A True Social Union – Necessary Yet Unrealistic?

cedric kochThere is no alternative. The mantra of chancellor Merkel’s government with regards to its Euro crisis policies appears to be true at least in one sense: It is difficult to imagine how the current, stubbornly one-sided austerity-plus-structural-reform course of EU policy is to be turned around in the short to medium term, given the German chancellor’s dominance and excellent domestic standing throughout the crisis. For proponents of a less supply sided and more socially balanced path in facing the crisis, this is a sobering situation. Indeed, if one would take 60 percent of youth unemployment (as in Greece at date) similarly into account as public deficits beyond the magic yet arbitrary threshold of 3 percent of GDP, a more social approach – a “Social Union” – appears to be unavoidable yet unrealistic in the current climate. It is not surprising in this context that recent publications by Wolfgang Streeck or Heiner Flassbeck despair in the face of this prospect and instead call for a re-nationalisation of Eurozone currencies.

Merkel has succeeded since 2010 in entrenching a reading of the crisis in Germany which has propelled her popularity to swindling heights, offering her Christian Democratic Party (CDU) the best of perspectives for this September’s general elections. With no competitors internal to her party in sight, and with her main Social Democratic opposition rival Peer Steinbrück deeply unpopular at date, the way appears to be paved for a continuation of the current course. Add to that the astonishingly narrow concentration of crisis politics to a series of executives’ meetings and the vast influence of classical, “realist” power politics in Council meetings, and it truly requires a degree of imagination to see the German-induced course change in the foreseeable future.

The dilemma is shocking: There seems to be no practicable political “way out”, yet the failures and misguidances of austerity become more apparent every day. Most economists by now agree that the reasons of the crisis are rooted in the EMU’s institutional setting, in unified monetary policy without corresponding cohesion of social, labour and – partly in breach of existing contracts – budgetary policy. Nonetheless, German government, supported by an ever-more politically active Bundesbank, advocated and enforced a policy of stark spending cuts and “structural reform” – meaning in most cases pension cuts and labour market liberalisation. These choices have strongly aggravated the crisis of the real economy in countries such as Spain and Portugal and structural reform has failed, far into its third year of existence, to deliver any sort of visible benefit. Even more so, deficits and debt levels have not been decreased, but have risen as a consequence of the catastrophic meltdown of public income resulting from the real economy crises in the “periphery”.

Equally shocking is how deeply unbalanced the crisis approach in the Eurozone is: “Crisis countries” are to enforce brutal wage cuts in order to make up for lost ground of intra-Eurozone competitiveness vis-a-vis states such as Germany, while no mention is made of the need of higher wages in Germany to accommodate this adjustment. Indeed, the German government praises itself for responsible financial behaviour and a nearly balanced budget, not willing to acknowledge the strong advantages it enjoys through its “safe-haven” status in bond markets and correspondingly low-interest payments as well as huge amounts of capital inflow from unstable “periphery countries” benefiting German economic activity and thus tax collection. Notwithstanding, crisis countries are to bear the burden and bear it alone while German conservative politicians like to complain about the terrible load of public guarantees and credit lines offered to debtor countries in the form of e.g. the ESM.

As a potential silver lining, a Social Union in the Eurozone or even the EU as a whole appears to be a promising avenue. Some of its central components – easily realisable without treaty change by the way – should be:

  • Changing course from front-loaded austerity by taking (youth) unemployment much more strongly into consideration as an anchor for policy, for instance by including such indexes in existing legislation such as the fiscal compact
  • Enriching and completing the newly created European Semester and its coordination and recommendation instruments by creating an equal status of the EPSCO Council of social ministers next to the currently unrivalled ECOFIN constellation of finance ministers
  • Turning away from debt clauses in national constitutions forbidding arbitrary deficit levels and replacing them with legislation requiring surplus budgets in economically good times, thus creating room for fiscal manoeuvre in a downturn

While the perspectives for such change have been assessed rather pessimistically at the start of this article, a turnaround might actually develop right now: The founding of a new party in Germany alluring to traditional CDU-voters and the continued weakness of Merkel’s coalition partner, the Free Democratic Party means that perspectives for post-September might just be on the brink of changing. Though there still is a lot of time until the election, for the first time now it appears to be possible that there might indeed be an alternative to Merkel steering the Eurozone down the wrong course. A potential Left-of-center coalition in Germany could use the dominance of Germany in the inter-state bodies of the Council and the Euro Group and re-establish a true Franco-German cooperation with President Hollande’s Socialists to finally and fundamentally change course towards a Social Union – and thereby possibly save the Monetary Union as a whole.

For this shift however, a strong policy program, notably of the German Social Democratic Party (SPD), is indispensable. Also, such a program would have to be self-critical and break with the course too often tolerated or supported by the party itself in the last years. Let’s hope that the SPD is willing to be that desperately needed alternative. If so, September will be dearly awaited.

This article is part of the EU Social Dimension expert sourcing project jointly organised by SEJ, the ETUCIG Metall, the Hans Böckler Stiftung, the Friedrich-Ebert-Stiftung and Lasaire.