilyexchangeexistingbondsfornewbond. Theexactamountisunclearduetouncertaintyabouthowmuchofthefundsresourceswillbeavail able,andthedegreeofleveraging.Italy,whichisseenasthegreatestsourceofpotentialrisk,hasan outstandinggovernmentdebtof1,900billion. 9

EuroMemorandum2012 marketsandnationalgovernmentshavebeentapped.Butmanyofthecomplicatedtechni calissuesabouthowtoimplementtheseproposalshadnotbeenresolvedand,intheafter mathofthesummit,sellingineuroareabondmarketsintensified. Table1.IndicatorsofEUoutput,unemploymentandwagegrowth

Euro area core Germany Luxemb. Belgium Netherl. Finland Austria France Ireland EU 27 Euro area periphery Portugal -2.2 -3.4 12.5 -3.6 -3.7 1.3 -7.0 7.3 -4.2 -16.9 Romania Greece

EA 17

Spain

GDP growth 2010-11, %* GDP growth peak-2011, %* Unemployment rate, 2011, %* Real wage growth 2010-11, %** Real wage growth peak-2011, %**

1.7 -0.8 9.5 -0.3 -0.4

1.4 -1.0 10.0 -0.3 -0.4

2.3 1.7 7.0 -0.2 -1.5

2.5 0.8 6.1 0.5 0.2

1.7 0.5 9.8 -0.1 -0.1

3.3 0.5 4.6 -1.0 -1.2

1.9 0.0 4.1 0.9 0.3

2.3 0.7 3.9 -0.3 -0.3

3.6 -1.4 7.8 -0.5 -0.5

0.7 -9.6 14.4 -1.3 -1.3

-3.2 -10.0 16.7 -3.5 -11.1

0.7 -3.1 21.0 -1.7 -3.7

1.9 -3.4 8.0 -1.0 -1.0

Other euro area Denmark Slovenia Slovakia Cyprus

Northern EU Bulgaria Sweden Estonia United Kingd. Czech Rep.

Eastern EU Lithuania Hungary Poland 4.3 9.8 9.5 2.0 4.6

GDP growth 2010-11, %* GDP growth peak-2011, %* Unemployment rate, 2011, %* Real wage growth 2010-11, %** Real wage growth peak-2011, %**

1.5 0.7 7.0 0.5 0.5

1.8 -4.9 7.9 -0.2 -0.2

3.5 2.5 13.3 0.3 7.1

1.6 -3.0 7.3 -0.8 -0.8

4.2 4.4 7.4 1.6 0.8

1.6 -2.2 8.0 -0.1 -1.6

2.7 -2.7 11.5 3.2 9.5

2.0 -0.2 6.8 0.3 1.9

4.2 -11.4 12.8 0.8 -3.8

2.7 -18.1 16.2 -1.7 -22.9

Latvia

4.4 -9.3 15.6 0.2 -17.0

2.6 -3.1 10.9 -1.3 -11.8

Source:*Eurostat(October2011),**Ameco(May2011).Peakishighestpreviousyearsince2007.

1.2

Austerityasapolicyguideline

TheEuropeanCouncilsetitsausteritypoliciesatitsMarch2011meeting,asfollows:Within thenewframeworkoftheEuropeansemester,theEuropeanCouncilendorsedthepriorities forfiscalconsolidationandstructuralreform.Itunderscoredtheneedtogiveprioritytore storing sound budgets and fiscal sustainability, reducing unemployment through labour marketreformsandmakingneweffortstoenhancegrowth.10 EachoftheabovestrandsisfurtherelaboratedbytheEuropeanCommissioninitsreporton advancingtheEUscomprehensiveresponsetothecrisis(COM[2011]11final),whereby: Restoringsoundbudgetsandfiscalsustainabilityrequiresannualadjustmentsofthe structuralbudgetinexcessof0.5%ofGDP,theconventionalbenchmarkoftheStabil ity and Growth Pact. This is to be achieved by keeping public expenditure growth firmlybelowtherateofmediumtermtrendGDPgrowthandincreasingtaxes,espe

10

EuropeanCouncil,24/25March2011,Conclusions,para.2,p.2. 10

Italy

EuroMemorandum2012 ciallyindirecttaxes,consideredtobemoregrowthfriendlythandirecttaxes.Also, fiscalconsolidationistobesupportedbypensionsystemreforms,suchasincreasing theageofretirementandprovidingincentivesforcomplementaryprivatesavings. Inordertoreduceunemployment,governmentsareadvisedtoprovideincentivesto work,avoidbenefitdependencyandsupportadaptabilitytothebusinesscycle(ibid, p. 6). Also, in order to balance security and flexibility, it is recommended that gov ernmentsreduceoverprotectionofworkerswithinpermanentjobs(p.7). Inrelationtogrowth,frontloadinggrowthenhancingmeasuresarerecommended. Suchreformsincludetheeliminationoftheremainingbarrierstotradeandobsta clestoentrepreneurship,thefullimplementationoftheServicesDirective,andtax harmonisation,althoughthisisdeemedtobeasensitiveissue(p.8).

Overall,themainstrandsofEUeconomicandsocialpolicyconstituteatriptych,consistingof fiscal consolidation labour market reform market liberalisation, where liberalisation includes privatisation of state assets, as well as of social security systems. This triptych is encapsulated in austerity, as a defining element of the present neoliberal agenda and a centralpolicyguidelineemployednotonlybytheEU,butalsobytheIMF,ascanbeseen from the individual EU/IMF Programmes, which come under two headings, the Balance of Paymentfacilityandthenewlyinstituted,albeitofatemporarydurationassetoutinsection 1.1 above, European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism(EFSM).BoththeEFSFandtheEFSMwerebasedontheloanfacilitysetupfor Greece. TheEU/IMFProgrammesI:BalanceofPaymentsfacility Intheaftermathofthefinancialcrisis,anumberofjointEU/IMFbalanceofpayments(BoP) ProgrammeswereputintoeffectinHungary,LatviaandRomania.AccordingtoArt.143of theTreatyoftheUnionandECReg.332/2002,theseprogrammesareaddressedtomem berstates in balance of payments difficulties and aim to safeguard the functioning of the internalmarketand/ortheimplementationofcommoncommercialpolicy.Theyentailthe provision of mediumterm financing on the basis of conditionality. The BoP facility is only opentomemberstatesthatdonotbelongtotheeurozone.Ithasaceilingof50billion. Inparticular,theEUactsasaborrower,issuingdebtinstrumentsinthecapitalmarketsand lendingthefundsthusraisedtotheprogrammecountries.OnthebasisoftheViennaInitia tivecreatedin2009,otherinternationalfinancialinstitutions,suchastheEBRD,EIBandthe WorldBankalsoparticipateintheseprogrammes. LatviaInDecember2008,LatviawasgrantedaBoPProgramme,expiringinJanuary2012 andamountingto20billion,ofwhich6.5billionwerefromtheEU.Theconditionsofthe Programme included the following: fiscal consolidation; fiscal governance reform; financial sectorregulationandsupervisionreform;structuralreforms;andabsorptionofEUstructural funds for projects cofinanced by the EU.11 In 2007 Latvia had a current account deficit amounting to 22.3% of GDP, which was reduced to 0.3% by 2011. There was, however, a declineinLatviasrealGDPofmorethan20%between2007and2010whileunemployment rosefrom6%ofthelabourforcein2007to17.2%by2011.Thelowratesofgrowthforecast for 2011 and 2012 will still leave output more than 10% below the 2007 level and unem
11

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

EuroMemorandum2012 ploymentover13%.Lastbutnotleast,in2007itspublicdeficitwasonly0.3%ofGDPandits publicdebt9%ofGDP,risingto4.5%and48.2%respectivelyby2011.Thesefiguresunder scorethefactthatalthoughLatviadidhaveaprobleminthefaceofthecrisisandasevere recession, this was not one of public indebtedness; this raises clear doubts over the EUs emphasisonausterity. RomaniaRomaniawasgrantedtwoBoPpackages:20billion,ofwhich5billionwasfrom theEU,inMay2009for24monthsand5billion,ofwhich1.4billionwasfromtheEU,in March2011,alsofor24months.TheconditionsoftheBoPprogrammeswereidenticalwith those for Latvia, with the addition of the privatisation of stateowned enterprises, the re formofthepublicwagesystemandofthepensionsystem.12LikeLatvia,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%declineinGDPbetween20082010),and33.7%ofGDP,wellwithin SGP limits. However, under the impact of the recession, unemployment rose to 8.2% in 2011. Hungary The BoP programme for Hungary was the first to be granted, in October 2008, andexpiredinNovember2010.Itamountedto20billion,ofwhich6.5billionwascontrib utedbytheEU.TheconditionsattachedtotheprogrammewerethesameasthoseforLat viaandRomania.Likethesetwocountries,Hungaryscurrentaccountimprovedfromadefi citof7%ofGDPin2007toasurplusof1.6%in2011.Overthesameperiod,thepublicsec torbalanceimprovedfromadeficitof5%ofGDPtoasurplusof1.6%,whilepublicdebtrose from66%ofGDPto75%.AfterasevererecessioninwhichrealGDPfellby6.8%in2009, outputissettoincreaseby2.7%in2011,althoughthisisinsufficienttorestoreGDPto2007 levels. In addition, unemployment deterioriated from 7.4% of the labour force in 2007 to 11%in2011.Thelargeinflowsofcapitalbeforethecrisishavenowbecomeasourceofeco nomic fragility as multinational corporations repatriate profits to their richer home coun tries. Inallthreecountries,abrutalcorrectionofthecurrentaccountbalancewasbroughtabout throughabrutalrecession.TheausteritydemandedbytheIMFandtheEuropeanCommis sionisincompletecontradictiontotheneedsoftheselowincomecountriessufferingfrom mass unemployment and in contrast to their relatively favourable budgetary 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 12

EuroMemorandum2012 IMF.TheEuropeanCommissionisnotactingasaborrower,butasanadministratorofthe pooled bilateral loans. The programme is conditional on measures taken to enhance fiscal consolidationandpensionreform,topromotelabourmarketreforms,toliberaliseregulated sectorsandtoprivatiselargesegmentsoftheeconomystillinpublicownership.Thefollow ingtargetsweresetfor2014:thepublicdeficitwastobecutfrom15.4%in2009toat2.6%; publicdebt,whichstoodat127%in2009wastosetfor157%.Accordingtothelatestreview carriedoutbythesocalledTroika(theEuropeanCommission,theECBandtheIMF),these targetsareunrealisticsincetheyunderestimatetheimplicationsofthedeepeningrecession. Itisestimatedthatthepublicdeficitwillnotfallbelow3%ofGDPuntil2020,whilethepub lic debt will reach 186% of GDP in 2013 and 152% in 2020. The reasons offered for these divergencesarethelongerandmoresevererecessionthanexpected(GDPhasdeclinedby morethan10%sincethestartoftheprogrammeanditwillcontinuetodeclinein2012)and slippages in policy implementation.13 The policy recommendations remain unchanged, whileGermanyandFrancesortouttheirdifferencesoverthequestionoftherestructuring oftheGreekdebt.Inthemeantime,unemploymenthasrisenfrom8.3%ofthelabourforce in2007tonearly17%in2011. InIreland,whichadopteditsfirstausterityprogrammein2009,athreeyearEU/IMFauster ityprogrammewasintroducedin2010.ThisinvolvedbilateralcontributionsfromtheBritain, Sweden and Denmark, from the EFSF and the EFSM, as well as from the IMF and an Irish contribution through the Treasury cash buffer and the national Pension Reserve Funds. It amountsto85billionintotal,ofwhich35billion(41%)isearmarkedforthedeleveraging and reorganisation of the banking sector. The other objectives of the programme include fiscaladjustmenttobringthedeficitfrom14.3%ofGDPin2009tobelow3%by2015,to gether and structural reforms of the labour market. According to the latest Troika review, Irelandisexpectedtoreturntopositivegrowthin2011,estimatedat0.4%,afteradeclineof morethan10%between2007and2010.14Theunemploymentratehasrisenfrom4.6%in 2007to14.6%in2011.ThelargenetflowsofprofitsoutofIrelandbyforeignmultinational corporationshavenotfallenduringthecrisis(althoughsomeoftherecordedflowsmayre flecttransferpricingbyMNCs)and,asaresult,whileGDPdeclinedby10.2%between2007 and2010,GNPregisteredafallof12.1%. Portugalisalsosubjecttoa3yearprogramme(20112014).Supportof78billionhasbeen financedbycontributionsfromtheEFSM,EFSFandIMF.Theprogrammesobjectivesinclude fiscal consolidation to bring the public deficit to below 3% of GDP by 2013, structural re formstoimprovecompetitivenessanddeleveragingandrecapitalisationofthebanks.Pro tugalsrealGDPfellin2008,2009and2011andisforecasttofallin2012,resultinginacu mulativedeclineof6%.Unemploymenthasrisenfrom8%in2009to12.3%in2011.Inspite of these developments, the Troika remains optimistic that economic recovery will start in 2013,althoughmostofthedifficultchangesstilllieahead.15 Overall,theEU/IMFprogrammesreiteratethetriptychfiscalconsolidationlabourmarket reformmarketliberalisation,whichisevidentinthegeneraldirectionofEUeconomicand socialpolicy.TheyhavealsobeeninsistedonbytheIMF.Oneofthemoststrikingelements
13

Statement by the European Commission, the ECB and IMF on the Fifth Review Mission to Greece, Memo/11/684,11Oct2011. StatementbytheEC,ECBandIMFontheReviewMissiontoIreland,Memo/11/720/20Oct2011. Memo/11/555/12,August2011. 13

14 15

EuroMemorandum2012 oftheEU/IMFprogrammesisthattheyhaveallresultedinsteepdeclinesinoutput.Accord ingtoannualAMECOdateforGDPdata,thefallinoutputbetweentheprecrisispeakand the subsequent trough was 20.6% in Latvia, 8.3% in Romania, 5.6% in Hungary, 14.4% in Greece,10.1%inIreland,and6.0%inPortugal. 1.3 ThecontradictionsinEUenlargementandneighbourhoodpolicies

ThegrowthmodelsintheofficialandpotentialEUcandidatecountriesinSouthEastEurope andTurkeyhavebeenseverelyaffectedbythecurrentcrisis.Inrecentyears,growthinthese countries was mainly based on capital inflows that were attracted by rigid exchange rates and relatively high interest rates. A significant part of the rising private debt was denomi nated in foreign currency and, as a result, the indebted middle strata were chained to an overvaluedexchangerate.Thehighexchangeratehashadseriousdrawbacks:Ithasstunted industrial development, especially in the successor states of former Yugoslavia. In Serbia, industrialproductionin2008was only51%ofthelevelin2001.16Unemploymentisstruc turallyveryhigharound30%inMacedoniaandBosniaandHerzegovina,andaround20% inSerbiaandMontenegro. In Turkey, the performance of manufacturing has been more positive than in the former Yugoslav republics, but it was mainly assembly plants that flourished. The exchange rate policies favoured imports over national production and exports. The trade and current ac countdeficitswereextremelyhighintheSouthEastEuropeancandidatecountries,inmany cases over 10% of GDP. The current account deficit in Turkey was lower, but grew signifi cantlybetween2002and2007.Inspiteofhighgrowthrates,employmentinTurkeyhasnot grownandrealwageshavelaggedfarbehindproductivitygrowthundertheJusticeandDe velopmentParty(AKP)governments. The economies of (nonEU) SouthEast Europe and Turkey were severely hit by the crisis. Croatia and Montenegro have suffered from a particularly strong and lasting recession. In bothcountries,GDPdeclinedinboth2009and2010. The contractionofGDPwasparticu larlystrongin2009withafallof6.0%and5.7%respectively.Thepolicychoicesofthetwo countriesareseverelylimited.InCroatia,thelevelofforeigncurrencydebtsisparticularly high.Inviewoftheinterestsofthebankingsectorandthoseindebtedinforeignexchange, theCroatiangovernmenthasoptedfordeflationarypoliciesandistryingtoavoidadepre ciationofthekunaatanyprice.Incontrasttothisstrategy,Croatiancriticaleconomistshave called for a more developmental approach and a conversion of existing domestic foreign exchangedebtsintonationalcurrencyinordertogainpolicyspace.Montenegrohasacom pletely euroised economy and registers the highest current account deficit in the region (26.6% of the GDP in 2010). Serbia, Bosnia and Herzegovina as well as Macedonia all suf feredrecessionsin2009,butstabilizedGDPin2010.Policieshavebeenprocyclicalinthese countries as well, often under IMF programmes. The Turkish economy suffered from a se vere recession in 2009 (a fall in GDP of 4.8%), but experienced a strong rebound in 2010 (+8.9%).However,Turkishgrowthisextremelyreliantoncapitalinflows,withacurrentac countdeficitin2010equalto9%ofGDP,andtherecoveryisthereforeextremelyvulnerable toareversalofcapitalflows. TheEasternneighbourcountrieshavealsoprovedtobeveryvulnerable,thoughtheypos sessastrongerindustrialbasethantheeconomiesofformerYugoslavia.Ukrainianprecrisis
16

M.Uvalic,Serbia'sTransitionTheThornyRoadtoaBetterFuture,Palgrave,Macmillan,2008,p.210 14

EuroMemorandum2012 growth was heavily reliant on capital inflows and rapidly increasing indebtedness, and UkrainianGDPfellby14.8%in2009withalimitedrecoveryin2010.Thecrisiswasmilderin more statist Belarus, but the economy is constrained by a severe shortage of foreign ex change. Thecrisisyearshaverevealedthatthecapitalisttransformationstrategieswhichwerepro moted by transnational and local business interests, national governments, the EU and in ternationalfinancialinstitutionshaveresultedinunviableproductionstructuresintheouter East European periphery of the EU. In the North African countries, the crisis revealed the structural weaknesses of the EUs Mediterranean strategy, the latter being primarily ori ented towards liberal economic policies. Contrary to the Eastern European periphery, the economiccrisishastranslatedintorevolutionarypoliticalprocessesinNorthernAfrica. Neoliberal policies have likewise produced extremely vulnerable economies and polarised societiesintheNorthAfricanneighbourcountries.Inthefinancialpress,TunisiaandEgypt hadbeenpresentedasshowcasesforneoliberalpolicies.Thesetwocountrieswerethepil lar of EU Mediterranean policies in Northern Africa. The EU Mediterranean policyhas two maingoals:accesstotheenergyresourcesoftheregionandpoliticalstabilityand,forthe EU,politicalstabilityhadpriorityoverdemocratisation. 1.4 Radicalisinganeomercantilismintradeanddevelopmentpolicies

Thedeepeningofthefinancialcrisisin2008and2009ledtoadramaticfallinglobaltrade, and this had a particularly marked impact on exportoriented EU member states like Ger manyorAustria,buttherecoveryoftradein2010and2011fuelledstronggrowthinGer manyandothercoreEUcountries.Therecoveryoftheworldeconomywasstronglyinflu encedbythehighgrowthratesofemergingeconomies,particularlyChina.Atthesametime, althoughglobalimbalancesweresomewhatmutedasaresultoftheimpactofthefinancial crisis, they remain at worrisome levels. While most deficit countries, in particular the US, reduced their imports as a consequence of weak domestic demand, major export nations likeGermanyandJapanhavecontinuedtopursuetheirexportorientedgrowthmodels.This isalsotrueforChina,whereexportsremainthedrivingforceforgrowth.AlthoughtheChi nesegovernmentappearstohavetakenthefirststepstowardspromotingagrowthstrategy based on stronger domestic demand, this will only have a serious impact, if at all, in the longerterm. Asecondtrendwithpotentiallydestabilisingeffectswastheappreciationofthecurrencies ofsomeemergingeconomies.Thiswasbroughtaboutbyinflowsofcapitalfromcorecoun tries,inparticulartheUSandtheEurozone.EmergingeconomieslikeBrazil,whosecurrency the Real appreciated by more than 30% between early 2009 and mid2011, implemented measures to halt these inflows, although with limited success. Their governments inter pretedtheinflowsasaconsequenceofbeggarthyneighbourpoliciesresultingfromlarge scalemonetaryexpansionintheUS(socalledquantitativeeasing)andineffectivecrisisman agement in the Eurozone, and warned of the dangers of a global currency war. While the countriesoftheGlobalSouthlargelymanagedtoavoidtheworstimpactoftheglobalcrisis in2008and2009,theturbulenceintheEurozonetogetherwiththedeepeconomicandpo liticalproblemsfacedintheUSarewidelyseenasacentralcauseoftheslowdowninthe globaleconomyin2011andtheriskofarecessionin2012.

15

EuroMemorandum2012 1.5 Adeepeningcomplexcrisistheexamplesofenergyandagriculture

The complex crisis of economic, ecological and international relations which has become apparentinrecentyears,isnotbeingaddressedseriouslybyestablishedpolicies.Thecatas tropheofFukushima,whichconfirmedallthedangersofnuclearenergy,haspromptedthe Germangovernmenttoreinstateanolder,longtermplantophaseoutnuclearenergy,and thiswillbefollowedeventuallybyBelgium,butithasnottriggeredaEuropeanwidephasing out.Inoneareaafteranother,adhocmeasuresarebeingtaken,mainlytobuytime,inthe hopethatspontaneoussolutionswillappear,butwithnosystematicapproachtodevelop ingseriouslongtermproposals.Inthecaseofthelossofbiodiversity,forexample,theEU hasfailedtofulfilitspromisetodevelopanadequatepolicy,althoughtherampantdestruc tioncontinuesasinpreviousdecades. SincetheCopenhagensummitonclimatechangefailedtoachieveanagreementonapost Kyotoprocess,theEUhasalsoprovedunabletoseizetheopportunityforformingacoali tionofthewillingwhichcouldgoaheadwithambitiousmeasurestocontrolandreducethe emissionofgreenhousegases.Insteadithascontinuedtomaintainitsillusorybeliefthatthis can be achieved through technological fixes and market instruments and it seems unlikely that any serious breakthrough will be achieved unless social and political movements are abletogeneratesufficientpressure. Theproblemoflimitedresourceshasbroadened,eveninthemoregeneralpublicpercep tion,frompeakoiltopeakeverything.17Nevertheless,theEUhasnotevenbeguntode velop a sustainable strategy for coping with problems of resource scarcity, a policy that wouldhavetoemphasiseadaptingdemandtosupplyinasociallyjustway.Instead,theEU continuestopursueastrategybasedonsecuringprivilegedaccesstoresourcesforEuro peanconsumers.Thisisanapproachthatisofonlyshortor,attheverybest,mediumterm relevance, and, most disturbingly, is likely to involve an increasing weight for the military dimensionofpolicy. Theproblemisespeciallymarkedasregardsenergypolicy:theEUclingstoproblematicen ergysources(nuclear,oil,gasandcoal),whichareallseverelylimited,andthereisnocon certedEuropeanefforttodevelopastrategythatharnessesthealmostunlimitedpotential availablefromenergysavingandthedevelopmentofsustainablesourcesofrenewableen ergy.Infact,EUenergypolicyissettoexacerbateproblemsinagriculture.Itaimstoproduce up to 20% of the fuel used for transport from agrarian raw materials, and this will have a negativeimpactonagricultureonaworldwidescale.Asanincreasingshareofagricultural landisusedforbiofuels,landpriceswillbepushedup.Thetendencyfortransnationalcor porations to accumulate large, worldwide holdings of land will increase and, especially in SubSaharanAfricaandLatinAmerica,smallfarmerswillbedeprivedofthebasisfortheir existence. There are areas in which scientific understanding is highly contested or not entirely clear. Butgovernmentsmustbecriticisedwhentheyneglecttheknowledgethatisavailable,espe ciallywhenthereareinstitutionsthatmakeithighlyaccessible,asisthecasewiththeInter nationalPanelforClimateChange.18Policyhassufferedfromanuncriticalrelianceoncertain paradigms in economics and other social sciences that have gainedascendency during the yearsofneoliberalhegemony.Democraticallyelectedgovernmentsshouldnotneglectthe
17

L.Brangschetal.,DenKrisenentkommen.SozialkologischeTransformation,Berlin,2011,p.30ff. 16

EuroMemorandum2012 concernsofthoseaffectedbypolicies,andshouldtakefullaccountofthehistoricalexperi enceofpublicagenciesandpopularorganisationsinthefieldsatstake,andshouldcertainly notoverlookpastscientificdebates.18 TheEUsCommonAgriculturalPolicy(CAP)offersaninstructiveexample.EUexpertsappear tooverlookthehistoricalexperiencesrelatedtotheemergingfoodcrisis,themilkcrisisand thecrisisofagrarianmobility,andalsoignorethehealthproblemslinkedtogeneticallyen gineered food, the pervasive use of medication in mass animal production, and the resis tancesinducedbyamassiveuseofantibiotics.Instead,supportedbypowerfullobbygroups oftheagrarianindustrialcomplex,theseexpertsgoondefendingmodelsforactionandin stitutionalregulationwhichhaveshownthemselvestobeinappropriate.Initsmostrecent policypapertheEuropeanCommissiontakesitforgrantedthatincreasedproductionalone willovercomethepresentpredicamentofworldwidehunger.19Thisis,however,quitein sufficient:Whatisatstakeinhungerisnotonlytheoveralllevelofproduction,butalsothe question of who produces for whom and at what prices; and, of course, how profits are eventuallydistributedalongthechainofprovision,fromtheprimaryproducerstothefinal consumers. Anecessaryfirststeptoovercomethisstateofaffairswouldbetoacknowledgethedismal state of European agriculture. A failed model of industrialisation in agriculture often ac companiedbygeneticengineeringtechnologieswithoutasustainableperspectiveofimple mentationbeyondafirstroundofshorttermsuccesseshasledtosoildepletion,biodiver sitydestruction,ruraldegradation,insecureandgloballyinsufficientfood,andreducedrural employment.Noprofitsaremadeanylongerinthesectorwithoutstatesubsidies,whileit has become a paradigmatic case for an aggressive nexus between mass consumption, massdistributionandmassconformity.Thishasseverelyundercutthepotentialforcreat ingthenewfigureoftheactiveandawareconsumer(cf.theFrenchnotionofconsommac teurorempoweredconsumer).Theclassaspectsofagriculturalconsumptionandproduc tionseemtohaveentirelyvanishedfromsight:Itisnotonlyaquestionoftherichversusthe poor, where the ecological concerns are unevenly distributed, and the poor are more vul nerabletoeconomicpressures.Globally,theabsenceofbindingregulationsandtheprefer ence for 'market solutions' based on private property have encouraged the processes of landgrabbingoutsideoftheEUreferredtoabove. The EUs agricultural policy has created a very critical situation, externally and internally. Fromthe1980suptothemiddleofthefirstdecadeofthe2000s,theEUwasaprimemover intheprocessoffloodingworldfoodmarketswithstronglysubsidizedagriculturalproducts fromtheindustrializedcountries,generatingadramaticcrashinworldmarketpricesforthis category ofgoods. Developing countries have become unable to compete and are still de pendentoncheapimportedfoodtofeedtheirgrowingpopulations.Manycountriesimport morefoodthantheyproduce.Yet,inordertoachievesustainabledevelopment,countries needtoexpandtheirownagriculturalproductionandreducetheirdependencyonvolatile world markets. They therefore need additional agricultural investment, and this should be
18

On thenegativeresultsofgovernmentinactionaroundclimatechangesee themostrecent

overview by the International Energy Agency, World Energy Outlook 2011, chapter 6, Cli matechangeandthe450scenario,pp.205241.
19

Cf. Legal proposals for the CAP after 2013, http://ec.europa.eu/agriculture/cappost2013/legal proposals/index_en.htm,published12October2011. 17

EuroMemorandum2012 organisedinsuchawayastocreateemploymentforruralpopulationsandstrengthenthe broadereconomiccapabilitiesofsmallandmediumfarmers.Evenifcountrieshavethepo liticalwilltopromoteinvestmentofthistype,itisunderminedbythekindoftradeliberali sationforagriculturalproductswhichtheEUissupportingonaworldwidescale.Thisten dencytopromotecompetitivenessatthecostofsustainabledevelopmentisalsoreinforced bynewtechnologicalstructuresofdependency,asinthecaseoftheintroductionofgeneti cally modified seeds which can no longer be reproduced by the farmers who have to use themintheirownproductionprocesses. ThestructuralproblemunderlyingthissituationisexemplifiedbytheEU'sstanceonglobal and European forestry, which has destructive effects on forestry resources, and conse quently human livelihoods, outside the EU. The monetary rewards of the EUs Emissions Trading Scheme (ETS) are encouraging big power companies, such as RWE, Vattenfall or DONG,toimporthugevolumesofwoodpelletstogenerateelectricityforEuropeancapital cities,suchasBerlin,LondonorCopenhagenThisisbecausewithintheEU,theincineration of wood is rewarded with CO2 credits earned for spreading the illusion of avoiding CO2 emissionsfromfossilenergysources,althoughinfactraisingCO2emissionsonaglobalscale asaresultoftheiroperation.20 Internally, the subordination of agricultural production and rural development to the de mandsoftheagroindustrialcomplexhasbeenleadingtothedestructionofthepotentialof smallfarmerstomaintainsustainablemodelsofagricultureandregionaldevelopment.The subordination of agricultural production to the interests of corporate agrarian enterprise tendstodestroytheimplicitmultifunctionalityoftheagriculturalsector.Theconservation of biodiversity, and its contribution to climate protection, is not only often overlooked in publicdebates;itisnotevenaddressedwithinthecontextoftherenewedCAPwhichthe EuropeanCommissionnowseemstobeadvocating.21Thiscan,again,bespecificallyexem plifiedwithregardtoforestrypolicy:astrategyofreducinggreenhousegasemissionsfrom agricultureandlivestockproductionismoreeffectiveandmoreimportantthancontinuing tosupporttheillusionofclimatebenefitsfromastrategyofsubstitutingforestproductsfor fossilfuels.Thewoodenergyoptionmayleadtoonlyatransformationofforeststoplanta tions,adevelopmentwhichwouldclearlybeunsustainable. A similar problematic has developed in the field of bio fuels: The EU directive obliging memberstatestoincreasethepercentageofbiofuelsinthetotaluseofenergyto10%by 2020canonlybeimplementedbyimporting50%ofbioethanoland41%ofbiodieseloilto theEU,mostlyattheexpenseoffoodproductioncapacitiesindevelopingcountries,increas ingthetendenciestolandgrabbingandthedestructionofprimaryforestsandthehabitats ofindigenouscommunities.22
20

EuropeanEnvironmentAgencyScientificCommittee,15September2011:OpinionoftheEEAScientific CommitteeonGreenhouseGasAccountinginRelationtoBioenergy. The present lack of integration and consistency of the EU policy proposals makes it very difficult to evaluatethespecificweightoftheproposalscomingfromtheAgrariancommissioneronly.Itshould belookedat,however,asanimportantsteppingstonetobeusedinadvancingthedevelopmentofa meaningfulstrategyofEUsustainabledevelopmentwhichdoesnotexistyet. Cf. Bettina Kretschmer, Sophie Bennett, Analysing Bioenergy Implementation in EU member states: ResultsfromtheBiomassFuturesExpertSurvey,InstituteforEuropeanEnvironmentalPolicy,London, 27July2011,www.ieep.eu/assets/827/IEEP_Biomass_Futures_Expert_Survey.pdf 18

21

22

EuroMemorandum2012

2
2.1

WrongpoliciesleadtowrongoutcomesAcritiqueofEUpolicies
MacroeconomicPolicies:towardsthesurveillanceregime

Bytheautumnof2011,thecompletefailureofEUleaderstodefineacoherentresponseto thecrisisinGreecehadnotonlybroughttheeurozonetothevergeofchaos;itevenmen acedtheworldeconomywithacatastrophiccollapse.Atthesametime,suchlongerterm reformsintheeurozoneashavebeenformulatedbytheCommissionarenotonlyirrele vanttothecurrentemergency,theythreatentoturntheEUintoahegemonicstructurein whicheconomicallyweakerstateswouldloseallpoliticalautonomyandbesubjectedtothe permanenttutelageofthestrongerstatesandoftheEUinstitutionsundertheircontrol.One aspectoftheproposedchangeswasadirectassaultonsocialmodelsandlabourstandards inthecountriesofthesocalledperiphery. TheincreasinglyselfdefeatingnatureoftheEU/IMFinterventionsinGreece,andtheconse quentthreatstoothercountriesandtothefinancialsystem,aredealtwithelsewhereinthis memorandum.Intermsofmacroeconomicpolicyitmustberememberedthatlittleornoth ingisbeingdonetocorrectamajorsourceoftheimbalancesbehindthecrisistheexport pressure from the stronger economies and from Germany in particular. The Commission itself forecasts that Germanys vast current account surplus in 2011 (4.7% of GDP or 123 billion)willbeunchangedin2012(4.6%ofGDPor124billion)whilerealwagesinGermany, inspiteofforecastgrowthof1%in2012,willremainbelowtheirlevelin2000.Inthesecir cumstances,balancedrecoveryintheweakereconomiesisimpossible. RevisionstotheStabilityPact TherulesoftheGrowthandStabilityPact,supposedtogovernthebudgetarypoliciesofall EU members and to be obligatory for members of the eurozone, were based on the falla ciousnotionthat,providedpublicsectordeficitswerelimited,marketforceswouldensurea balanceddevelopmentoftheeconomy.Inreality,thelimitedgrowthachievedoverthelast decade (the years of the Lisbon strategy) depended on widening imbalances: in 2007, just priortotheoutbreakofthefinancialcrisis,Germanypostedacurrentaccountsurplusequal to7.6%ofGDP;thecounterpartofthissurplus,generatedbyirresponsiblemacroeconomic policiesinGermanytogetherwithaveritableassaultonlowerpaidGermanworkers,were hugedeficits,ofover10%,insuchcountriesasCyprus,Greece,PortugalandSpain.Farfrom bringingaboutbalanceddevelopment,marketforceshadpermittedanunsustainablelossof competitiveness across the periphery (Irelands current account deficit, although in single figuresat5.6%,wasalsounsustainablefiguresinIrelandaredistortedbymassiverecorded outflowsofprofit,partlyreal,partlythereflectionoftransferpricingbythemultinationals.) Until2008,thesegrowingimbalanceswerefinancedbybigcapitalinflowsintothecountries affected.InSpainandIrelandthesewereflowsintotheprivatesector,especiallythecom mercialbanks;inPortugal,andespeciallyGreecewherethereareseriousproblemsinraising tax revenue, the inflows were mainly absorbed by the public sector. The financial climate, encouragedbythederegulatorystanceoftheEuropeanCommission,theECBandmostna tionalgovernments,wasoneofexcessiveconfidenceleadingtospeculationandincreasing fragilityinthebankingsystem.Itshouldberemembered,however,thatwithoutthesecapi talflowstheemploymentperformanceoftheeurozonewouldhavebeenevenworse.

19

EuroMemorandum2012 Thefinancialcrisisof2008,whichprovokedarapiddeclineinprivatesectorexpenditures, necessitatedsubstantialpublicsectorinjectionsaroundtheworld.TheCommissionhadto recognisethatmuchwiderpublicsectordeficitswereneededtemporarily,butbylate2009 itwasalreadydemandinganearlyexitfromthesemoresupportivebudgetarypolicies.At thesametimeitmadeproposalstomaketheStabilityPactrulesonpublicsectorborrowing anddebtmuchmorerestrictiveandtointroducenewrulesonmacroeconomicimbalances. Theofficialrationaleforthesechangesiscouchedintermsofbothcoordinationandsur veillance.Buttheydonothingtopromotecoordination.Genuinecoordinationwouldre quirefirstlythespecificationofanoverallmacropolicyfortheeurozoneandthenthespeci ficationofdifferentiatednationalpoliciescompatiblewiththeoverallmacrostance.Thereis nothingofthisintheproposedamendments.Inreality,theprimaryfocusofthesemeasures isonthesurveillanceofindividualmemberstatesand,althoughthisisnotstated,thecon cernisonlywiththeweakermemberstatestowhoseindisciplinethecurrentcrisisisat tributed.Thusthewholepackageneglectsthecentralproblemofcoordinationthehuge imbalancesincurrentaccounts. The legislative package must be seen in the context of a comprehensive attempt to strengthen economic governance in the EU. This term, however, no longer has the same meaning as when it was first used by the European labour movement or even by Jacques DelorswhowerearguingfortheassertionofsocialcontrolovertheEuropeaneconomy.It now signifies reinforced efforts to weaken social controls over labour markets, to reduce expenditureonpublicservicesandwelfarebenefitsandtobringerrantmemberstatesinto line with these objectives. Other aspects of the drive for the new economic governance include: theEurope2020Strategy,successortotheLisbonStrategy,focusedonfurtherstruc turalreformsandexpressedintheintegratedpolicyguidelines; theEuroPlusPact,agreedinMarch2011,inwhichtheeurozonecountriesandsix otherscommitthemselvestopursuecompetitiveness,employment,sustainabilityof publicfinancesandfinancialstability; ThePactwillbetranslatedintoNationalReformandStabilityProgrammeswithim plementationmonitoredbytheCommission.

Economicgovernanceinallitsformsemphasiseslabourmarketreforms,including:there viewofwagesettingarrangements;decentralisationofwagebargaining;reviewofindexa tionmechanisms;subjectionofpublicsectorwagestotheneedsofcompetitiveness;reform ofemploymentcontractstopromoteflexicurity.Otherkeythemesare:raisingthepension age;adaptingtheregulatoryframeworktotheneedsofsmallandmediumenterprises;and promotingabusinessfriendlyenvironment. ThereformoftheGrowthandStabilityPactconsistsofsixpiecesoflegislation,whichhave nowpassedthroughtheEuropeanParliamentwithveryfewchanges.Thefirstfourtighten the requirements of the existing stability pact and its enforcement through the socalled excessive deficit procedure. The other two introduce an excessive imbalance procedure which introduces similar legal constraints on other aspects of macroeconomic policy; they areobviouslyinspiredbythefactthatinIrelandandSpaincrisishadnothingtodowithpub licsectordeficitsbutrelatestocapitalinflowsintotheprivatesector.Themainfeaturesof thislegislationincludethefollowing:
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EuroMemorandum2012 TighteningtheStabilityPact: 1. Newdefinitionsofthestabilitypactrulesemphasiseexcessivelevelsofpublicdebtas wellaswellasannualdeficits;discretionarymeasureshavetobetakentocorrectboth andthespeedofcorrectionisspecified.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 to permit the Council to verify prudent fiscal policies. Even countries within the prescribed reference values must not increase public expenditure faster than GDP (thus any move by other countries towards Scandinavian social models becomes ille gal).24 3. Reinforced penalties involve first compulsory deposits and then fines for eurozone members.Sanctionsaretobecomemoreautomaticsinceatmanystagesoftheexces sivedeficitprocedureaqualifiedmajorityintheCouncilwillbeneededtoblockpenal tiesratherthantoimposethem.25 4. MemberstatesmustestablishasatisfactoryBudgetaryFramework.Thiscoversaccount ing systems, statistics, fiscal relations with regional and local government, forecasting practices(althoughtheCommissionsownforecastingislessthanimpressive),budgetary proceduresandfiscalrules.Itisstronglyrecommendedthatthelatterinvolvenumeri callimits,inspiteoftherepeateddifficultiesthatsuchrulesprovoke,mostrecentlywith publicfinanceintheUStoday(andnodoubtGermanyinthenearfuture).26 TheExcessiveImbalanceProcedure: 5. Ascoreboardcomprisingalimitednumberofeconomicandfinancialindicatorsistobe established.Indicativethresholdswillbesetforthese;iftheyarecrossedinvestigative proceduresmaybelaunched;howevertherewillnotbeanautomaticalert;economic judgementshouldensurethatallpiecesofinformation,whetherfromthescoreboardor not,areputinperspectiveandbecomepartofacomprehensiveanalysis;thiswilliden tifymemberstatestobesubjecttoanindepthreview;thiswillinvolveenhancedsur veillancemissionsandadditionalreportingbythememberstateconcerned.27 6. Penaltiesdonotfollowrightaway.Whenexcessiveimbalancesaredefinitelyidentified, recommendations will be made to the member state. Its response should be timely; should use 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. AmendmentofRegulation(EC)No1467/97onspeedingupandclarifyingtheimplementationofthe excessivedeficitprocedure. Regulationontheeffectiveenforcementofbudgetarysurveillanceintheeuroarea. Directiveonrequirementsforbudgetaryframeworksofthememberstates. Regulationonthepreventionandcorrectionofmacroeconomicimbalances. 21

24

25 26 27

EuroMemorandum2012 beimposed.Equityinpenaltiesistobeassuredbyexpressingtheseasapercentageof theGDPoftherecalcitrantstate.28 Thereis,ofcourse,somethingabsurdaboutthisattempttoconstructajuridicalframework formacroeconomics,asanyoneremotelyfamiliarwiththatdisciplinewillrecognise.Butthe project is also sinister: it threatens to subject economically weaker members and those alonetoacomprehensivetutelageinvolvingeveryaspectofpublicpolicy.Itisclearthat themainindicatorsusedwillreflectaviewofcompetitivenesswhichmakesitaproblem only for the less competitive, not for the more competitive, economies. Criticism in the EuropeanParliamentandbysomeEUgovernmentshasledtotheremovalofexplicitrefer encetowagesinthelegislation.Butthewagelevelsandsocialmodelsoftheweakerstates remainthetargetsofthisproject. Manytypesofimbalancewillbeoutsidethescopeofthenewprocedures.Theseinclude: thecoexistenceofimmenseprivatefortuneswithpublicsectorscrippledbydebt;thefailure ofwagegrowthintheEUtomatchproductivitygrowthovernowthreedecades;theremu nerationoffinancialandcorporateleadershipsoutofallproportiontotypicalincomes. The package is embedded in a reinforced set of administrative procedures known as the Europeansemesterwhichwilltakeplaceinthefirsthalfofeachyearandleadtothedefini tion of two sets of policies, one concerned with macroeconomic policy (the stability pro grammes) and the other (the national reform programmes) concerned with structural reformsintheCommissionsusualsenseofreducedprotectionforemployees,privatisation andthederegulationofbusiness.Thefirstsuchexercise,whichtookplacein2011,indicates whatistobeexpectedfromtheseprocedures:neithertheCommissionsrecommendations for Germany nor Germanys own programmes recognised any problem with the countrys hugetradesurplus.Theentireprocessfocusesonfurtherfiscalconsolidation,labourmarket reforms,andsupplysidemeasuressupposedlytopromotegrowthbylargepriceandcost adjustmentsintheweakereconomiesinotherwords,bydeflation. Theconsequencesofthisstanceareaswouldbeanticipatedbyanyonescepticalaboutthe notionofgrowthpromotingdeflation.BySeptembertheCommissionwascompelledtore vise downwards its already low predictions for growth in 2011 and 2012. It declared that the downward revisions concern all the member states under review, suggesting both a commonfactorandarecouplingofgrowthdynamics. Onecommonfactorisofcoursetheconstantpressureforrestrictivepoliciescomingfrom theCommissionandfrompoliticalleadersinmostmemberstates.Anotheristhelooming financialcrisisstemmingfromrepeatedfailurestoresolvethecrisisinGreece.Therediscov ery of recoupled dynamics points to genuine coordination problems neglected by those same leaderships who have preferred to attempt a virtually colonial subordination of the weakestmembercountries. 2.2 Financialsectorreformstymiedbyextensivelobbying

ThedeepeningoftheeuroareacrisishasledtoacrisisforEuropeanbanks,raisingachal lenge for the entire European financial architecture. As private financial institutions have sought to profit from massive speculation, politicians have struggled to get on top of the
28

Regulation on enforcement measures to correct excessive macroeconomic imbalances in the euro area. 22

EuroMemorandum2012 immediateeffectsofthedebtandbankingcrisis,whilecompletelyfailingtoimplementthe majorstructuralreformsthatareneededtocontrolthefinancialsystem.Followingmassive lobbyingbythefinancialsector,reformshavebeenblocked,watereddownor,asinthecase ofchangestotheMarketinFinancialInstrumentsDirective(MiFID),postponed.Evenwhen urgent shortterm action has been necessary, EU states have been unable to agree, as in August2011whensomegovernmentsrefusedtoparticipateinabanonshortselling. Inthecourseofthe2010,attemptstoreformtheEUfinancialsystemwerelaunchedforthe derivativesmarketand big banks. In both cases, the EU proposals were even weaker than thosethathavebeenintroducedintheUS. Derivativesmarket In July 2011 the European Parliament voted on a draft legal text for the European Market Infrastructure Regulation (EMIR). EMIR will deal with some of the problems in the deriva tivesmarket,inparticularoverthecounter(OTC)derivatives,butfailstofundamentallycall ahalttothisfinancialcasino.EMIRattemptstodealwithamajorproblemthatarosebe foreandduringthefinancialcrisisin20072008,namelythatnobodyknewwhowastrading whatkindofriskyfinancialproductswithwhom.Thislackoftransparencywasespeciallythe case for OTC derivatives that were traded in private deals (over the counter) and not on publicexchanges.ThemainelementsofEMIRarethatmostOTCderivativesshouldbere ported to the authorities to improve transparency, and that more financial speculation shouldbeinsuredagainstdefault.Thefinanciallobbymountedahighlysuccessfulcampaign towaterdownthelegislationbecausetheOTCderivativesbusinessisanimportantsourceof incomeforbig(investment)banksandinstitutionalinvestors,andrelatedtohighbonuses. TheEMIRtexthasmajorloopholes.Forinstance,pensionfundscanbeexemptedfromclear ingtheirOTChedgingderivativestradefor3yearsormore;similarly,nonfinancialcounter partiesdonothaveanobligationtoclearthehedgingactivitiesrelatedtotheircommercial activity.Furthermore,nolimitsarebeingimposedontheoverallamountofOTCderivatives thatmaybetraded.ThereisanurgentneedtoreducesharplythesizeofOTCtransactions, since most are purely speculative. This is very striking in the case of credit default swaps, whichareplayingakeyroleintheeurocrisis,sincethebuyerveryoftendoesnotholdthe bondwhichisbeinginsured.However,followingpressurefromthefinanciallobby,thenew regulationsfailtoestablishsuchlimits. Bankreforms ThelackofmajorbankreformsintheEUhasleftbanksvulnerabletoshocksfromthesover eigndebtcrisis,theeurocrisisandstockmarketvolatility.InJuly2011,theCommissionpre senteditsproposalsforamajorbankreform.Thisbankreform,knownasthe4threviewof theCapitalRequirementDirective(CRDIV),shouldimprovebankscapitalbuffers,bankgov ernanceandsupervision.TheEUParliamentstartedthediscussionofCRDIVinSeptember 2011anditissupposedtomovetoaplenaryvoteinJuneorJuly2012.TheCRDIVconsists ofasetoftwodifferentEUlaws.Thefirstlawdealswiththeregulationonstrictercapital reserves,incorporatingthenewBaselIIIstandardsintoEUlaw.Thesecondpieceoflegisla tionisaDirectivetoimprovethesupervisionandgovernanceofbanksandinvestmentfirms, especiallyregardingriskassessment. Thebankingsectorhasagainlobbiedheavilytoreducethescopeofthelegislation,arguing that the additional capital requirements will reduce its competitiveness, and will result in
23

EuroMemorandum2012 banksreducingthesupplyofcredit,especiallytosmallandmediumenterprises(SMEs).Su pervisors,academicsandregulators,includingtheCommission,havebeenshowingthrough differentimpactassessmentsthattheseclaimsareunfounded,andthattheseproblemscan beavoidedbychangingbankingbusinessmodels.Furthermore,manydoubtsremainasto whether this new EU legislation which it is not planned to implement fully until 2019! comprisestheappropriatemeasurestodealwiththeproblematicbehaviourandinstability oftheEuropeanbanks.TheCommissionsbankreformproposalscanbeconsideredtobefar fromsufficientnotonlybecausetheuseofcapitalbuffersasamajorinstrumentofbanking regulation is problematic, or because the introduction of a leverage ratio and liquidity re quirements is being delayed, but also because the Commissions proposals have major weaknesses.Theproposals: Donotseparateretail/commercialbankingfrominvestmentbanking,norlimittheir linkageswithfinancialmarketssincebankscanstillengageinderivativestrading; Failtolimitthesizeofthetotalbalancesheetandoffbalancesheetofbanks;thus banksandfinancialconglomeratescanstillbetoobigtofail; Donotprohibitbanksfromspeculatingwiththeirowncapital(proprietarytrading whichisforbiddenbytheVolkerruleintheUSDoddFrankActofJuly2010); Donotreformtheusebybanksoftheirownriskassessmentmodels,whicharefre quentlybasedonerroneousassumptions(Greekbondshavea0%risk!).

TheFinancialTransactionsTaxdirective:abreakthroughbutnotquiteavictory TheEuropeanCommissionpresentedadraftdirectivefortheimplementationofaFinancial Transaction Tax (FTT) in September 2011. This is a significant breakthrough for a proposal thathasbeenadvocatedformanyyearsbycivilsociety,inparticularAttac,andwhichhas more recently also gained the support of the French and German governments. The Com missionsdraftdirectivehastakenupmanyoftheelementsthatcampaignershavesought, includingthetaxationofoverthecounter(OTC)derivatives,theresidenceprincipletopre venttaxavoidanceand,aboveall,theintentionnotonlytogeneraterevenuesbutalsoto havearegulatoryimpactonspeculation,inparticularonhighfrequencytrades.Neverthe less, the proposal also contains significant limits. Two major criticisms stand out. First, the proposedFTTdirectivedoesnotprimarilyaimatfightingspeculationandreducingthevol umeoffinancialtransactions.Thiscanbeseeninthetaxbase,astheCommissionproposes toexcludecurrencytrades.Thetaxratesforderivativesarealsomuchtoolow.Thesecond limitisthatthedirectiveisdisturbinglyvagueontheissueofhowthetaxrevenuesshould be used. A key feature of the campaign by civil society was that a significant share of the revenuesshouldbedeployedintherealmsofdevelopmentandtheenvironment,butnei theroftheseismentionedintheCommissionsproposal.Finally,themarkedreluctanceof Britain,SwedenandtheNetherlandstointroduceaFTTcouldyetprovetobeaseriousob stacletoitsimplementation. 2.3 Austerity:ThewrongpolicyfortheillsoftheEU

AusterityisbeingpursuedbytheEUgovernments,asageneralcureallrecipe.Thousands are demonstrating in the streets of an increasing number of European cities protesting againstausteritybecauseitisradicallyreducingtheirlivingstandardsandofferingnohope forthefuture.UNCTADsTradeandDevelopmentReport2011isalsohighlycriticaloffiscal
24

EuroMemorandum2012 tightening and the IMFs policy recommendations, pointing out that fiscal space is not a static variable. In addition, the rush by a number of European countries to pay back high levelsofprivatedebtinthecrisiswillfurtherdampensdemandifitisnotcompensatedby increasedpublicsectordebt. InthewordsoftheUNCTADreport,fromadynamicmacroeconomicperspective,anappro priate expansionary fiscal policy can boost demand when private demand has been para lysedduetouncertaintyaboutfutureincomeprospectsandanunwillingnessorinabilityon thepartofprivateconsumersandinvestorstoincurdebt.Insuchasituation,arestrictive fiscalpolicyaimedatbudgetconsolidationorreducingthepublicdebtisunlikelytosucceed, because a national economy does not function in the same way as an individual firm or household.29Thisiswhatisknownasthefallacyofcomposition,i.e.believingthatwhatis goodfortheindividualmembersofagroupisbydefinitiongoodforthegroupasawhole. Perhapsmorefundamentally,thepresentcrisishaslaidbarethedivergenceoftheproduc tivestructuresintheEuropeanUnionandtheeurozone.TheEUischaracterisedbyadivi sion between an exportorientated, neomercantilist core, which is grouped around Ger many(andincludesBenelux,Austria,CzechRepublic,Slovakia,Slovenia,NorthernItaly,and, to some extent, Poland and Hungary) and an importdependent European periphery, for whomintegrationintotheEUhasledtoapartialdeindustrialisation(Greece,Spain,Portu gal).Further,insomeEastEuropeancountries(especiallytheBalticstates,Bulgariaandeven EastGermany), severe deindustrialisation resulted from the transformation policies, which werenotreversedafteraccessiontotheEU. EU regional policies have focused on physical infrastructure development and general purposetraining.Butnoattentionhasbeengiventothekeyissueofindustrialstructures. TheneomercantilistcorecountriesaroundGermanyhavehadnointerestinpromotingsuch policiesandthedesignofEUpolicieshastendedtocementtheexistingEuropeandivisionof labour. This division of labour has translated into a divide between creditor and debtor countries, whereby importdependent countries financed their current account deficit by incurringexternaldebt,whilethebanksintheneomercantilistcountriesfacilitatedexports totheEuropeanperipherybyprovidingsuchloans.Thisdivisionoflabourisnolongersus tainable.AusteritypoliciesnotonlyfailtoaddresssuchfundamentalproblemsofEuropean integration,theyactuallyexacerbatethemfurther. Austerity not only fails to attain its economic objectives; it has also had a highly negative socialimpact.Section1.2above,examinedthesteepdeclinesinoutputintheEUcountries implementingEU/IMFprogrammes;inthissection,weexaminethewidersocialimplications ofausteritypoliciesfortheEU. Theeconomiccrisisishavingaheavytollonsociety,intermsofdecliningemployment,in creasingunemployment,parttimeandtemporaryemployment,aswellasrisinginequality andpoverty.Inthesecondquarterof2011,theEUemploymentratefor2064yearoldsfell to68.9%from70.5%atthebeginningofthecrisisinthesecondquarterof2008,diverging furtherformtheEurope2020targetof75%.Theemploymentratewasequalto75.3%for men and 62.6% for women. Parttime employment increased by 1.3 percentage points, to reach 19.6% (9.1% for men and 32.1% for women), while the share of temporary employ
29

UNCTAD,TradeandDevelopmentReport,2011,pp.VIVII 25

EuroMemorandum2012 ment amounted to 14.2% (13.7% for men and 14.8% for women), indicating that employ mentisbecomingevermoreprecarious. Atthesametime,unemploymentrosesharplyattheonsetofthecrisisand,afterdeclining veryslightly,roseagainin2011.BySeptember2011,unemploymentaveraged10.2%ofthe labourforceintheeurozone(9.9%formenand10.6%forwomen)andat9.7%intheEUasa whole (9.5% for men, 9.9% women). Especially hit were young people, migrants, the low skilledandwomen.Inparticular,youthunemployment(thoseunder25)reached21%,while youngpeoplehavebeenespeciallyaffectedbyparttime,includinginvoluntary,andtempo rary work. In addition, 20% of migrant workers are unemployed, as are 15% of the low skilledwishingtowork.Furthermore,longtermunemployment(morethan12months)ac countedfor43%ofthetotal30. Therearealsostrongdivergencesamongstcountries,withthehighestunemploymentrates recordedinSpain(23%)andGreece(18%)andthelowestinAustria(3.9%)andtheNether lands(4.5%).Inthesecircumstances,theEUobjectiveofprovidingincentivesfortheunem ployedtofindworkoneofthestrandsofausteritypolicyidentifiedinsection1.2above appears ironical, to say the least. In 2010, for example, there were 7 times more unem ployedpeoplethantherewerejobvacanciesintheEUasawhole,16moreinGreece,21 moreinSpain,27moreinPortugal,39moreinIreland,and76timesmoreinLatvia. ThehighandincreasingunemploymentratesintheEUmakeforsocialdistress,asthenum berofjoblesshouseholdsandofhouseholdswithrelativelyfewpeopleinemployment(low work intensity households) is increasing. In 2010 less than onehalf of those aged 2564 livedinhouseholdsinwhicheitherallmembersormostmembershadajob(35%and13% respectively). In these conditions, unemployment leads to widening inequalities amongst andwithincountries. In 2009, nine EU countries (Bulgaria, Romania, Latvia, Poland, Estonia, Hungary, Lithuania, Slovakia and the Czech Republic) which accounted for one fifth of the EU population re cordedrealhouseholdincomepercapitaequalto45%oftheEUaverage.Further,thefif teen countries of the EU which are eligible under the Cohesion Fund (the above nine to getherwithSlovenia,Portugal,Malta,Greece,CyprusandSpain)togetheraccountedforone thirdoftheEUpopulationandhadarealhouseholdincomepercapitaequalto72%ofthe EUaverage. In2008thetotaldisposableincomeofthe20%ofthepopulationwiththehighestincomein their country of residence was about 5 times higher than the income of the 20% with the lowestincome.Theratiooftheincomeofthetop20%ofearnerstothebottom20%was evenmorepronouncedincertaincountries,includingGreece(5.8),Bulgraria(5.9),Spainand Portugal(6.0),Lithuania(6.3),Romania(6.7)andLatvia(7.3).31 By contrast, in Europe there are 3.1 million individuals considered ashigh net worth indi viduals (HNWI), which is defined as owning investible assets of at leat US$1 million. They accountfor0.6%oftheEUspopulation,whichstandsat502.5million.In2010,theirwealth

30

Eurostat160/2011andEurostatdatabase,accessed5/11/11.Theunemploymentdataareseasonally adjusted. Eurostat16/2011. 26

31

EuroMemorandum2012 totalledUS$10.2trillion,whichisequalto24%oftheglobalwealthofHNWIs,whileitgrew by7.2%inrelationto2009.32 Wealthandincomeinequalitiesarehoweveroutsidethescopeofausteritypolicieswhich,in reality, tend to exacerbate inequalities. It is argued, for example that indirect, rather than directtaxation,shouldberaisedtodealwiththepublicdeficitwhile,atthesametime,itis arguedthatcorporatetaxesshouldbereducedinthenameofamorebusinessfriendlyenvi ronment.Thisisclearlyregressiveandtherehasbeenatendencytoshifttheburdenoftaxa tionintheEuropeanUniontolowerincomewageearners.
VAT standard rates have been hiked strongly as a result of the crisis
21.0%

Crisis has not reversed, but possibly slowed, the steep decline in corporate tax rates
36% 34%

Development of statutory CIT rate (adj.)

Revenue data stop here

20.5%
32% 30% 28% 26% 24% 22% 20%

20.0%

19.5%

19.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average standard VAT rate
European Commission Taxation and Customs Union

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU-27 average top statutory CIT rates
15
European Commission Taxation and Customs Union

EU-27 EATR- Taxation of the non-financial sector

17

Source:M.Fantini,M.,2011,2011EditionoftheTaxationTrendsReport,EC,DGTAXUD

TheausteritymeasuresembodiedinEUeconomicandsocialpolicyprescriptionsandapplied byEU/IMFprogrammesareeconomicallyineffectiveinproducinggrowthandsociallydan gerous, impoverishing European societies and leading to greater social polarisation. In ac centuating social tensions, already under stress due to the crisis, austerity policies lay the groundforpoliticaltensions,ifnotinstability,asrightwingpopulismgrowsstronger. 2.4 Enlargementandneighbourhoodpolicieslackapoliticalvision

In2011,thestrategicpillarsoftheEUMediterraneanpolicieswerecalledintoquestion.The economiccrisisaggravatedexistingstructuralproblemsoftheNorthAfricancountries.Tuni siaandEgypt,thetwopillarsoftheEUMediterraneanpolicy,werethefirsttwocountries, whichexperiencedrevolutionaryprocesses.Theseprocessesweredirectednotonlyagainst the authoritarian regimes, but also against their prevailing economic policies, which had producedhighunemploymentandsocialpolarisation.Theythereforeraisedachallengefor EUMediterraneanpoliciesinatleasttwoimportantrespects:thecollaborativerelationship between the EU and the authoritarian regimes and the type of economic order that had beenpromotedbytheEU.InspiteoftheofficialprodemocratisationdiscourseoftheEuro peanUnion,EUofficialswerevisiblydisconcertedbythedemocratisationmovementinthe Arab world and the removal from power of Ben Ali in Tunesia and Mubarak in Egypt, the EUstwomainalliesintheregion.BoththeEUandmemberstatesgovernmentswerevery slow to react to the events. While the initiatives promoting democratisation were finally welcomed,therehasbeennochangetotheEUseconomicapproachtotheregion,which continuestobebasedonneoliberalprinciples,inparticularfreetrade.InLibya,EUcoun tries,inparticularFranceandBritain,intervenedmilitarilyinthesimmeringcivilwar,clearly
32

2011WorldWealthReport,http://www.capgemini.com/insightsandresources/bypublication/world wealthreport2011/?d=BCD137B08001326187C298873EFF1DF0 27

EuroMemorandum2012 actingbeyondtheboundsoftherelevantUNSecurityCouncilresolution.Thereremainnev erthelessseriousdoubtsastowhethermilitaryinterventionismwillbeconducivetodemoc ratisationintheregion. EU enlargement and neighbourhood policies in Europe have also been mired in contradic tionsandambiguities.EUenlargementpoliciesaremainlyaimedatpreparingthegroundfor the expansion of West European business and making the candidate countries adopt EU norms.Amongthecandidatecountries,Turkeyhasthelongestcontractualrelationshipwith theEU.Atthesametime,itisthemostcontroversialofthecandidatecountries.EUacces sion negotiations are continuing with Turkey but they are of a rather token nature. Both sidestacitlybehaveasthoughthesenegotiationswillleadnowhere. InmostofformerYugoslavia,wheretheEUishopingthatthepromiseofEUintegrationwill contributetopoliticalstability,thereareindicationsofasimilartrendtoTurkey.WhileSlo veniajoinedtheEUin2004andnegotiationswithCroatiawereconcludedin2011,thepros pects of joining the EU are in jeopardy for the other countries of the region. In many EU memberstatesthereisanevidenthesitationaboutafurtherenlargementoftheUnionand theremainingcandidatecountriesfacenumerousobstacles,partlyresultingfromcontradic toryEUpolicies.AlthoughtheFormerYugoslavRepublicofMacedonia(FYRM)signedaSta bilisationandAssociationAgreementinApril2001,evenbeforeCroatiareceivedtheofficial statusofacandidatecountryin2005,negotiationsonFYRMmembershipoftheEUhavenot commencedbecauseGreeceobjectstothenameofMacedonia.ThequestionofSerbiasEU membershipisseverelychargedbythequestionofthestatusofKosovo.Inthe1990stheEU declared that it would only recognise the independence of former Yugoslav republics, but severalEUmember states supported Kosovos secession from Serbia, even though Kosovo didnothavethestatusofarepublicinYugoslavia.Inall,22EUmemberstateshaverecog nised Kosovos unilateral declaration of independence, while only five EU member states have, like most UN members, not done so. In spite of the divided opinion in the EU, the EuropeanCommissionispressuringtheSerbiangovernmenttotakestepstowardstherec ognition of Kosovo. In October 2011, the European Commission announced that it was in favour of granting Serbia and Montenegro candidate status but, in the case of Serbia, it madethebeginningof negotiationsdependentonimprovedrelationsbetweenSerbiaand Kosovo. By contrast, the defacto partition of Cyprus was not resolved before Cypriot EU membershipandconflictsaboutNorthernCyprusareoneofthepointsofcontentioninEU negotiationswithTurkey. TheEasternPartnershipinitiative,whichwaslaunchedin2008andsupportedespeciallyby Poland,isaimedatopeningupcountriesinthepostSovietregiontoWestEuropeancapital andatpersuadingthemtoadopt EUnormsinkeypolicyfields.Forthosecountriesofthe EU, which have very cool (or even tense) relations with Russia, the Eastern Partnership is conceivedasameansofreducingRussianinfluenceintheregion.EasternPartnershippoli ciesarelikewisefacedwithcontradictionsandconflicts.UkraineandBelarusbelongtothe key countries of the initiative. The political relationship between the EU and the govern mentsofthetwocountriesarefraughtwithtensions.TheEUwantstobindthetwocoun triesliketheothercountriesoftheEasternNeighbourhoodclosertotheEU.ForPoland andtheBalticstates,itisastrategicforeignpolicyaimtoreducethetwocountriesdepend ence on Russia. However, there are strong reservations about the governments in Belarus andUkrainebecauseoftheirauthoritariantendencies,especiallyinthecaseofBelarus.The governmentsinBelarusandUkrainefollowamultivectoralexternalpolicybetweentheEU andRussia.TheytrytoexploitthecompetitionbetweentheEUandRussiatotheirownad
28

EuroMemorandum2012 vantage.Ukrainianheavyindustry,whichisbackingthepresentUkrainiangovernment,has economicinterestsintheEUandwantsbetteraccesstoEUmarkets.Thisconstellationhas resultedinupsanddownsintheEUBelarusandEUUkrainerelationships.Sinceawaveof repression after the last elections in Belarus, the relationship has become tense. Similarly, aftertheformerUkrainianPrimeMinisterJuliaTymoenkowassentencedtosevenyearsin prisoninOctober2011,inwhatCatherineAshton,theEUCommissionerforForeignAffairs, describedasanactofpoliticallymotivatedprosecution,itisdoubtfulwhethertheassocia tionagreementwithUkraine,thecoreofwhichconsistsofafreetradeagreement,willbe signed.Forgeopoliticalreasons,however,someoftheEastEuropeangovernmentsseemto bewillingtosigntheagreement. IntheEU,attitudestowardstheEasternPartnershipinitiativearetoasignificantextentcon ditioned by attitudes towards Russia. The views on this issue are highly divergent, ranging fromthedesireforastrategicpartnershipinGermangoverningcirclestofundamentalres ervationsintheBalticStates. Box1:EUmigrationpolicyandtheeconomiccrisis
BeforetheaccessionofEasternEuropeancountriesandthedeepeningofthefinancialcrisisin2008, migrationpolicyatEUlevelwasgovernedmainlybylabourmarketconsiderationsaspartofthesin glemarketprojectwhichculminatedintherightoffreemovementforEUnationalsandtheSchen gen treaty, which removed border controls between the participating countries. However, matters related to thirdcountry nationals have always been treated at national level and governed by the nationallawsofEUmemberstates.Migrantworkerswerenotgrantedalegalstatus,butdemandfor themascheaplabourersintheagriculturalandservicesectorswashighandwagedumpingandmis erableworkingconditionswerewidespreadamongthemigrantworkforce. TheuprisingsintheNorthAfricancountriesofTunisia,LibyaandEgyptbroughtSouthNorthmigra tion sharply into focus. For decades North Africans have been seeking a better life and supplying labourtotheSouthernEuropeancountrieswhichsufferedfromashortageoflabour,especiallysea sonal workers in agriculture. The choice of destinations for the North African migrants was mainly governed by former colonial relationships (between Algeria and France, Morocco and Spain, and LibyaandItaly)aswellasearlierpatternsofmigration.MigrantsfromsubSaharanAfricancountries havealsobeenmovingthroughNorthAfricatovariousEUcountriesinsearchofabetterlife. These developments have made a mark on EU migration policies and, more importantly, on the memberstatesapproachtomigrationbybothEUandnonEUnationals.AtEUlevel,thefreedomof movementwithintheEUandtheSchengentreatywerecombinedwithwhathasbeentermedaFor tressEuropepolicyraisingwallstostemtheflowofmigrationfromoutsidetheEU.Aspartofthis policy,thecontrolofmigrationflowswascoordinatedwith,andtosomeextentsubcontractedto, NorthAfrican countries such as Libya. Under the Gaddafi regime, cooperation on immigration was oneoftheconditionsforLibyasreadmittancetotheWesterndominatedinternationalarena.The settingupofholdingcampsforillegalimmigrantsinNorthAfricawaspartoftheEUspolicyofexter nalisingmigrationmanagement. Thehumanrightsimplicationsofatighterandexternalisedmigrationpolicy,togetherwiththeneed for migrant labour and serious problems with human trafficking and smuggling have led the EU to designamorecoherentmigrationpolicyalongthelinesofthatintheUS.ThisissetoutintheEuro peanPactonMigrationandAsylum,whichwasadoptedbytheEUin2008.Thecoreofthepolicyis centred on the stabilisation of migrants status by granting longterm and single/targeted resident permits, integration and the facilitation of longterm migration through the development of a per manentresidencyBlueCardsystem(modelledontheUSGreenCard).Aspartofthenewpolicy,leg islation was also implemented for promoting seasonal migration and facilitating intracorporate

29

EuroMemorandum2012
transfers. However, close examination of these initiatives by trade unions, including IG Metal of GermanyandtheEuropeanTradeUnionConfederation,andhumanrightsorganisations,suchasthe EuropeanAssociationfortheDefenseofHumanRights,revealthatthemeasuresfailtomeettheir objectivessincetheydiscriminateamongdifferentcategoriesofmigrantsonthebasisofskills,coun tryoforigin(EUorthirdcountry),andtypeofmigration(temporary/seasonalorlongterm).Thiswill resultinamorefragmentedEuropeanlabourmarketinwhichhighlyskilledEUorthirdcountryna tionalswiththehighestincomeswillbethemostprivilegedamongthemigrants. These policies have been combined with antiimmigration measures such as the return of immi grants,cooperationwith immigrantshomecountryofficialsandtighterpolicingofirregularmigra tion.Anewstrategicpolicyhasalsobeendesignedinordertocombinemigration,mobilityandse curitythatwouldinevitablyleadtoafurthersecuritisationofmigrationissuesandamarginalisa tion of the humanitarian and labourmarket aspects of migration. It is claimed that these policies wouldhelplegalimmigrantsandprotectpotentialmigrantsbyreducingpeoplesmugglingandtraf ficking. In reality, a more restrictive European immigration policy together with widespread anti immigrantsentimenttendtoreinforceeachotherandpromotesanevenmorerestrictiveimmigra tionpolicyatanationallevel. These developments have clearly shifted the migration policy in the EU and in member states to wards more control and have undermined the timehonoured principles of cohesion and solidarity enshrinedinmanyoftheEUdeclarations. TheEUisinurgentneedofanimmigrationpolicythatcombinesitsdemandforlabourwiththeso cial,humanandeconomicrightsofimmigrants.Discriminationattheworkplace,inparticular,needs tobeended.Oncemigrationisseparatedfromsecurityissuesofcrimeandterrorism,itwillbecome easiertodealwithlabourmarketaspectsofmigrationandcreateamigrantfriendlyculturewhere strictmigrationrules(likethoseintheUS)couldbecombinedwithrespectformigrantsoncethey areinthecountry.Onhumanitariangroundsanyrestrictionontheaccessofimmigrants,irrespective oftheirlegalstatus,tobasicpublicservicessuchashealthandeducationshouldberemoved.Inthe mediumtolongrunattemptsshouldbemadetomovetowardsacommonimmigrationpolicyacross the EU based on international justice, solidarity and integration of immigrants, that draws on best practicesoftheEUnationalpoliciesonadmissions,naturalisation,familyreunionandlabourmarket relatedissues.

2.5

Tradeanddevelopmentpolicies:Wavingthestickandnotthecarrot

Theglobalfinancialandeconomiccrisishasbeenaccompaniedbyashiftinthebalanceof power in the global economy. This can be clearly seen in the new geopolitical agendas of ChinainAfricaand,toalesserextent,inSouthAmerica.Thesocallednewdonorspursuean explicitagendaofaccesstorawmaterialsinexchangeforquitegenerousfundingforinfra structureandotherprojects.IncontrasttotraditionalOECDdonors,Chinadoesnotattach stringsintheformofpoliticalconditionalitiestoitsaidpayments.Asaconsequence,both theEUandtheUSseetheirinfluenceinAfricadeclining.TheEUhasreactedtothisbystep pinguppressureonaidrecipientstoacceptunrestrictedmarketopeningforEUgoodsand investments. The Commissions document, Trade, Growth and World Affairs, presented in November 2010, is the sequel to its paper Global Europe, which appeared in 2006. In the newtradestrategy,theEUCommissionmakesitclearthatitintendstopursueanaggressive agenda to open up markets and secure accessto raw materials in the interest of EU busi nesses.Althoughthedocumentpayslipservicetoconcludingnegotiationsofthesocalled DohaRoundatthemultilateralWorldTradeOrganisation(WTO),thefocusoftradepolicy hasshifteddecisivelytowardsnegotiatingbilateralfreetradeagreementswithmajortrading partners.
30

EuroMemorandum2012 TheEUsnegotiationswiththeAfrican,CaribbeanandPacificgroupofstates(ACP)tocon cludeEconomicPartnershipAgreements(EPAs)havemadelittleprogressandtheCommis sion has taken steps that will increase the pressure on the African countries to sign such agreements.TheCommissionhasannouncedthatitwillphaseoutaspecialmarketaccess regulationforACPcountriesbytheendof2013,anditisalsoimplementingaparallelreform of the EUGeneralized System of Preferences (GSP). Via the GSPsystem, lessdeveloped countries are granted unilateral preferential tariff treatment by the EU. Since most of the African ACP countries have received GSP treatment, the incentives for them to enter into EPAs, which would demand from them wideranging liberalisation commitments on trade andinvestment,havebeenlimited.Sofar,23countriesinAfrica,includingZambia,Nigeria andSenegal,haverefusedtosignEPAs.TheEUisnowusingtheGSPreformasanadditional bargainingchiptopressAfricancountriesintosigningEPAs.Beforelosingmarketaccessto the EU under beneficial terms, some vulnerable African countries eventually will have no otherchoicebuttoacceptsuchadealwiththeEU.However,thegeopoliticalandeconomic situation has changed in recent years and stronger African countries, which have profited fromincreasingcommoditypricesorprivilegedrelationswithChina,mightsimplywalkaway fromthenegotiations. EUtradeanddevelopmentpolicieswiththeEUROMEDcountrieshave,similarly,alsofocus sedonaonesidedliberalisationagendaoverthelast10years.Negotiationsontheliberali sation of investment and services with Morocco, Egypt, Tunisia and Israel have been on goingsince2008.Therevolutionaryeventsduring2011inEgypt,Tunisiaandothercountries oftheregionwere,atleastinpart,motivatedbywidespreadrejectionoftheprevailingeco nomic model, and this is a clear indication that the EUs trade and development policies mustbeseriouslyreconsidered. 2.6 Inadequateandinsufficientaction:theexampleoftheCommonAgriculturalPolicy

ThereisaseriousmismatchbetweenthedeclaredaimsoftheEU,andthepolicieswhichit actuallypursues.SomewhereinthemassofdocumentspublishedbytheEUitispossibleto findareferencetoawiderangeofaims.Someoftheseareproblematic,butothersarede sirableandthecaseforthemiswellargued,eveniftheyaresometimesembeddedinprob lematic overall strategies. A central destructive feature of the EUs prevailing strategies is theiroverarchingorientationtowardspromotingcompetitiveness.Thisisnotonlydestruc tiveforthepotentiallypositiveroleofEuropeintheworld;italsopervertstheworkingsof policies within the EU. Instead of a structure of opaque instruments, which are often sup posed to act indirectly through market mechanisms, a set of a set of direct, explicit and transparentpoliciesshouldbedevelopedattheEUlevel,takingtheimperativesofsustain abledevelopmentasitsexplicitandbindingbasis. Intheglobalarena,theEUisalmostasconspicuousastheUSinanticipatingamilitarydi mensiontoitsenergyandrawmaterialsstrategy.Themilitaryconceptofsecurityhasbeen appropriated, wrongly, to designate an illusory way out of the dependency on the world marketforcertainrawmaterialsandenergysources.TheEUstrategyofsustainabledevel opment,whichdoesntevenaddressmajorareasofconcern,suchasexternaltrade,mone tary policy,and the common agricultural policy, is largelyan example of window dressing, and completely fails to recognise the destructive impact of the integrated European econ omy.

31

EuroMemorandum2012 Theproblemsare,again,wellillustratedbytheexampleofthecommonagriculturalpolicy (CAP).Theurgentneedforathoroughgoingreformisacknowledgedby(almost)everyone involved. However, the Commissions proposals for reshaping the CAP preempt a much needed political debate on the aims of agricultural policy, and how these should be achieved. TheCommissionsnewpaperonagriculturalpolicymakesanimportantsteptowardsasus tainableconceptionofagriculture.33Itrecognisestheimportanceofagrarianlabourand,as part of its concept of greening agricultural production, it proposes the category of active farmersascentraltoruraldevelopment.Theproposaltointegrateagrarianlabourintothe calculationofthebonusestobepaidtoproducersis,finally,acknowledgingagricultureasa potentialsourceofdignifiedemployment.However,thisapproachisnotbeingpursuedina consistentmanner,anditisnotproposedtobindallpaymentsunderCAPrulestothiskind ofactivesocialcontribution.DefiningactivefarmersasthesubjectsaddressedbyEuropean subsidieswouldhavetheverybeneficialeffectofexcludingthebigcorporationsinvolvedin theproductionanddistributionoffoodfrompayments. Theinclusionofenvironmentalgoalsasanimportantfeatureofagriculturalpolicyshouldbe apowerfulleverforpromotingthechangesthatarerequiredtodevelopsustainabilityinthis sector.Itis,however,notsufficienttopromisetobindEuropeanagriculturalsubsidiestothe ecological and social dimensions of agrarian performance. The European Council and the European Parliament will need to supplement the Commissions proposal so as to ensure thatitpartofacoherentandoverarchingstrategyofsustainabledevelopment.Thisshould recognisetheneedfordevelopingcountriestoachieveasustainablemodelofruraldevel opment,sothattheyarecapableofguaranteeingtherighttofood.Thisrequiresendingthe practice of unfair competition by the EUs agrarian sector, and a redirecting of European resourcestodevelopmentcooperationwithcountriesintheGlobalSouthandtoachieving asustainableregionaldevelopment(andemployment)inEurope.

33

EuropeanCommission,TheCommonAgriculturalPolicyafter2013,12October2011. 32

EuroMemorandum2012

3
3.1

StrengtheningdemocracyandsocialjusticeinEurope
Financialandfiscalalternatives

Themarketforeuroareapublicdebthasbeendestabilisedbymassivesalesofsomecoun triesbondsbyprivateinvestors.Inordertobreakthecycleofsalesandfallingprices,the ECBmustactaslenderoflastresort.Inplaceofthelimitedandreluctantinterventionithas practiced to date, the ECB should announce that it will use all the recourses necessary to ensurethatbondpricesdonotdropbelowacertainlevel.Akeyfeatureofthelenderoflast resortfunctionisthat,provideditisclearthatthecentralbankstandsreadytointerveneon thenecessaryscale,itcanstemawaveofpanicselling.34Atthesametime,majorinitiatives shouldbelaunchedtostemthepowerofthefinancialsystemandtoestablishthebasisfora sustainablerecovery. Downsizingthefinancialsector The major expansion in the size and influence of the financial sector in the last three decades must be dramatically reversed. Financial institutions have appropriated an in creasingshareofnationalincomeand,followingashortinterlude,haveresumedpaying largebonuses;theyhavesignificantlyfailedinprovidingfundingthatwillcontributeto the creation of good jobs; and by creating a massive superstructure of derivatives and othercomplexsecurities,theyhavegeneratedmassiveinstabilitywhich,onlythreeyears after the financial meltdown in 2008, is again threatening the future of the European economy. Commercialandinvestmentbankingshouldbeseparated.Commercialbanksshoulden suretheprovisionoffinancetohouseholdsformajoritemsofexpenditure,andtofirms for investments in socially and environmentally desirable investment projects. The ex pansion of cooperative, municipal and other public and nonprofit making commercial banksshouldbeactivelyencouraged.Thereshouldbestrictlimitsonthesizeofprivate commercialbanks and there must be clear provisions so that they canfail without en dangering the stability of the financial system. The regulation of commercial banks shouldinvolvedirectcontrolsontheexpansionofcredit,sincerelyingonincreasedcapi talrequirementsreinforcesbanksdependenceonfinancialmarkets. Investment banks, together with hedge funds, private equity funds and all other so calledshadowbankinginstitutionsshouldbetightlycurtailed.Theyshouldnotbeper mittedtooperatewithborrowedmoney,andalltheiractivitiesshouldbeopentopublic scrutiny. Mostderivativesdonotcontributetomacroeconomicstability.Theyhaveledtoamas sive superstructure of instruments which generate profits for financial institutions and which,whiletheymightappeartoprovidecoverforspecificrisks,haveactuallyledtoa majorincreaseinsystemicrisk.Derivativesshouldthereforebestandardisedandtightly controlled and financial investors should not be able to offload the risk of failure as with credit default swaps so as to contribute to a greater concentration of systemic risk.
ForaforcefulstatementofthisseePauldeGrauwe,OnlyamoreactiveECBcansolvetheeurocrisis, CEPSPolicyBrief,No.250,August2011. 33

34

EuroMemorandum2012 Allsecuritiesshouldbetradedonapprovedpublicplatformsandafinancialtransactions tax should be levied on all transactions. A publiclyowned European ratings agency shouldbeestablished. The existing level of public debt, in particular in Greece, cannot be repaid. Part of the debt will therefore have to be cancelled. In place of an across the board write down, which would hit all financial institutions including employees pension funds, Debt Au dits,asoriginallypioneeredinEcuador,shouldbeheld.DebtAuditsprovideaninnova tivemeansofpromotinganopendiscussionaboutwhichpartsofthepublicdebtarele gitimate and which should be written down. They can also identify which institutions, suchashedgefundsthathaveadoptedhighlyspeculativepositionsingovernmentdebt instruments,shouldbearthebruntofdebtwritedowns. Inallmemberstateswithhighlevelsofpublicdebt,areductionshouldbeachievedbya significanttransferofwealthfromtheveryrichthroughlevyingawealthtax.35 The euro area countries should eliminate the possibility of speculating against weaker memberstatesbondsbyissuingeurobonds.Theeuroareacountriesshouldbeableto convert government debt into common bonds, perhaps up to a certain limit, and this wouldbejointlyguaranteedbyallcountries.Thiswouldnotinvolveanetissueofbonds, butratherachangeintheforminwhichbondswereheld.Asaresultofthecurrentun certainty,hugesumshavefloodedintoGermangovernmentbonds,drivingtheirrateof interest below 2%, the lowest return in 60 years. A common euro bond would ensure that the benefits of low interest rates were shared by all euro area countries, thereby eliminatingoneofthekeyproblemsfacedbyseveralperipheralmemberstates. The common monetary policy must be complemented by a common fiscal policy. This shouldbebasedonaEuropeanbudgetofatleast5%ofEUGDP,andacoordinationof nationalbudgetarypolicies.Theaimofthecommonfiscalpolicyshouldbetopromote fullemploymentwithgoodwork.ThecurrentpolicyofimposingausterityonGreeceand othermemberstatesasaconditionofreceivingfinancialsupportissociallyunjustand, by driving the countries into deeper recessions, it will make it even more difficult for thosecountriesgovernmentstoreducetheirdeficits.Austeritywillalsostrengththede flationary pressure facing Europe as a whole. Instead, the European Financial Stability Facility,andtheEuropeanStabilityMechanismwhichwillreplaceitin2013,shouldpro vide governments that have primary deficits with the financing necessary to resume growth. At the same time, those countries with strong fiscal andcurrent account posi tionsshouldstrengthentheirinternaldemandsothatadjustmentisnotforcedentirely ontodeficitcountries. Astrongprogrammeofpublicinvestmentsisnecessarytocounterthedangerofanew recession. Such investments should be part of a longterm strategy to promote social

Towardsasustainabledebt

AEuropeanpolicyforasustainablerecovery

35

InSeptember2011,euroareahouseholdsnetworthamountedto39.3trillion(ECB,MonthlyBulle tin, p.S32). This is equal to 420% of euro area GDP, much of it presumably held by the wealthiest households.Bycomparison,totalgovernmentdebtintheeuroareain2010wasequalto85%ofGDP (p.S57). 34

EuroMemorandum2012 solidarityandenvironmentalsustainability,andshouldbeinitiatedataEuropeanlevel, including in particular an ambitious plan for promoting investment in those countries which are hardest hit by the crisis, and at a national level. Financing for such pro grammescoulddrawonanexpandedrolefortheEuropeanInvestmentBank,whichis alreadyempoweredtoissuebondstofinanceitsactivities.36 Instead of constantly pushing for cuts in spending, governments should raise the re sourcesavailableforpublicinvestmentbyreversingthelongtermreductioninthetaxa tionofhigherincomes.Largeincomes(say,over250,000ayear)shouldbetaxedata high marginal rate (perhaps 75%). Flat rate income tax should be abolished in those countrieswhereithasbeenintroducedandreplacedwithgraduatedtaxrates.Inaddi tion,aminimumrateofcorporatetaxationshouldbeintroducedintheEUtopreventtax competitionbetweenmemberstates. Constitutional amendments prohibiting governments from running deficits (socalled debtbrakes),firstintroducedinGermany,butsincefoistedonothercountriesseeking toingratiatethemselveswithBerlin,aredangerouslyrestrictive.Theproposalpandersto a common misconception that equates a government budget with that of a private household. It also involves treating the public sectors balance in isolation from the fi nancialbalancesoftheprivatesectorandtheforeignsector.37Ifprivateinvestmentor consumptiondeclines,asintherecentdownturn,thestatesdeficitwillrise.Inacapital isteconomy,privateinvestmentishighlyvolatileandmacroeconomicstabilityrequires thepublicsectortofollowanactivebudgetarypolicy. A common monetary and fiscal policy must be complemented by a coordinated wage policy.Acentralaimofthispolicyshouldbetoreversethewidespreadtendencyinthe EU(asintheUS)fortheshareofwagesinnationalincometodecline.Ineachmember state,wagesshouldriseatleastinlinewithnationalproductivityplusanagreedtarget forinflation.Sinceproductivityhasgenerallybeenrisingmorerapidlyinmemberstates withlowerlevelsofincome,thisimpliesthatwagesshouldbegintoconvergeonthosein thehigherincomestates. To eliminate the imbalances which have accumulated in the last decade, adjustment should not be imposed solely on countries where unit wage costs have risen by more thantheeurozoneaverage.Insteadamajorpartoftheadjustmentshouldbeborneby countriesinwhichunitwagescostshaverisenbelowtheaveragefortheeurozone.This appliesinparticulartoGermanywhereunitwagecostsremainedvirtuallystagnantbe tweentheintroductionoftheeuroin1999andtheoutbreakofthecrisisin2007,and whichthereforedidnotevenconformtotheECBstargetof2%inflation,atargetwhich is in anycase excessively restrictive. In order to offset the trade advantage which Ger manygainedoverothereuroareacountriesthroughthismercantiliststrategy,wagesin
SeetheproposalsbyStuartHolland,UnionBonds,EurobondsandaNewDealforEurope,July2011. Theproposalsdistinguishbetweenaconversionofexistingnationalbondstoeurobondsforstabilisa tionpurposes,whichwouldnotinvolveanetissueofnewbonds,andtheissueofnewbondstofi nanceinvestments,whichwouldinvolveanetissueofnewbonds. Itisanaccountingidentitythatthegovernmentsbalance(taxationminusspending)mustequalthe private sectors balance (investment minus saving) plus the foreign sectors balance (exports minus imports). 35

Wagesandemployment

36

37

EuroMemorandum2012 Germany will need to rise at a higher rate than that given by national productivity growthplustargetinflationforanumberofyears.Thewagesofworkersatsubsidiaries of German companies located Poland, Slovakia and other central European countries shouldalsoberaisedtorelievethedownwardpressureonthewagesofworkersinGer many. Areductioninnormalworkingtimeto30hoursaweekremainsamajorstrategicgoal foraprogressiveeconomicpolicy.Intheshortterm,thisisakeycomponentofapro gressivestrategytoensurefullemployment(thepossibilitieshereareindicatedbythe waythatareductioninworkingtimehelpedtostabiliseemploymentinGermanyduring therecentcrisis).Inthelongerterm,shorterworkinghoursisacentralfeatureofcreat ingasocietyinwhichlifeisnotdominatedbywagedwork,ofcreatingrealfreetimeand theconditionsinwhichhouseholdsareabletoovercomethegenderdivisionoflabour, particularlyinrelationtochildcare. Alternativestoausterityurgentlyneeded

3.2

The allencompassing nature of EU/IMF austerity policies means that alternatives are ur gentlyneeded.Indiscussingalternatives,atwolevelapproachisnecessary,(i)oneconcen tratingonthetraditionalsocialpolicysystem,mainlyconcernedwithfinancialtransfersand certainserviceprovisionssuchassocialbenefitpayments,healthcare,supportofpensioners etc. and (ii) a wider approach from a socioeconomic perspective, addressing fundamental andstructuralaspectsofcapitalistsystemstoday.Lastly,itisimportanttoregardthefollow ingproposalsaselementsofanintegratedwhole. At the centre of the changes that are needed is a strengthened and publicly accountable public sector. Past developments have clearly shown that privatisation policies have been counterproductive.Healthcarehasbecomeanexclusive,twotiersystem,completelyexclud ingcertainsectionsofthepopulation.ForexampleinIreland,22%ofthepopulationisnot covered by any kind of health insurance, public or private, and is therefore dependent on thebasicemergencyservice.38Similarly,transportandcommunicationprovisionsnolonger fulfiltheirpublicroleofadequatelylinkingdistantregions,whileinadequateinfrastructure oftenendangersthesafetyofthepublic.Itisofimmediateimportancetoreestablishthe roleofpublicservicesinordertosecure: Adequatehealthcareservicesforall,includinganincreasingnumberofpersonswho arefallingcompletelyoutofthesystemandthosewhohaveonlyamarginalsocial insurance. Statutory insurance should be introduced where none exists and meas uresshouldbeputinplaceforthosewhoarefreelancersorinprecariouspositions andunabletopaycontributions. Childcare facilities of a high quality from an early age. These should also provide muchneedededucationalservicessince,asiswellknown,thefoundationforaquali fiedworkforceislaidintheearlypreschoolyears. Financial support for households in need, something which will also contribute to strengtheninginternaldemand.

38

CSO, Health Status and Health Service Utilisation, Quarterly National Household Survey, 31 August 2010. 36

EuroMemorandum2012 The coreperiphery division of labour discussed in previous sections means that regional policiesneedtoberadicallytransformed.Lowwagestrategies,supposedlyaimedatincreas ingcompetitivenessoflessdevelopedregions,havebeenprovenwrong.Recoveryandde velopmentmustbebasedonpromotingthedeploymentofmoderntechnologyandthees tablishmentofsectorsoftechnologicallyadvancedproduction.TheEUhasinthepasthada partlyeffectiveframeworkofregionalfundingbutundertheinfluenceoftheLisbonAgenda, which assumed there would be a trickle downeffect from rich to poor regions, Structural Fundswerereducedfortheperiod20072013.Thismustbereversedandsuchfundsshould be substantially expanded, something that will also contribute to a desirable expansion of theEUbudget.ThemainpriorityforStructuralFundsshouldbetopromoteadvanced,pro ductiveeconomicsectors,ratherthanprovidingdecliningareaswithsocialsupport. Inordertoimprovethetradebalanceofdeficitmemberstates,itisnecessarytolookbe yondincreasingexports.Itisalsonecessarytofindwaysofsubstitutingforimports,forex amplebyexpandingrenewableenergysources,soastosubstituteforoilimports,orrecruit ingqualifiedengineersinordertoavoidtheneedtoimportcomplextechnicalservices.Such astrategytakestime(itwillprobablytakeasmuchas40yearsintheRuhrareaandatleast 30yearsinEasternGermany)andpublicsupport.Butitismeasuresofthistype,ratherthan austerity,whicharerequiredtocreatethebasisforasustainableeconomicrecovery. Asignificantcontributiontocombatingtheimpactofthecurrentsocialandeconomiccrisis can also be played by social economy enterprises. There are two features that should be stressed.First,enterprisessuchascooperativesshouldnotbeseenonlyastemporarysolu tions,fillinggapswiththesupportoftemporarylegal,taxorothermeasures,withtempo raryrelieffromthepressureofthemarket.Instead,theyshouldbeencouragedaslongterm initiativeswhichaimtomeetawiderangeofobjectives,ratherthanaimingsolelyatmaxi misingprofitasinatraditionalenterprise.Second,andthereasonwhytheyareabletomeet variousobjects,isthattheyare,inanumberofdifferentrespects,integrativeorganisations: Theycanintegratedifferententrepreneurialgoalssuchastheprovisionofgoodsand services,socialintegration,andenvironmentalmaintenance; Theycanbringtogetherdifferentstagesofproductionfromgeneratingrawmaterials toprocessing,manufacturing,distribution,exchangeandconsumption; Theycanencouragelocalproductionandconsumption; Theycandefinetheirproductandservicerangeprimarilyonthebasisoftheuseful ness of products, rather than on their value as a status symbol, as is the case with designer labels, an important feature of a shift to a sustainable model of socio economicdevelopment.

Such an alternative to profitable privatisation strategies implies a strict reorientation in publicresponsibility.AproposalbytheIrishTradeUnionCongressputsforwardaredefini tion of public responsibility. Rather than reducing the role of the public sector to that of frameworksetting,i.e.assumingtheroleofcoordination,controlandoversight,whileleav ingtheimplementationtoprivateenterprise(asinpublicprivatepartnerships),thereshould be a major commitment to promoting the public engagement of citizens (what might be calledpubliccitizenpartnerships). Intheareaoflabourmarketpolicy,flexicurityhasledtoincreasingemploymentinsecurity andtheprivatisationofrisk,aswellastoarestrictionofworkersrights.Atstakeisequally
37

EuroMemorandum2012 theprivatisationofrights,notleastduetotheerosionofcollectivebargaining.Incontrast towhatishappeninginIrelandandotherperipheralareacountriesasaresultofEUpolicies, therightsoftradeunionsshouldbefullyreestablishedandenforced.Itisalsoimportantto ensurethatenterprisesarenotabletousetheargumentofcompetitivepressurefromother partsoftheEUtopushforlowerwages,oradeteriorationinworkingconditions.Theap propriatelegislationshouldbeframedinsuchawaythatitalsoappliestoenterprisesfrom outsideoftheEUwhichwishtoinvestinoneofthememberstates.TheEUshouldalsode velopacoordinatedpolicyforenforcingminimumwagesinmemberstates,andensurethat occupational health and safety regulations are strictly enforcedsomething that has the addedadvantageofreducingthecostsofhealthcare. 3.3 Supportingautonomousdomesticdevelopmentinpartnercountries

TheunderlyingphilosophyofEUenlargementandneighbourhoodpolicyhastochange.The EUscurrentapproachbasedonfreetradehassimplycementedexistingasymmetries.The aim,however,shouldbetoreduceasymmetriesandthisrequiresthattreatiesandformsof cooperationbebasedonasymmetricalprincipalssoastofavourthepartnercountries.Both accessionandneighbourhoodpoliciesmustbebasedonarecognitionthatexistingneolib eralstrategieshavefailedand,insteadtheyshouldaimtocreatepolicyspacesthatfacilitate industrialdevelopmentstrategies. ReindustrialisationisofparticularurgencyinthepostYugoslavregion.However,economic and political conditions here are not favourable for industrial development as, during the waryears,asmallstratumoftajkuniemerged.Thesearedominantlocalbusinessgroups withverygoodpoliticalconnections,andaremainlyactiveinservices,withaclearprefer ence for exploiting monopoly positions. Within the EU, resistance to an inwardlooking in dustrialisation strategy is to be expected from exportorientated businesses in the core countriesandthegovernmentsoftheneomercantilistgrouparoundGermany.Contraryto existingEUpractice,membershipcandidatesshouldbeencouragedtoretaintheoptionof controlsoncapitalflowsinordertobeabletoreduceexchangerateinstabilityandprevent currencyappreciations.Theyshould,foratime,alsoretaintheoptionofdevaluingtheircur renciessincethisisapolicyinstrumentthatcanplayanimportantroleinprotectingweak productivesectorswhiletheyareintheprocessofgainingstrength. The relationship with Eastern and Southern neighbours should not be built on free trade agreements, but on mutually advantageous sectoral, political and cultural cooperation. Double standards on democratisation, so evident in EU policy towards North Africa and EasternEurope,shouldbediscontinued.Therelaxationandphasingoutoftheexistingre strictivevisaarrangementshasbeenademandinbothEasternandSouthernneighbouring countries.Thisdemandshouldbemet,sinceitwoulddemonstratetothecitizensofthose countriesthattheyarewelcomeintheEU. Thebasicchangesrequiredinenlargementandneighbourhoodpoliciescanbesummarised areasfollows: ToaddressandcorrecttheexistingasymmetriesbetweentheEUandneighbouring countries,institutionalarrangementsshouldbeasymmetric,i.e.infavourofthepe ripheralcountries.ThismeansinparticularadistinctivelynewapproachtoAssocia tion Agreements as the main contractual instrument in governing relations with thesecountries.

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EuroMemorandum2012 Freetradearrangementsshouldbeabandonedinfavourofsectorallydifferentiated approaches. Very long transitional arrangements should be granted to candidate countriesinsensitiveareas. Peripheral countries should retain policy space that permits the strengthening of productivestructures.EUfinancialaidtothesecountriesshouldbeorientedtowards thepromotionoftheirindustrialdevelopment. Takingresponsibilityintradeanddevelopmentpolicies

3.4

The EU has failed to draw the appropriate lessons from the financial and economic crisis. Instead of stimulating internal demand, its policy is based on the belief that growth must come froman increased reliance on exports. As a result,it adheres stubbornly to external strategythatisprimarilyfocusedonthepursuitofmercantilistgoals.EUpoliciesrefuseto takeanyresponsibilityforglobalmacroeconomicmanagement.Instead,theEUappearsto placeitshopesinemergingeconomiesasthedrivingforceoftheglobaleconomy.Thiscom plements the prevailing approach of the EUs surplus countries like Germany, Finland, the NetherlandsorAustria,whichrefusetoabandontheirexportorientedgrowthstrategiesin favourofanexpansionofinternaldemand.Thisnotonlythreatenstheveryexistenceofthe MonetaryUnion;italsounderminesthereputationoftheEUasacooperativeforceininter nationalrelations. TheEUshouldadoptanapproachwhichtacklesprevailingasymmetriesbetweencountries byallowingforamoredifferentiatedapproach,balancingitscommercialinterestswiththe need to safeguard thepolicyspace of its partners, and using development policies to sup portdemocraticallyguidedeconomicdevelopmentstrategies.Themainfeaturesofsuchan approachincludethefollowing: Anexpansivedomesticmacroeconomicpolicyshouldbeadopted,therebyleadingto amoderatelyhigherabsorptionofimportedgoodsandservicesandmakingaposi tivecontributiontoglobaldemand. TheprevailingmodelofWTOPlusbilateralFreeTradeAgreementsshouldbeaban donedsoastoallowforadifferentiatedapproachwhichtakesasymmetriesbetween countriesintoaccountandwhichsupportsautonomouspolicyspaceinpartnercoun tries.TradedistortingagriculturalsubsidiesintheEUmustbephasedout.Demands forliberalisationofpublicservicesinpartnercountriesmustbedropped. Developmentpoliciesshouldbereoriented,especiallyvisvisthe(North)African economies,soastosupporttheconstructionofdiversifiedlocaleconomies.Inre sourcerichcountries,theEUshouldsupporteffortstoavoidDutchdiseasephenom enaandshouldcontributetopromotingindustrialupgradingandeconomicdiversifi cation. Theconstructionofstatecapacitiesinlessdevelopedcountries(LDCs)shouldbefos teredbysupportingeffectivetaxadministrations,whichcontributetoequitableand sustainablefiscalpolicies.

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EuroMemorandum2012

Box2:Taxingmatters:TheEUasmodelforLessDevelopedCountries?
While therelationshipbetweenless developed countries(LDCs)andthe EuropeanUnionhasbeen farfromunproblematiccoloniallegacies,tradeinequalities,dependency,chronicindebtednessetc. the economic prosperity, political stability and extensive and intensive integration of Europes statescontinuetoberegardedasadmirableachievementsandworthy,inpart,ofimitation.These verityofEuropesrecenteconomiccrisishascertainlycastdoubtonsomeoftheregionseconomic virtuesintheeyesofobserversinLDCs,butEuropecontinuestoexertveryconsiderableinfluenceon thecourseofmodernisationinLDCs,bothdirectly,throughadvisoryprogrammesofmaterialassis tance,andindirectly,throughtheoverseasoperationofEuropeanenterprises.Morerecently,partly in conjunction with the Economic Partnership Agreements with the African, Caribbean and Pacific (ACP)countries,theEUhasprovidedguidanceinrelationtoeconomicgovernance,inparticularin the field of taxation. In April 2010 the European Commission published a communication to the European Parliament, the Council and the European Economic and Social Committee entitled Tax and Development: Cooperating with Developing Countries on Promoting Good Governance in Tax Matters, which sought to assist in building effective, efficient, fair and sustainable tax systems in lessdevelopedcountries.39 Thecentralityofawellresourcedfiscalsystemtothesuccessofeconomicandsocialmodernisation and for reducing income inequalities is undeniable. Advanced states are all characterised by both strongrevenueraisingcapacitiesandbyhighratiosofoveralltaxationtoGDP.Tradeliberalisation, promoted by the EU and others within the WTO, has created serious problems for the many LDCs thathadhithertoreliedheavilyoncustomsdutiesasasourceofstaterevenues.TheEU,alongwith theIMF,hasproposedtheintroductionofvalueaddedtaxes(VAT)the(indirect)taxationofcom mercialgoodsandservicesasasubstituteforcustomsduties;indirecttaxation,however,tendsto compoundincomeinequalities:ithasaregressive,ratherthanprogressive,effect,especiallyifbasic goodsarenotexempted,becausepoorerfamiliesspendahigherproportionoftheirhouseholdin comeonconsumptionandareabletosaveless.Amoreeffective,longtermsolution,tobothfiscal modernisationandtosocialjustice,istheestablishmentofanefficientandfairsystemofprogressive directtaxation,inwhichtherateoftaxationrisesinproportiontothelevelofincome.Inthisareaof directtaxation,theEUanditsmemberstateshavearguablybeenverypoorexamplesofbothprinci ple and practice. Firstly, the progressive features of EU member states tax systems have been erodedbybothaneoliberalconsensusconcerningtheneedforreducingtopmarginal ratesofin cometaxandcorporationtaxandanincreasinglydangerouscompetitionbetweenEUstatesforin wardinvestment,usingtaxreductionsasinducements.Thistaxcompetitionacceleratedinthewake of enlargement, during which the Commission failed to set minimum standards for either rates of incomeandcorporationtaxorfixtherulesfordefiningthetaxbasenationallyandcrossnationally; thetolerationofflattaxregimesinsevenoutoftenCentralandEasternEuropeancountriesandof significantlylowertaxratiosinthetransitionstateshasweakenedthesecountriesabilitytopromote economic modernisation according to national priorities and, above all, to fund effective national crisismanagementprogrammes.AllEUstates,butparticularlytheNewmemberstates,haveincon sequencebecomeincreasinglyreliantonregressiveindirecttaxationtofinancetheiroperations;this inturnhasreducedthescopeforcounteractingthegrowinginequalityofmarketincomesthrough state redistribution, with the result that the distribution of real net disposable income has grown significantlylessequitableinmostEUstates. EUpracticethereforepresentsaveryflawedmodelforlessdevelopedstatestoemulate.Thefailure, aboveall,toachieveacommonandequitableapproachtothetaxationofbusinessincomehasal lowedinternationalcorporationstocontinueabusingindividualfiscalstates,endangeringthereve

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European Commission, Tax and Development: Cooperating with Developing Countries on Promoting GoodGovernanceinTaxMatters,COM(2010)163final,2010. 40

EuroMemorandum2012
nuestreamsofdevelopingstatesinparticular.Thelackoftransparencyintheaccountingpracticesof multinationalcompanies(MNCs),inparticularthewidespreadmisuseoftransferpricing,hasdenied vitalrevenueforthoseLDCswithweakertaxationauthoritiesandlowergenerallevelsofcompliance. Similarly,theuseofsecrecyjurisdictions(taxhavens)bybothMNCsandsomeLDCelitestoavoid taxobligationshasbeenidentifiedasafundamentalthreattothedevelopmentpotentialofpoorer states. Global Financial Integrity states in its updated report, Illicit financial flows from developing countries,that,accordingtoitsestimates,theseflowshaveincreasedtoarangeofUS$1.26trillion to US$1.44 trillion in 2008 and that, on average developing countries lost between US$725 billion andUS$810billionperyearoverthenineyearperiod20002008.40ChristianAid,inits2008report DeathandTaxes,estimatedtheannuallosstodevelopingcountrytreasuriesthroughtransfermis pricingat$160billion,41whichisconsiderablymorethanthe$122billionreceivedbyLDCsindevel opment aid in 2008.42 The continued toleration by the EU of tax avoidance and the channelling of between60and70percentofallglobaltradeandinvestmentflowsthroughtaxhavensremainsthe greatestobstacletoestablishingfiscalhealthinLDCs.Thereisanurgentneedtosupporttheefforts of the Tax Justice Network and other organisations to introduce countrybycountry reporting of corporateturnoverandprofitsasapreconditionforthepromotionofeffectiveandfairtaxsystems inLDCsandtherestoftheworld.

3.5

SustainabledevelopmentandtheCommonAgriculturalPolicy

InplaceoftheneomercantilistobsessionwithcompetitivenessthatdominatespresentEU policy,thereisaneedforformsofregulationwhichensurethateconomic,social,ecological andpoliticalgoalsareimposedonthespontaneous,unregulatedworkingofthemarket.This mightnotbeanimmediate,concretepossibilitygiventhepoliticalandinstitutionalsituation intheEU,butitisimportantthatthepoliciesthatareadoptedarenotunilateralistandiso latedbutratherpartofacomprehensiveresponse.Itisalsoimportantthattheshortterm responsestotheimmediatecrisisdonotunderminethelongertermchallengeofachieving sustainablesolutions. For Europe, such a perspective would not imply an inwardlooking stance. Rather it would lead to a positive delinking from automatic globalisation, making Europe (and specifically theEU)onepartneramongmanyotherswhoarepresentlylinkedtoglobalizedcircuitsina moreorlessdependentway.TheEUmayfindaconstructiveroleinsuchaprocessofchange byparticipatinginthecreationofamorepluraleconomicworld,inwhichEuropeceasesto exploithistoricaladvantagesandassistsothercountriestoachieveademocraticcontrolof theireconomicdevelopmentintheirownspecificways. As an active participant in the multilateral search for models of decentralized sustainable development,EuropecouldovercomeitsEurocentricheritageandplayasignificantrolein amultipolarworld.IftheEU,andespeciallythecountriesoftheeurozone,couldfindap propriate ways of addressing the multidimensional crisis of sustainability, itcould provide importantsupportforcountriesandregionalgroupsofcountriesintheGlobalSouth.

40

DevKar&KarlyCurcio,IllicitFinancialFlowsfromDevelopingCountries:20002009,Washington, 2011,p.vii,:www.gfip.org/storage/gfip/documents/reports/IFF2010/gfi_iff_update_reportweb.pdf ChristianAid,DeathandTaxes.TheTrueTollofTaxDodging,London,2008,p.49. JensMartens&WolfgangObenland,UmSteuern.FolgenvonKapitalfluchtundSteuerhinterziehungfr dieLnderdesSdensundwasdagegenzutunist,Misereor,GlobalPolicyForumEurope,Terredes Hommes,Aachen/Bonn/Osnabrck,2011,p.31. 41

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EuroMemorandum2012 TheEUcouldmakeanimportantcontributiontoadvancingstrategiesofsustainabledevel opment on a worldwide scale if it were able to coordinate its member states initiatives beforetheRioIIsummitinspring2012.However,giventhepresentsetofprioritiesandin stitutionalstructurethisisunlikelytooccur.TheEUcoulddevelopcredibledemandsforRio II by proposing transnational green job programs, linking ecology and social concerns for example,intheecologicallycentralfieldofenergysaving.Itcouldalsostrengthenbothits internaleffectivenessanditsexternalcredibilitybyreshapingEuropeanstructuralpolicies notonlyinthefieldofagriculturesothattheywillservetopromoteatransitiontowards formsofsustainabledevelopment. TheCAPcouldserveasacrucialfieldforsuchatransformationoftheEUbyachievingasus tainable compromise between the political requirements of feeding Europeans with high quality foodstuffs at moderate prices; of maintaining a stratum of active farmers who are abletosustainthedelicateecologicalbalanceinmanyEuropeanlandscapes;andofpurchas ingagriculturalproductsfromtheGlobalSouthatpricesthatarefairandwhichenablethe countriesoftheSouthtodevelopsustainablepatternsofproduction. The CAP should be transformed into a European instrument for assuring the food sover eignty of the EUs member states, while at the same time supporting relations of fair ex changeforagrarianresourcesandproductswiththerestoftheworld.Transformedinthis way,itcouldalsoprovideamodelfortheareasofrawmaterialsandofsustainablerenew ableenergysources.TheCAPshouldatthesametimedevelopnewmodelsforvaluingand compensatingtheenvironmentalandclimateservicesofagrarianproduction;itcouldcon tribute decisively to the maintenance and development of traditional cultured landscapes andnaturalreservesasthetwomostprominentcornerstonesofculturalandnaturaldiver sity.BydefiningabindingframeworkforagrarianproductionunitstheCAPwoulddefinethe cornerstonesoflongtermruraldevelopment.InordertoimprovetheEUsabilitytoachieve this,theCAPshouldbestructuredasonecoherentpillar,withalltherelevantexpenditure brought together in the EU budget, and with the competence to make decisions brought togetherinoneinstitution.
ContactinformationoftheSteeringCommitteeoftheEuroMemoGroup: Wlodzimierz Dymarski, Poznan (wlodzimierz.dymarski@ue.poznan.pl) Miren Etxezarreta, Barcelona (miren.etxezarreta@uab.es); Trevor Evans, Berlin (evans@hwrberlin.de); Marica Frangakis, Athens (frangaki@otenet.gr);JohnGrahl,London(j.grahl@mdx.ac.uk);JacquesMazier,Paris(mazier@univ paris13.fr);MahmoodMesskoub,DeHague(messkoub@iss.nl);WernerRaza,Vienna(w.raza@oefse. at); Catherine Sifakis, Grenoble (catherine.sifakis@upmfgrenoble.fr); Diana Wehlau, Bremen (eu romemo@unibremen.de);FriederOttoWolf,Berlin(fow@snafu.de).

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EuroMemorandum2012

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EuroMemorandum2012
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