Social Europe http://www.socialeurope.eu politics, economics and employment & labour Fri, 30 Jan 2015 11:00:17 +0000 hourly 1 http://wordpress.org/?v=4.1 "Why Podemos Poses A Major Threat To The Spanish Political Establishment" by Vicente Navarro http://www.socialeurope.eu/2015/01/podemos/ http://www.socialeurope.eu/2015/01/podemos/#respond Fri, 30 Jan 2015 11:00:17 +0000 Vicente Navarro http://www.socialeurope.eu/?p=37073 Vicente Navarro, Podemos

Vicente Navarro

Following Syriza’s victory in the Greek elections on 25 January, a number of commentators have turned their attention toward Spain, where the left-wing Podemos, which originally emerged from the Indignados protest movement, has been receiving strong polling numbers since the end of 2014. Vicente Navarro writes on the growth of Podemos and his role in shaping the party’s economic programme. He argues that the anti-austerity and pro-democracy narrative put forward by Podemos has deeply resonated with the Spanish electorate, and that the party now poses a major threat to the Spanish political establishment.

Something is happening in Spain. A party that was only founded a year ago, Podemos, with a clear left-wing programme, could well gain a majority in the Spanish Parliament if an election were held today. Following the victory of Syriza in the Greek elections on 25 January, speculation has been raised as to whether Podemos could achieve a similar feat in Spain’s parliamentary elections later this year, but what is driving the party’s success?

Support for Podemos is intricately linked to the policies pursued by the conservative People’s Party government, led by Mariano Rajoy. These policies have included the largest cuts in public social expenditures (dismantling the underfunded Spanish welfare state) since democracy was established in Spain in 1978, and the toughest labour reforms pursued in the same period, which have substantially deteriorated labour market conditions. Salaries have declined by 10 per cent since the Great Recession started in 2007, and unemployment has hit an all-time record of 26 per cent (52 per cent among the youth). The percentage of temporary, precarious work has increased, becoming the majority of new contracts in the labour market (more than 52 per cent of all contracts), and 66 per cent of unemployed people do not have any form of unemployment insurance or public assistance.

These measures have created an enormous problem in terms of a lack of domestic demand, a major cause of the long-term recession. It has only been recently that very limited growth has appeared, due primarily to the decline in the price of oil, a devaluation of the euro, and the commitment by the European Central Bank (ECB) to buy public bonds. The Spanish government did not have anything to do with any of these events, although it claims now that the short recovery is a result of its policies.

These policies were promoted by the European Union through the European Council, European Commission, and ECB, and by the International Monetary Fund. They were carried out in Spain with the support and encouragement of financial capital, major business enterprises, and their political instrument, the People’s Party. The Spanish right has arguably got what it had always wanted: the reduction of salaries and the weakening of social protection with a dismantling of the welfare state. These policies are what the participants at the latest G-20 meeting in Australia presented as a strategy for all countries to follow, championing Spain as a model country.

Why Have The Cuts Happened?

The reduction of salaries and of the number of people receiving salaries, as well as the reduction of public expenditures, has resulted in an enormous decline in domestic demand and, as a result, of economic growth. The waning of salaries meant increased indebtedness of families and of small and medium enterprises. Debt increased enormously. This meant that banking also increased enormously (Spain has one of the largest banking sectors in Europe, proportionally three times as large as in the United States). But the low profitability of the productive economy meant a large increase of banking investments in speculation, causing huge bubbles, the most important of which was the housing bubble.

When the bubble was still occurring, there was a feeling of euphoria among the political establishment. Even the governing socialist leader, José Luis R. Zapatero, felt that, in a time of such exuberant growth, taxes should be reduced – his slogan at the time was that ‘reducing taxes should be an objective of the left’. He reduced taxes enormously, primarily on capital and high incomes. He announced his slogan in 2005 and passed the Tax Reform Act including the tax cuts in 2006. And in 2007, when the bubble exploded, a huge hole appeared in state revenues: 27 billion euros. According to economists at the statistical office of the Ministry of Finance, 70 per cent of this hole was due to the tax cuts and only 30 per cent to the decline of economic activity at the beginning of the Great Recession.

This is how the cuts started, under the false argument that the country needed to face austerity measures because it was spending too much. In reality, when the crisis started, the Spanish state had a surplus. Spain’s public expenditure is in fact far too low: much lower than its economic level of development would call for. The cuts demonstrate the political nature of these interventions.

Zapatero froze public pensions to save 1.5 billion euros, when he could have obtained 2.5 billion by recovering the property taxes that he had abolished, reversing the lowering of inheritance taxes (2.3 billion), or reversing the reduced taxes of individuals making 120,000 euros a year (2.2 billion). These cuts were expanded later by Rajoy, who cut 6 billion from the National Health Service, stressing, as Zapatero said before, that “there were no alternatives” – the most frequently used sentence in the official narrative.

There were alternatives, however. He could have reversed the lowering of taxes on capital to large corporations that he had approved, obtaining 5.5 billion. Indeed, I wrote, along with Juan Torres and Alberto Garzón, a book on this subject entitled ‘There are Alternatives’ (Hay Alternativas: Propuestas para Crear Empleo y Bienestar Social en España). The book showed, with clear and convincing numbers, that there were in fact other options to the policies pursued. It became a bestseller in Spain and was widely used by the Indignados movement.

The Indignados Movement

The cuts to public social spending and the three labour market reforms carried out first by the socialist (PSOE) government, and later by the conservative (PP) government, angered many citizens, since not one of these measures had a genuine popular mandate. None of those policies had been mentioned in the electoral programme of the governing parties. In response, the Indignados movement appeared and quickly spread all over the country. Its slogans, such as “They, the political class, do not represent us” became widely popular. Consequently, state institutions started losing legitimacy, while the state responded by trying to repress the movement. That did not stop the Indignados, however: many of their leaders were young and therefore highly affected by the crisis.

The Indignados movement demanded a second transition, calling for an end to the 1978 regime (the political system established in 1978 when the dictatorship ended) and for the establishment of a new democratic order, explaining the need to substitute existing representative institutions with new ones, complemented by other forms of democratic participation such as referendums and/or popular assemblies. The goal was to establish an authentic democratic system with forms of direct citizen participation such as referendums, plus indirect forms of participation such as representative democracy, ensuring political parties would be much more democratic than they are today.

The movement had an enormous impact, with its starting point being a protest against the slogan “There are no alternatives”. In fact, the leadership of the Indignados showed our book, Hay Alternativas, in front of police who were trying to control a demonstration. The photograph of thousands of people displaying the book was widely distributed within the movement and published in the press. Their major aim was essentially to highlight that there were indeed alternatives, and to question the legitimacy of the state, which was imposing policies that did not have a popular mandate.

The New Political Party: Podemos

The Indignados became aware that alongside protests they also had to intervene in the political arena, and this is essentially how Podemos began. The leaders of Podemos were drawn from individuals who had played a leading role in the movement. Some are junior faculty members in the Department of Political and Social Sciences in the largest public university in Spain, Complutense. Many have been active in the youth movements of the Spanish Communist Party.

Regardless of where they come from, they all felt that the root of the problem was the control of the state by a class of politicians, based primarily in the major parties – the liberal-conservative party (PP) and the socialist (PSOE) – who were closely related and tied to the major financial and banking corporations that have corrupted state institutions. They called for the establishment of a democratic state and a democratic Europe, “a Europe of the people, not the Europe of the bankers”.

They stood in the elections to the European Parliament in 2014 and received a much larger vote than they had expected. More importantly, the polls showed substantial growth in their support, to the point that at the end of 2014 it became clear they might even be capable of becoming Spain’s governing party – a situation they had never thought possible in such a short space of time. The party’s message, “Vote against the caste: Throw all of them out,” has deeply resonated with the electorate. It is clear that the majority of people are fed up with the political and media establishments and have turned to Podemos for an alternative.

Podemos is shaking up Spanish politics. Podemos

Podemos is shaking up Spanish politics. (photo: CC BY 2.0 Thierry Ehrmann)

Nevertheless, at this stage the party still lacked a clearly defined structure. This created an urgent need to develop a party organisation, based on an assembly model within a frame developed by the leadership. To prepare its programme, they have asked myself and Juan Torres (co-author of Hay Alternativas) to formulate an outline of the economic programme that the Podemos government should implement if it is elected. This outline would be the basis for a full discussion within the Party. The title ‘The Need to Democratise the Economy in Order to End the Crisis and Improve Justice, Well-Being and Quality of Life: A Proposal to Initiate a Debate to Resolve the Problems of the Spanish Economy’, describes the intention of the document. It was widely distributed by Podemos, under the new title Un Proyecto Económico para la Gente (An Economic Project for the People) and has so far had an enormous impact.

The presentation of the proposal by the spokesperson of Podemos, Pablo Iglesias, together with ourselves as authors, became a major event in Spain. The hostility of the mainstream and economic media, as well as the intellectuals and spokespersons of the major governing parties (PP and PSOE) has led to some notable attacks against the document – and indeed its authors. In Europe, the President of the Bundesbank indicated that the proposals put forward in the document would be harmful to the Spanish and European economies. Alongside these unprecedentedly negative responses, however, it has also created considerable positive responses at the street level in Spain and has contributed substantially to altering the character of the economic debate by challenging the prevailing ideology.

Our document was not a budget for the future Podemos government, but rather the strategic lines to be followed. The analysis of the causes of the crisis focused on the enormous growth of inequality responsible for the financial, economic, and political crisis. It puts at the centre of the analysis the conflict of capital (under the hegemony of financial capital) against labour. This has led to an enormous decline of domestic demand caused by the decline of wages, increases in unemployment, and cuts of social public expenditures. The proposals, therefore, aimed at reversing this growth of inequality by increasing domestic demand (via salaries and employment growth) and by expanding public expenditures and investments (in particular, the social infrastructure).

It also underlined the need to expand public banking, as a way of providing credit to families and to small and medium-sized enterprises. It proposed reducing the working week to 35 hours and reducing the age of retirement from 67 to 65, reversing policies approved by the PP and the PSOE. The impact of the programme would strengthen labour at the cost of capital. Furthermore, it showed the clear need to correct gender inequalities as a way of increasing employment. It also suggested how all the proposals could be funded, asking for substantial changes in the fiscal policies of the country and the reduction of tax fraud.

What Explains The Success Of Podemos?

It is easy to answer this question. There is enormous anger toward what Podemos calls “la casta,” the cast. That includes the governing elites in the political establishment who have developed close complicities with the major financial and non-financial corporations that dominate the political and media institutions of the country. The call for “throwing all of them out” awakens general support among the majority of the Spanish people.

In addition, Podemos uses a language that people relate to, redefining class struggle as the conflict between those at the top and everyone else – a narrative that mobilises a diverse support base. Moreover, Podemos makes the call for democracy central to its strategy, redefining democracy to include different forms of participation, such as referendums (defined as the right to decide, el derecho a decidir) together with indirect or representative forms of democracy. It is because of this commitment to democracy that it has accepted the right of self-determination for the different nations that exist in Spain, breaking with the vision of Spain as a uni-national state.

This understanding of Spain as a ‘plurinational’ state has been a historic demand of all left-wing parties (including the PSOE), but it was abandoned during the transition to democracy by the socialist party because of the King (appointed by Franco) and the Army. The enormous popular demand by the Catalan population for the right of self-determination (not to be confused with the call for independence: 82 per cent of Catalans support the first, 33 per cent support the second) has created enormous tension within the central government and today is highly unpopular.

The success of Podemos has become a major threat to the Spanish (and European) establishment. Today, the Spanish financial, economic, political, and media establishments are on the defensive and in panic, having passed laws that strengthen the repression. The heads of the major banks in Spain are particularly uneasy. The chairman of the Spanish banking group Santander, who died in September last year, indicated shortly before he died that he was extremely worried, noting that Podemos and Catalonia posed notable threats to Spain. He, of course, meant his Spain. And he was right. The future is quite open. As Gramsci once indicated, it is the end of a period without a clear view of what the next one will be. Europe, Spain, and Catalonia are ending an era. This is clear. What remains unclear is what will come next.

This column was first published by EUROPP@LSE

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"We Need An Industrial And Innovation Policy For Europe" by Paolo Pini and Davide Antonioli http://www.socialeurope.eu/2015/01/innovation-policy/ http://www.socialeurope.eu/2015/01/innovation-policy/#respond Fri, 30 Jan 2015 09:00:45 +0000 Paolo Pini and Davide Antonioli http://www.socialeurope.eu/?p=36825 Paolo Pini, Innovation Policy

Paolo Pini

The prolonged economic crisis since 2008 has drastically reduced incomes and employment levels and the promised recovery will not reabsorb unemployment, particularly in Europe. Nevertheless, economic policy in Europe is sticking to past recipes based on two mainstays: fiscal austerity and labour flexibility. This strategy does increase the short-run cost competitiveness of European firms overseas but this comes at the cost of decreasing the size of European internal markets reliant on domestic demand.

Europe needs clearly structural reforms, but of a kind very different from those asked by the European Commission during this crisis.

Davide Antonioli, Innovation Policy

Davide Antonioli

We here report on two closely connected and integrated lines of policy intervention related to the labour and the industrial system in Europe and its periphery countries. The two layers of intervention relate to industrial/innovation policy and labour policies mainly linked to wage setting.

Industrial And Innovation Policy

First of all, Europe needs a public industrial policy for strategic sectors, both traditional and mature, new and innovative. This policy must be complementary to government macro policies aimed at sustaining aggregate internal demand that private firms view as seriously deficient. Such demand can be increased only by stepping up public expenditure on investments – a strategy that requires major changes in the Eurozone’s Fiscal Compact.

Establishing an effective industrial policy means:

  • choosing how and where to place national manufacturing in the global market in terms of technology, production and demand, and
  • backing structural changes in the economic system, not only quantitative growth in demand but changes in its composition and direction.

Stronger investment depends on the removal of budgetary constraints imposed on Eurozone countries so action has to take place at a pan-European level if industrial policy is to be more than just a rhetorical flourish.

Europe should also be the arena for an effective industrial renaissance. Product innovation has a large, positive direct effect on employment; the same does not hold for process and organizational innovations. But the latter innovations usually have a positive impact on a firm’s economic performance and hence on product innovation as well.

Choosing which key sectors and research areas public actors should invest in is closely linked to policies that aim to spur innovation in the private sector.

Secondly, it is time to establish a government policy that fosters not only traditional technological innovation but induces the adoption of best work organization practices. These should be focussed on labour organisation changes with worker participation in decision-making at shop floor level.

To this end various tools should be designed:

  • innovation policy requires an active role for public actors to direct and guide government investment at the European level.
  • particular attention here should be paid to the employment intensity of investments.
  • specific policies could help innovate by increasing employee participation in firms’ decision-making, improving their responsibilities and autonomy, reducing hierarchical levels and increasing problem solving behaviour.

Innovation policies must not only spur R&D or technological development but also prompt firms to introduce organizational innovations adopted in bundles aimed at increasing productivity – particularly in periphery countries.

Wage Policy

The role of wage determination is crucial within this integrated industrial and innovation policy. The rationale behind wage-setting should point to a new dynamic favouring growth, combining employees involvement and innovation.

Here we recognize the importance of renewing the role of national bargaining in the two-tier system:

  • At national level, wage increases should be negotiated in the first place in order to preserve purchasing power.
  • At this national contractual level, higher wages should not simply be treated as a residual leftover for firms to decide.

The social parties and government should adopt measures designed to reach a targeted growth in productivity by acting on technological and organizational innovation, investment in physical and intangible capital, using public resources to spur R&D, encouraging public and private investment to improve human capital, reducing working time.

  • Bargaining at the second, decentralised level should employ specific measures to attain productivity and wage increases.
  • At this level, the adoption of a pay-for-participation model would imply that wage increases are linked to organizational changes and to a commitment to technological innovation, product and process innovation, ICT development, improving human capital empowering and environmental innovations. This new pay-for-participation model would help encourage employees to embrace new ways of organizing work and generate incentives to innovate in several spheres.

This policy would, what’s more, reduce the aberrant separation between productivity and real wages that several European economies have experienced in the last decade – contributing to reducing labour income’s share of the economy and depressing aggregate demand via compressed consumption. The proper route would be that of a “golden rule for wages” in which real wages increase at the same pace as productivity. Eurozone labour policy should monitor wage movements in individual countries in accordance with their internal and external imbalances.

Those countries showing a large trade surplus and fast productivity growth should increase real wages at a faster pace than productivity. The combined effect of extra domestic consumption and increased unit labour costs would help to reduce the trade surplus. Countries with slow productivity growth and a trade deficit should use the real wage dynamic as an instrument to increase productivity and recover competitiveness. The latter must be achieved through innovation and not via wage deflation, with real wage rises tied to productivity goals set nationally by the social parties and government.

Conclusion

Current policies in Europe and particularly in periphery countries – pursuing fiscal consolidation at all costs – have effects at odds with the desired ones. We see cuts in employment rather than job-creation; firms take advantage of bargaining against an even weaker counterpart (the unions): higher flexibility and a squeeze on wages are the result, with a further depressive effect on consumption and thence on aggregated demand. Nationally, we are forced to act within binding rules agreed at EU level.

It is at this European level that we need the biggest change. The Fiscal Compact urgently requires major revisions. And coordinated labour policies among Eurozone countries should follow the “golden rule for wages” of fostering wage-led growth rather than one that is export-led – and based on labour market flexibility and consequent wage deflation.

Click here for a more complete discussion of these policy actions

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"Why Juncker’s Investment Plan Is A Good Try But Not Enough" by Martin Myant http://www.socialeurope.eu/2015/01/junckers-investment-plan-good-try-not-enough/ http://www.socialeurope.eu/2015/01/junckers-investment-plan-good-try-not-enough/#respond Thu, 29 Jan 2015 11:00:01 +0000 Martin Myant http://www.socialeurope.eu/?p=36989 Martin Myant, Investment Plan

Martin Myant

Jean-Claude Juncker received approval for his long-awaited investment plan at the European Council meeting on 18 December 2014, giving more details and clarifying some of the open questions on 13 January 2015. Forecasting at least €315bn additional investment over the three years 2015-2017, it was billed as the central plank in his determined effort to spend five years saving Europe, alongside member states’ ‘commitment to intensifying structural reforms and to pursuing growth-friendly fiscal consolidation’.

The commitment to investment represents a noble effort to start reviving the European economy with the very limited resources allowed by current political constraints. It will lead to some more investment, but it suffers from serious shortcomings, meaning that the investment will be limited in volume and biased towards the countries that need EU help the least.

A proposal for a credible European investment plan needs to answer a number of questions. It needs to explain why investment is necessary and where it should be directed, why it has not been happening already, how it will be financed, what governance structures will be created, what other measures might be needed to make it effective and why such a programme should be directed from the European level.

The first of these receives the most convincing answer. A so-called Special Task Force, with representatives of member states, the Commission and the European Investment Bank (EIB), argued in its final report in December 2014 that investment had fallen 15% below its pre-crisis peak with far greater declines in some countries. Juncker’s plan would cover about one fifth of that gap over its three years.

In general, investment would provide a short-term stimulus. It is also needed to overcome the wide divergences in economic and social levels across EU member states and to help meet the long-term need in all countries for infrastructure, facilities for education, training and research, innovation and new technologies, energy transformation, urban renewal and social services. These are largely typical public sector activities and the public sector should be expected to be involved in, if not lead, much of the investment. Member state governments were immediately able to identify 2000 projects awaiting implementation with a cost of €1300bn, of which € 500bn would come in the next three years.

To explain why this investment has not been forthcoming, the Task Force pointed to ‘a wide array of barriers and bottlenecks’, justifying a similarly wide array of policies, including reducing regulation, completing the single market and continuing with ‘structural reform’. This latter term has frequently been used to mean policies to reduce employment protection, the scope of collective bargaining and ultimately wages, but there is no basis in the Task Force’s analysis for expecting such measures to contribute to higher investment. Rather, the key constraints on private investment are recognised at various points in the Task Force report as ‘low demand growth’ . This is not a matter of a lack of confidence in general, but a lack of confidence reflecting an accurate perception of reality. Demand is low and there is therefore every reason to hold back on investment, as also confirmed by the European Commission`s Business Surveys. Where bank lending is constrained, the key factor is usually also low demand and poor business prospects leading to doubts over the safety of lending.

The barriers to public sector investment are detailed within the Task Force report on projects that are ready to be started. Of 46 they selected as illustrative from the full list of 2000, finance appears explicitly as the key barrier in all but three. For some, the barrier was a lack of long-term finance, for some it was the effects of Eurozone budget rules and the cuts that have been imposed while for others it was the unattractiveness of the projects to private lenders. Regulatory issues appear even in a secondary role very rarely.

Financing is to depend on a fund, the European Fund for Strategic Investment (EFSI) with a starting value of €21bn; of this €5bn will come from the EIB and the remainder will be a guarantee from the European Commission. This will then be used to guarantee, in turn, credits from private sector long-term investors to favoured projects reaching the value of € 315bn, fifteen times the original commitment. It is hoped that the initial sum will be increased by contributions from member state governments.

Jean-Claude Juncker's investment plan is not enough according to Martin Myant (photo © European Union 2015)

Jean-Claude Juncker’s investment plan is not enough according to Martin Myant (photo © European Union 2015)

This part of the plan suffers from the following weaknesses:

- the high leverage rate is derived from estimates of what has been achieved in the past from the most secure long-term investments. It does not reflect the position in countries in the greatest difficulty. The total investment will therefore either be strongly focused on countries in the least difficulty or fall well below the target level.

- member states are expected to commit extra resources to the EFSI out of a general desire to help EU economic recovery without any promise of return or any direct ability to influence investment decisions. A small number of governments (Spain, Finland, Slovakia) came forward quickly to say that they would be willing to contribute, but action is yet to be seen. The initial funding of €21bn is therefore unlikely to increase much, if at all.

- repayment for public sector projects will be especially difficult for countries constrained by Eurozone debt rules. The solution proposed is ‘an increased adoption of the user-pays principle’. The implication is that investment will be biased towards projects offering quick financial returns and towards countries facing the least budget difficulties, with very little on offer to public sector projects elsewhere.

The proposed governance structures threaten to exacerbate the weaknesses of the proposed financing mechanism. Decisions are to be taken by an Investment Committee of the EFSI made up of ‘independent market experts’. The EFSI will create a ‘pipeline’ of investment projects judged adequate to guarantee, with selection based on certainty of returns and without reference to any geographical or sectoral priorities.

Private sector investment funds have particularly welcomed the fact that they expect to be able to choose the projects they lend to, meaning that they can avoid countries they consider, or they fear their depositors may consider, risky. The bias is therefore likely to be towards those countries with the largest supplies of long-term lending resources, meaning the most wealthy – and those with the most extensive finance sectors.

The emphasis in accompanying measures is on ‘structural reforms’ and maintaining existing rules on budget deficits and public debt levels. This makes financing public sector projects extremely difficult. It also raises questions over their usefulness: there is, for example, little point in building and equipping new schools and research facilities if there is no funding to run them once completed. In a small concession towards reducing the effects of austerity in the Juncker proposal, member states that contribute to the EFSI will not be penalised for a resulting small and temporary breach of the Stability and Growth Pact.

The continuing emphasis on ‘structural reforms’, when this is partly a euphemism for reducing employment protection and pay levels and for limiting the scope for collective bargaining, should also be judged counter-productive. Cutting wages has contributed in a number of countries to lower demand, without obvious positive effects in raising exports. Cutting wages can also nullify the positive effects of investment in areas which need to attract and retain qualified employees.

A final remarkable feature of the Juncker plan is that there is no obvious argument for such a programme to be run from the European level. There are some cross-border projects, but they are a small part of the total. For the most part, the same effect could be achieved from programmes run separately in individual countries. Countries and businesses will have no new access to finance beyond what could be financed from their own budgets – were there to be a slight relaxation in budgetary rules.

Thus, a reasonable forecast is that the Juncker plan will lead to some increase in investment in EU ‘core’ countries. It is not the magic bullet that will revive the EU economy. To achieve more would require dropping the strict insistence on the core elements of austerity and developing a more substantial and better-funded investment plan. The current proposal ignores the great potential strength of a plan run from the EU level. A EU fund, or institution such as the EIB, if adequately capitalised, could raise substantial finance at very low rates of interest and use it to finance investment across the EU, above all in countries in the greatest difficulty. That would require overcoming the political barriers that restrict the availability of finance for starting such a project. Without that, the EU economy faces the prospect of continued stagnation.

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"Europe’s Jihadi Generation" by Javier Solana http://www.socialeurope.eu/2015/01/europes-jihadi-generation/ http://www.socialeurope.eu/2015/01/europes-jihadi-generation/#respond Thu, 29 Jan 2015 09:00:33 +0000 Javier Solana http://www.socialeurope.eu/?p=37031 Javier Solana, Jihadi Generation

Javier Solana

He came from Algeria seeking a better life, anticipating an escape from poverty, oppression, and hopelessness. In Paris, he found a low-skill job and had children and grandchildren. As French citizens, they had the right to an education and health care. But they grew up in the ghettos that ring France’s major cities, surrounded by families like theirs, literally on the margins of society. Unable to integrate fully, they had few opportunities for economic advancement. Paradise was never gained.

This story has been repeated millions of times in the countries of Western Europe, with immigrants and their families ending up poor and excluded. In the worst-case scenario, they are recruited by extremist groups that seem to offer what they are missing: a sense of belonging, identity, and purpose. After a lifetime of marginalization, participation in a larger cause can seem worth the lies, self-destruction, and even death that inclusion demands.

In the wake of the attack on the French satirical magazine Charlie Hebdo in Paris and the thwarting of another attack in Belgium, Europe needs to take a good look at itself. It must recognize that second- and third-generation immigrants are susceptible to the blandishments of terrorist organizations because European citizenship has not translated into social and economic inclusion. If anything, growing inequality – exacerbated by years of crisis – is making the problem worse.

People need hope. They need to believe in a vision, a project that promises a better future for them and their communities. European countries once offered that sense of hope. But the crisis, and the official response to it, has replaced hope with frustration and disillusionment.

People need hope. They need to believe in a vision, a project that promises a better future for them and their communities.

This has created fertile ground for anti-immigrant populists and Islamist terrorists alike. More than 1,200 French citizens are estimated to have joined the jihadi cause in Syria, along with 600 from the United Kingdom, 550 from Germany, and 400 from Belgium. Other European countries, including Spain, are experiencing a similar phenomenon. And some European citizens, like the Charlie Hebdo assassins, have acted at home.

While intelligence services and police forces must be engaged to prevent attacks, devising an effective strategy to counteract extremist movements requires, first and foremost, understanding what drives them. Western countries must go beyond defending freedom of speech and improving police coordination to develop lasting solutions that address adherents’ economic and social marginalization, while avoiding cultural confrontation and reliance on repression alone.

Youth at the fringes of society need a positive vision for the future and life chances according to Javier Solana. Jihadi Generation

Young people at the margins of society need hope and life chances according to Javier Solana. (photo: CC BY-SA 2.0 Jean-Paul P.G.)

More fundamentally, such solutions require abandoning the false dichotomy of liberty and security. If security concerns trump basic rights and freedoms, fanaticism will have scored a victory; and the same thing will happen if expressions of Islamophobia and xenophobia increase.A week after the Paris attacks, German Chancellor Angela Merkel  expressed by former President Christian Wulff in 2010: standing beside Turkish Prime Minister Ahmet Davutoğlu, Merkel declared that Islam is as much a part of Germany as Judaism and Christianity. This statement represents the right way forward. Muslim immigrants, whether first-, second-, or third-generation, must be able to integrate fully into European society, gaining the same opportunities as Europe’s other residents and citizens.

A week after the Paris attacks, German Chancellor Angela Merkel reiterated the sentiment expressed by former President Christian Wulff in 2010: standing beside Turkish Prime Minister Ahmet Davutoğlu, Merkel declared that Islam is as much a part of Germany as Judaism and Christianity. This statement represents the right way forward. Muslim immigrants, whether first-, second-, or third-generation, must be able to integrate fully into European society, gaining the same opportunities as Europe’s other residents and citizens.

That principle should be applied at the global level as well, through the establishment of an inclusive framework that fosters development – and encourages the rejection of fanaticism – in the Islamic world. The aggressive fundamentalism and infighting that held down Christian societies for centuries has been relegated to the past, and that is where it must remain.

A religion is not only a belief system; it is also an institution, a language, and even a kind of market actor, competing for supporters. Radical terrorist groups attempt to consolidate their distorted version of “true” Islam as the only institution, imposing their language to win the entire Muslim market.

Muslim immigrants, whether first-, second-, or third-generation, must be able to integrate fully into European society, gaining the same opportunities as Europe’s other residents and citizens.

Today, groups like the Islamic State and Nigeria’s Boko Haram have joined Al Qaeda in a struggle to attract Muslims from all over the world, thereby securing their leadership in global jihad. These groups take advantage of unruly environments and weak or collapsing institutions to gain a territorial foothold.

Indeed, it was the failed transitions in Syria, Libya, and Yemen after the Arab Spring revolts that fueled the Islamic State’s emergence. Millions of young people, though disillusioned by decades of social paralysis, unemployment, and brutal dictatorships, had dared to expect better. Though Tunisians have made progress, the other affected populations, like many Muslim immigrants in Europe, have had their hopes shattered.

Jihad, like any other reductionist political program, is capable of seducing a wide variety of people. The attribute they almost always share is a sense of futility or a lack of purpose.

The West must recognize that, as Afghanistan and Iraq have shown, conflict in the Arab world cannot be resolved through foreign military intervention. The only way to restore order and spur progress in the region is by empowering moderate Muslims, so that they can triumph over the forces of radicalism and violence. The West’s role is to identify them and offer them acceptance and support. This lesson should be applied both abroad and at home.

© Project Syndicate

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"The Three Elements Of A New Deal For Greece And The Eurozone" by Henning Meyer http://www.socialeurope.eu/2015/01/new-deal-for-greece/ http://www.socialeurope.eu/2015/01/new-deal-for-greece/#respond Wed, 28 Jan 2015 10:33:22 +0000 Henning Meyer http://www.socialeurope.eu/?p=37009 Henning Meyer, New Deal For Greece

Henning Meyer

Now that the Greek elections are out of the way and the new government under Alexis Tsipras has taken office we are entering a phase in which the existing policy mix will be re-negotiated. This is good news and overdue as the old recipes have clearly not worked. The evidence from Greece and elsewhere is overwhelming so it is important for the creditor countries to accept that the current policy direction is, in fact, misguided.

As James Galbraith wrote yesterday, it is also important that everybody approaches the upcoming negotiations in good faith and realises what responsibility they have not just for their respective countries but for the Eurozone and the European Union as a whole.

That said, I am hopeful that there can be a compromise – a new deal for Greece and the Eurozone. There is certainly scope for one and here are the three elements that I consider necessary:

Dealing With The Debt Burden

Addressing the issue of the existing debt mountain, I think Paul Krugman hit the nail on the head when he made the crucial distinction between stocks and flows. The debt burden the new government has inherited is a stock and whether it is a problem or not really depends on how one deals with it:

the great bulk of the debt is now officially held, the interest rate bears little relationship to market prices, and the interest payments come in part out of funds lent by the creditors. In a sense the debt is an accounting fiction; it’s whatever the governments trying to dictate terms to Greece decide to say it is.

Greece’s primary budget surplus on the other hand is a flow which, together with aid funds, is used to service the debt. If I understand Syriza’s policy correctly their idea is to cut the debt burden (stock) in half in order to free up funds for extra spending and investment (alternative use of flows).

One key principle of negotiation is that you negotiate interests, not positions. The positions in this case are mutually exclusive: Syriza insists on a debt write-down, the creditor countries insist on repayment. As the sustainability of the debt depends on the cirucmstances (see Andrew Watt here), I think there is a solution if you move beyond positions and try to reconcile interests.

The creditor countries’ interest is effectively the same as their position: they don’t want to be seen rolling over and giving in. The interest of the Greek government, however, is to free up funds to kick-start growth again and deal with the humanitarian crisis in the country. The negotiation position of debt write-down is a means to that end.

This end can, however, also be achieved if there is a moratorium on debt service, a further reduction of interest rates and a linking of future debt service to growth rates. This would take the debt stock problem off the table for the foreseeable future without the need for a formal haircut or default. Both sides could claim victory as their interests would be reconciled.

Kickstarting Growth And Domestic Reform In Greece

Once the debt stock problem is under control there needs to be a clear departure from austerity. The Greek surplus should be invested in the country and there should also be a more extensive European investment push by making sure – probably through policy tweaking as Ronald Janssen suggested this morning – that the European level investment programme of the Commission ends up helping the countries most in need. The Troika conditionality needs to change and misguided policies of recent years should be reversed. Once a growth path is firmly re-established, the debt/GDP ratio will be significantly lower when debt service resumes at a later point and the old debt stock ceases to be a major problem.

In return for this change, Syriza needs to make good on its promise to fundamentally reform the flawed domestic structures in Greece itself. There is little doubt that corruption is a major problem and that the tax system and the civil service, amongst other institutions, need serious reform. It would be an important signal of commitment to the rest of Europe if the new government made serious progress in the areas its predecessors did not.They have to deliver in this area.

Linking Up Monetary And Fiscal Policy Across The Eurozone

The third element of a new deal is a task for the Eurozone as a whole. It is obvious that if you want to deal with sluggish growth and large debt burdens a deflationary economic environment is really the last thing you want. The ECB has, in the end, done its bit by starting QE. But as Mario Draghi said, QE alone won’t do the trick. We need a concerted investment push across the Eurozone that takes advantage of the new money created through QE and record low interest rates. If you don’t invest now, when would you ever do?

There are reliable calculations that coordinated investment would have a significant positive multiplier effect and help boost growth. If you want to leave behind the years of stagnation and make sure that high debt levels – by the way not just in Greece! – decline in the medium to long-term, you need to make sure that Eurozone inflation gets back to its 2% target as quickly as possible. If a real deflation takes hold the problems will become much harder to manage as the real debt burden increases.

This investment push should start in Germany with a large public investment programme. There is a significant private and public investment gap that is estimated at around 3% of GDP at a time when yields of German 10-year bonds are below 0.5%. There is a lot of catch-up investment to do and plenty of historically cheap funds around to get this done. It just takes the political will to get going.

A Lot Is At Stake!

We are at the beginning of a journey that will take a lot out of the negotiators and there is a clear danger that we end up in a blame game and thus create a toxic political situation that could easily spiral out of control. But if everybody approaches this process in good faith, acknowledges past mistakes (on both sides) and focuses on a sustainable solution there is a good chance that the Eurozone comes out stronger. If not we are in for a bumpy ride!

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"How To Improve The ECB’s QE Programme" by Ronald Janssen http://www.socialeurope.eu/2015/01/ecbs-qe-programme/ http://www.socialeurope.eu/2015/01/ecbs-qe-programme/#comments Wed, 28 Jan 2015 08:45:00 +0000 Ronald Janssen http://www.socialeurope.eu/?p=37003 Ronald Janssen, QE Programme

Ronald Janssen

With up to €60 bn of debt a month being bought for the next 19 months, the ECB’s programme of quantitative easing (QE) is massive. But its programme suffers from three major shortcomings (see below). These shortcomings imply that the ECB’s QE programme, even if it does represent a major leap, needs serious redesigning. It must ensure that printing additional money is closely linked with a European investment plan.

The ECB has allowed the genie of deflation to escape

The first shortcoming is that the ECB’s decision to engage in a major QE programme comes way too late and after the facts. It is not just that the bank has allowed a continuous slide in both core as well as headline inflation, with the latter even turning negative in December 2014. The problem is also that medium (5-year) and even long-term (10-year) inflationary expectations are falling and are now around respectively 0.5% and 1% only.

By allowing these trends to materialise, the ECB is playing with fire. If employers and workers internalize low inflation and falling inflationary expectations when setting prices and wages, then we have a self-fulfilling prophecy on our hands with disinflation and, ultimately, deflation becoming entrenched. In the recent collective bargaining rounds in the Austrian and German engineering sectors, there have already been indications that this process is under way, with the employers’ side using the argument of low inflation to strike very moderate wage bargains. Note that these are the strong (‘surplus’) countries. If wage bargaining goes that way in these economies, one can imagine the pressure on the bargaining position of workers in countries where prices are already falling and unemployment is sky-high.

“We are all monetarists now.” Really?

In Milton Friedman’s textbook, putting more money into the hands of economic actors prompts households and businesses to spend and invest this money, thus launching inflation or/and aggregate demand. However, instead of simply proclaiming that extra money by definition equals more spending, one should consider the concrete mechanisms through which an increase in money balances would be passed on into an increase in aggregate demand.

Here, we know that the Euro Area is very different from the US (for a more complete description and comparison, see here). In the US, QE works by pushing up the value of stocks and driving down interest rates on corporate debt. The former incites stockholders to consume more (the so -called ‘wealth effect’) whereas the latter makes it cheaper for business to finance new investment.

In the Euro Area however, these mechanisms are absent. There is no ‘wealth effect’ in the sense that households in the Euro Area do not tend to spend substantially more when their wealth increases. And businesses in Europe finance their investment mainly through the banking system and rely significantly less on direct market finance. The ECB, by pumping money into the system, will certainly boost the value of stocks and corporate debt (admittedly a major windfall gain for those that own such assets), but this will have only limited effects on aggregate spending and investment.

Unfortunately, there is more. Six years of crisis have clearly shown the consequences of heterogeneous member states sharing the same currency and an identical monetary policy. The ECB’s QE programme suffers from the same problem. Indeed, when the ECB and national central banks buy up sovereign debt according to the national central banks’ share in the ECB’s capital, €144bn of German bunds or 12.5% of outstanding German sovereign debt will be transferred to the Bundesbank and ECB balance sheets. Corresponding figures for Italy and Spain are much lower, respectively €98bn or 5% of total Italian debt and €70bn or 7.6% of Spanish sovereign debt.

In other words, the ECB’s QE represents substantial support for an economy that is already on a strong footing. One can reasonably expect QE to push interest rates on long-term10 year Bunds from their present level of 0.5% towards zero.

This contrasts with the troubled members of the Euro Area where, after years of recession, economic activity remains depressed, unemployment is at record highs, outright deflation has already set in and the banking system remains constrained because of a sizeable portfolio of non-performing loans (the latter being the result of austerity and economic stagnation!). And, last but not least, total debt loads, both public and private remain huge.

This paradox, whereby the ECB’s QE de facto prioritizes those member states that are in a relatively better shape, is further highlighted by the graph below. It shows that member states already experiencing deflation are at the same time saddled up with high debt loads. Given the fact that deflation increases the real burden of debt, this s is a lethal combination warranting relatively more, not less support….

QE Programme

QE and structural reforms: Pulling at both sides of the rope at the same time

Another shortcoming concerns whether the ECB truly understands the dynamics behind deflation.

It is indeed striking that the ECB keeps on preaching the benefits of structural reforms of labour markets, particularly that of a “radical” loosening of wage formation systems, employment protection legislation and unemployment insurance schemes. These reforms are supposed to “liberate” labour supply and boost productivity, thus getting people to spend more by raising positive expectations about their future higher incomes.

We have been here before. It is the “confidence fairy” reborn… “Confidence effects” were supposed to make fiscal austerity work. Now that this has proven not to be the case, the identical argument is used to continue with structural reforms. As if scrapping workers’ rights to a decent wage and a stable job will somehow make them feel optimistic about the future!

However, if there is one major reason why deflation is amongst us, it is the policy of structural reforms that member states adopt in pursuit of an internal devaluation of wages. Simply put: If you cut wages, prices will follow sooner or later. And if the wage squeeze is kept up long enough, disinflation will eventually end up in outright deflation.

ECB policy is therefore still characterised by a significant internal contradiction. While massively printing money to try and counter the forces of deflation, the ECB is at the same time promoting reforms that will intensify deflationary pressures even more. It is as if the ECB is pulling on both sides of the same rope at the same time. If it is really serious about fighting deflation, then that should be the priority and all policies, steering the economy in the right direction: Away from deflation, away from the ‘black zero’.

Transforming QE into a real “game changer”

These shortcomings are serious but can be met if the design of the ECB’s programme is improved.

One could, for instance, increase the volume of purchases of debt issued by European institutions and the EIB in particular. If this measure is then complemented by a bias in EIB lending towards extra public investment programmes for those countries that need it most, then a direct link between the ECB’s money printing programme and investment and job creation will be established. We can then be sure the newly printed money ends up in the real economy and in those economies that need it most.

If, on top of this, the ECB were to abandon its push for deflationary reforms of wage formation systems, then its quantum leap would stand more chances of being really successful in raising growth and inflationary expectations.

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"The Greek Hope" by James K. Galbraith http://www.socialeurope.eu/2015/01/greek-hope/ http://www.socialeurope.eu/2015/01/greek-hope/#comments Tue, 27 Jan 2015 14:58:53 +0000 James K. Galbraith http://www.socialeurope.eu/?p=36997 James Galbraith, Greek Hope

James Galbraith

Fifty-four years ago, in his inaugural address, President John F. Kennedy declared, “Let us never negotiate out of fear. But let us never fear to negotiate.” They were not the most soaring sentences in that short speech, but they were among the most important. For they signaled, deliberately and unmistakably to the Soviet Union, that the Cold War might be ended without turning hot, and that the world need not live forever under bluster, threat, and the shadow of nuclear war.

Today, Europe faces a negotiation over debt and depression. On one side there will be the young government of Greece. On the other, the financial powers of Europe and the world. Now as then, the question of fear cannot be escaped.

The European powers hold three cudgels as negotiations start. First, Greece has debts coming due this year that it cannot pay. Second, Greek banks rely on the Emergency Liquidity Assistance of the European Central Bank, which could be cut off. Third, Quantitative Easing gives the ECB a new way to insulate the rest of Europe from Greece’s agonies. Should Europe choose, these cudgels can be used to enforce a policy of threats, so as to maintain austerity, foreclosures and penury in Greece.

President John F. Kennedy declared, “Let us never negotiate out of fear. But let us never fear to negotiate.”

Threats are in the air. The Telegraph summarized the EU finance ministers meeting on January 26: “The eurozone has ruled out debt forgiveness for Greece and warned its new anti-austerity coalition government must honour all past agreements…” The German government spokesman Mr. Steffen Seibert told the oligarchs at Davos that Greece must “take measures so that the economic recovery continues.” And that means “holding to its prior commitments and that the new government be tied in to the reform’s achievements.” Or as German Finance Minister Wolfgang Schäuble put it last December, “New elections change nothing”.

To Greeks these comments must be a cruel joke. What economic recovery? What achievements? If elections change nothing, why bother to hold them? And of course the premise is that “prior commitments must be honored” is just stubborn dogma. What SYRIZA’s victory drove home, above all, is the unanswerable point that failed policies must be changed.

UK Prime Minister David Cameron summarized the Greek view with British understatement: “What the Greek election will also show is that there are some warning signs in the global economy, including in the eurozone.”  Well, yes. When policies fail, economies decline. Greeks are not alone in seeing the failure in front of their eyes.

The new Greek government under Alexis Tsipras will soon start negotiations with its European partners., Greek Hope

The new Greek government under Alexis Tsipras will soon start negotiations with its European partners.

As the Telegraph reported, there are two issues: the agreements and the debt. On the first, Greece now proposes to recover command of its own fate. The experiment of troika control has been tried. The results are in. New policies to help the destitute and vulnerable, to stabilize the economy and to foster recovery, will be put in place. The past record of the Greek state is not good – this no one disputes. But the heavy-handed diktat that followed has been a disaster.

The issue behind the debt write-down is only in part an issue of resources. The alternative of “extend and pretend” is after all a form of fiscal transfer. The problem is that the practice piles debt on top of debt, and this is the lever that keeps the country under tutelage, always in the position of begging. A write-down is the means back to policy autonomy. The form and precise terms are, in part, what negotiation is about.

Talks under short deadlines, coercion and ultimatums would likely mean that Europe has taken the decision to prevent a real discussion and to blow up the talks at the start. If that is the decision, then the historical burden will be on those who took it, including for the chaos that may follow.

Greece must not be compelled to negotiate under fear. And Europe, for her part, must not fear to negotiate – calmly, without bluster or threats, in good faith.

What leverage does Greece have? Obviously, not much; the heavy weapons are on the other side. But there is something. Prime Minister Tsipras and his team can present the case of reason without threats of any kind. Then the right and moral gesture on the other side would be to throw the three cudgels out of the room, and in particular to grant fiscal space and to guarantee Greek financial stability while talks are underway.

If that happens, then proper negotiations can proceed. On this issue, Chancellor Merkel has made some of the mildest comments so far. Possibly she understands that the choices she makes – very soon – will determine Europe’s future.

In this situation, both halves of Kennedy’s dictum – drafted for him, by the way, by my father – apply. Greece must not be compelled to negotiate under fear. And Europe, for her part, must not fear to negotiate – calmly, without bluster or threats, in good faith.

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"The Return Of The German Question" by Hans Kundnani http://www.socialeurope.eu/2015/01/return-german-question/ http://www.socialeurope.eu/2015/01/return-german-question/#comments Tue, 27 Jan 2015 09:00:44 +0000 Hans Kundnani http://www.socialeurope.eu/?p=36978 Hans Kudnani, German Question

Hans Kudnani

One of the key geopolitical issues in Europe prior to the Second World War was how the power of Germany could be effectively balanced by other European states. Hans Kundnani assesses the relevance of these historical debates to the current situation within Europe in the aftermath of the Eurozone crisis. He argues that while Germany is no longer a threat from a military perspective, its economic power has put intolerable pressures on other members of the Eurozone, generating instability in much the same way as its previous military power once did. This instability is now centred around the standoff between creditor and debtor countries, underlined by the victory of Syriza in the Greek parliamentary elections, and potential future electoral success for parties such as Podemos in Spain.

During the five years since the euro crisis began, there has been much debate about German power in Europe. In 1953 Thomas Mann famously called for a “European Germany” rather than a “German Europe”, but it has now become commonplace to speak of a German Europe emerging from the crisis. There has been much debate about actual or potential German “hegemony”. Some serious analysts such as George Soros and Martin Wolf have even perceived the emergence of a kind of German “empire” within Europe – a term that is even stronger than “hegemony”, which implies at least a degree of consent.

Obviously, questions about German power in Europe have a long history. Implicit in the current debate about a new “German question” is the idea that history has in some way returned to Europe and in particular that Germany has in some respects regressed or reverted to a role comparable to the problematic one it had between 1871 and 1945. Even Anthony Giddens has written: “Germany seems to have achieved by pacific means what it was unable to bring about through military conquest – the domination of Europe.” My book, The Paradox of German Power, is an attempt to explore whether Germany’s pre-1945 history is relevant to the current situation in Europe – and if so, how.

After unification in 1871, Germany was too powerful for any of the other great powers of the time to challenge, but not powerful enough to defeat a coalition of two or more of them. This was the essence of the “German question”. The German historian Ludwig Dehio later described Germany’s position in Europe during this period as one of “semi-hegemony” rather than hegemony. This structural problem encouraged other European states to form coalitions to balance against German power. That in turn created fear in Germany – the so-called cauchemar des coalitions, or nightmare of coalitions. Thus began what the historian Hans-Peter Schwarz has called a “dialectic of encirclement”, which culminated in World War I.

Although Germany’s increased power and France’s relative weakness have allowed Germany to impose its preferences on others in the Eurozone, it is too small to be a European hegemon.

I argue that the “German question” – which Europe seemed to put behind it – has now re-emerged in “geo-economic” form. Whereas in the past Germany had faced potential enemies on all sides, it is now surrounded on all sides by NATO allies and European Union partners – in other words, in geopolitical terms, Germany is benign. But Germany’s persistent current account surplus puts intolerable pressures on other countries in the Eurozone and in particular on the countries of the “periphery”. The size of Germany’s economy, and the interdependence between it and those around it, is now creating instability within Europe as its military power once did.

At the same time, however, Germany remains too fragile to take on the burdens of hegemony, whether through fiscal transfers or a mutualisation of European debt or moderate inflation. In short, although Germany’s increased power and France’s relative weakness have allowed Germany to impose its preferences on others in the Eurozone, it is too small to be a European hegemon, as some see it or urge it to become. This in between position is strikingly similar to that of Germany within Europe between 1871 and 1945. In other words, Germany seems to have returned to the position of “semi-hegemony” that Ludwig Dehio described – except in geo-economic form.

Angela Merkel's policy direction is widely criticised across Europe. Hans Kudnani argues that the German question has returned in a geo-economic form.

Hans Kundnani argues that the German question has returned in a geo-economic form.

What this may mean in concrete terms is a geo-economic version of the conflicts within Europe that followed German unification – in particular, something analogous to the kind of competitive dynamic of coalition formation among great powers that existed in Europe before 1945. Since the crisis began, member states have adopted a mixture of bandwagoning and balancing in relation to Germany: some (especially those in central Europe whose economies are now deeply integrated with Germany’s) are beginning to form a kind of geo-economic equivalent of a sphere of influence; others (especially those of the so-called periphery) have found themselves under increased pressure to form what George Soros has called a “common front” against Germany.

This in turn seems to be leading to a geo-economic version of the old German fear of encirclement: Germany now fears the emergence of a coalition of weak economies rather than strong armies. This fear of an anti-German coalition has increased since the European Council meeting in June 2012, when Chancellor Angela Merkel succumbed to pressure from France, Italy and Spain and agreed to enable the European Stability Mechanism, the Eurozone bailout fund, to directly recapitalise banks in crisis countries. Shortly afterwards, European Central Bank (ECB) President Mario Draghi promised to do “whatever it takes” to save the euro and announced Outright Monetary Transactions (OMT).

The geopolitical dilemmas that Europe struggled with for centuries seem to have returned in geo-economic form, centred this time on the conflict between the interests of creditor and debtor countries locked into a single currency.

In much of Europe, this initiative was seen as a breakthrough that finally broke the feedback loop between bad banks and sovereign debt and thus saved the euro. But in Germany it was seen as a defeat – “the night Merkel lost”. This zero-sum dynamic within the Eurozone has continued since I finished writing the book. Most recently, the “periphery” breathed a sigh of relief when a legal opinion by a European Court of Justice adviser seemed to clear the way not just for OMT, but for the much-anticipated programme of quantitative easing announced by the ECB on 22 January. But there is much opposition in Germany to such measures – to Holger Stelzner, one of the publishers of the Frankfurter Allgemeine Zeitung, the ruling was a “blank cheque” for the crisis countries.

Moreover, although ECB action has kept the euro together, it is not enough on its own to create growth or to bring down the extraordinarily high levels of unemployment in Eurozone countries such as Greece and Spain. As a result, frustrated with the failure of centre-right and centre-left parties, voters are increasingly turning to radical left-wing and right-wing parties. After the general election on 25 January, Syriza is now in government in Greece. Podemos could find itself in a similar position in Spain later this year. The most alarming development, however, is the rise of the Front National in France.

It is hard to see how the leaders of France, Italy and Greece can create growth and jobs without a big shift in Eurozone economic policy. But it is also increasingly hard to see how they can force such a shift unless they join forces and take a more confrontational approach to Germany – as many are now urging them to. Thus the geopolitical dilemmas that Europe struggled with for centuries seem to have returned in geo-economic form, centred this time on the conflict between the interests of creditor and debtor countries locked into a single currency. What is unclear is how much conflict within Europe will be needed to resolve this dynamic.

This column was first published on EUROPP@LSE

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"Thank You Greece!" by Maria Helena dos Santos André http://www.socialeurope.eu/2015/01/thank-greece/ http://www.socialeurope.eu/2015/01/thank-greece/#comments Mon, 26 Jan 2015 10:00:14 +0000 Maria Helena dos Santos André http://www.socialeurope.eu/?p=36913 Maria Helena dos Santos André

Maria Helena dos Santos André (photo: www.ps-alemanha.de)

In a time when in Paris Marine Le Pen is “Ante Portas”, when xenophobic populists are marching through the streets of Dresden, when in London the UKIP sets the tone for an ever more anti-European hysteria, and when in Helsinki the Finnish government becomes the most ardent proponent of more austerity for Greece, for no other reason but the fear of a success of the “Real Finns” at the next ballot box, the Greek people have given a clear signal, voting against more austerity and for the European values of democracy, the welfare state, tolerance and inclusive societies.

They have rejected the ruling by European and international technocrats. They have said no to their national oligarchic establishment that has led the country into the current situation. But they also resisted the siren calls of Golden Dawn. They have given their confidence to an untested party, with no experience in government, a party that has presented an electoral programme proposing better governance, more democracy, greater social justice and an end of austerity policies that have destroyed the economy and created unprecedented hardship while the public (and private) debt continued to increase. The Greek voters have sent a clear message to the rest of Europe: they want to be part of Europe, they can’t bear more austerity; they need a sustainable solution to their debt problem; they want to be a respected partner in the European Union and play an active role in the common search for a Greek and European recovery.

Europe should not see the victory of Syriza as a threat. Instead, it should be seen as a clear signal from the people and as an opportunity for Europe as a whole to reconsider its crisis response.

Europe should not see the victory of Syriza as a threat. Instead, it should be seen as a clear signal from the people and as an opportunity for Europe as a whole to reconsider its crisis response, which has already lead the continent into what may become a decade of deflationary stagnation, even with the last intervention of the ECB. There is no easy solution to the deep crisis in Europe but one thing is certain:  continuing with policies that do not work, because they concentrate exclusively on fiscal prudence, is the opposite of what must be done. We must give priority to growth, investment, employment and redistributive policies.

Anyone guided by realism will recognise that Greece cannot, at the same time, serve its tremendous debt burden and recover economically and socially. Insisting on servicing the debt without a strong economic recovery might be popular in some European capitals but it will just not work. Debts that cannot be paid remain un-payable even if creditors continue to insist that it should be paid.

The debt crises in Germany in the last century offer great lessons in this respect. After World War I, the victorious powers insisted that Germany should pay reparations independently of its economic performance. The results are well known: hyperinflation in the twenties, brutal austerity in the early thirties resulting in the rise of Hitler who immediately stopped servicing any foreign debt when he came to power.

After World War II, the Allies recognised that Germany had to become prosperous first and should pay afterwards. That reasoning lies behind one of the most generous debt restructuring agreements in history in 1953, when more than 50% of the German debt was written off, repayment was stretched out over more than half a century and debt payments were made conditional on the existence of a trade surplus. The last payment of debt from World War I was actually made as late as in 2010 and payments at no time exceeded 5% of German export earnings.

In many European countries the public debate on the debt crisis is also framed in moral terms. Many claim that Greece had cheated when entering the Eurozone, that they are free-riding on hard-working Northern Europeans, that they need to be taught a lesson in order to learn financial responsibility, etc. The judgements should not be about “Crime and Punishment” but about economic viability and a better future. If debt restructuring had been guided by any moral reasoning in 1953 it would have certainly been extremely difficult to make the case for German debt relief. But it was economically, politically and socially the right thing to do and it paid off not only for Germany but for Europe as a whole.

Greece’s 317 billion Euro debt today is in absolute terms 13 billion less than five years ago but due to the economic collapse the debt to GDP ratio nevertheless rose from 113% to 175% of GDP. Any assumption that this debt can be serviced without growth is illusionary. This must be recognised by all those interested in a solution and be the realistic starting point for renegotiating the debt.

As long as capitalism exists there has not been a boom that did not end in a crisis and not a crisis that wasn’t followed by a recovery. Policies should reduce the severity of the crisis and increase the speed of the recovery. Austerity has failed on both accounts but nevertheless it looks that, by a number of indicators, the crisis in Greece has finally bottomed out and, with the right policies of debt restructuring and of productive public investment, there is a reasonable chance for a strong recovery.

Bringing down unemployment and increasing revenues has to be a priority over debt repayment. The required economic growth will not come from any rapid rise in private sector investment as long as the risk of unsustainable debt and default remains. Therefore the solution to the Greek problem should start with a solution to the debt situation, a strong public investment programme leading to the creation of more and better jobs.

Researchers from the Levy Economics Institute in New York who, in cooperation with the Labour Institute of the General Confederation of Greek Workers, regularly publish a strategic analysis of the Greek economy have calculated the economic impact of a moderate public investment programme of 6.6 billion Euro per annum funded by the EU complimented by a debt moratorium until the country returns to the real GDP level of 2010. While this would certainly not solve Greece’s problems over night, it would set Greece on a much higher growth path than continuing the current policies (see the baseline scenario in the graph below).

Greece

Debt restructuring and public investment alone will not solve the Greek problem but there will be no solution without it. Improving the public administration, creating an efficient and fair tax system, fighting corruption, curtailing oligarchic power, rationalising pension systems, improving access to credit, improving the functioning of education, health and social protection systems and creating the conditions for job creation are some of the important elements in a comprehensive recovery strategy. However, some of these structural changes take time and have more long-term effects, while others can boost recovery more quickly. A government of new faces is better positioned to implement such a programme. These structural reforms have bigger chances of success if done in parallel with economic recovery, job creation and growth and not during a continued depression.

New faces have also a better chance to re-energize society and to put an end to vested interests that so far remain largely untouched. Strengthening institutions, including those that are responsible for social dialogue and collective bargaining, and improving the participation of citizens are essential for (re)-building trust in the state and political decision-making. The mistake of dismantling the industrial relations and collective bargaining system must be quickly and seriously addressed in order to achieve better labour market conditions, more quality and equality in employment and a fairer income distribution.

In the spirit of Franklin Roosevelt, the Greek people decided that “We have nothing to fear but fear itself” and put more trust into an alternative, sometimes expressing contradictory ideas, rather than to continue with the trotted path of failure.

The challenges Greece is facing are more extreme than in any other European country but they are not unique. Throughout southern Europe the policies of fiscal austerity, no public investment and wage repression have led to a deflationary stagnation with unacceptable levels of unemployment and an increase in inequalities. Pumping billions of Euros at close to zero interest rates into the private banking sector has failed to trigger private real investment and has not reached the real economy. It was more successful in raising asset prices than employment levels. As millions of people are unemployed and many governments can borrow at historically low interest rates, the case for large scale investment in public infrastructure and networks, in education, research and development at a European level is compelling.

European and international institutions have argued for six years that there is no alternative to austerity and that the Greek people will pay dearly if they abandon the policy prescription of the Troika. In the spirit of Franklin Roosevelt, the Greek people decided that “We have nothing to fear but fear itself” and put more trust into an alternative, sometimes expressing contradictory ideas, rather than to continue with the trotted path of failure. They have raised expectations and deserve the credit of the doubt and the support from those interested in a change of policies in Europe.

The Greek people must be thanked for putting the need for changing the course of economic policies firmly onto the European agenda. The stakes are high. A failure in Greece will be seen as vindication of austerity as the only option. It will have negative repercussions for any progressive alternative throughout Europe. Those convinced that Europe needs to change cannot sit on the fence, but need to engage in support of the new winds of reform.

This column was first published by the Global Labour Column

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"Tsipras And Syriza’s Win Reboots European Social Democracy" by David Gow http://www.socialeurope.eu/2015/01/syriza/ http://www.socialeurope.eu/2015/01/syriza/#comments Mon, 26 Jan 2015 08:00:57 +0000 David Gow http://www.socialeurope.eu/?p=36921 David Gow, Syriza

David Gow

The “vicious circle of austerity is over,” said Alexis Tsipras, Syriza leader and Greece’s likely new premier, after his party won a stunning victory in yesterday’s general election. It would be replaced, he added, by “a politics of hope, solidarity and co-operation.” He and his senior colleagues say this is true for the EU as a whole.

As Sunday evening unfolded it was clear the Syriza victory was less comprehensive than that of early exit polls suggesting a 12% lead over New Democracy, the outgoing ruling centre-right party of Antonis Samaras. In the end it was 8.5%, with Tsipras, armed with some 149 seats, just shy of an absolute majority of 151, gladly forced to rely on coalition partners.

The outcome is, nevertheless, extraordinary and not just because Syriza, a left/democratic socialist party, won just 4.6% of the vote five years ago. It sends several clear and dramatic messages to the EU and its ruling elite in Brussels, Berlin and other European capitals – not least Madrid where Podemos, Syriza’s ally, is riding high in the polls ahead of the elections later this year.

One is that long-suffering voters can no longer stomach self-defeating austerian policies that result in a country losing a quarter of its national output, its young people either emigrating in droves or forced to be, like 50%-plus others, jobless and without a future, its pensioners lose 40% of their income, its middle class unable to buy medicines – and its rich squirrel even more of its wealth overseas and pay no tax. This six-year Sisyphean effort to meet with the conditions imposed with the €240bn bail-out programme has pushed up public debt to 175% of GDP – when it is supposed to reduce it.

Another is that the “alternatives” offered by traditional social democratic parties – at best mitigating the worst effects of austerity but essentially accepting the need for “structural reforms,” aka internal devaluation – are unacceptable. Pasok, which ruled throughout the 1980s and, not least, during the post-2008 crisis, has just about survived with a dozen or so seats and less than 5% of the vote but the new party of George Papandreou, its ex-leader, is out. These parties fail because they have run out of ideas and offer little or no hope.

It is the case, however, that Syriza and its youthful leader, aged only 40, have a tortuous course to follow even with the wind of popular acclaim in their sails. First, they have to keep the people on their side rather than spreading disappointment and disaffection from early on – as many left parties do. The threefold agenda set out by Yanis Varoufakis, the Athens economics professor and potential finance minister, of a €2bn “end the humanitarian crisis” welfare programme, of tackling anti-social oligarchs and, not least, renegotiating economic policies with the Eurozone, has to get off to a positive start. The absence of an absolute majority and need to rely upon/willingness to embrace coalition partners helps here.

 
Numerous commentators have also made plain that the ultra-ambitious Tsipras is not the “far left” hard-liner painted by the neo-liberal media – “Euroschreck” or “eurohorror” in the Bild Zeitung headline – but a pragmatist, albeit to the left of Labour/PS/SPD. The Financial Times asked (rhetorically) last night if he is a Lula or a Chavez, with its reporters consistently painting him as the former.

Second, the talks with Eurozone ministers – which, effectively, kick off informally at the eurogroup/ecofin meetings starting today – will be extremely tough. Unsurprisingly, German centre-right politicians and the Bundesbank President, Jens Weidmann, have been unwelcoming: “I hope the new government won’t call into question what is expected and what has already been achieved,” Weidmann told German public TV last night. Wolfgang Schäuble, finance minister, said coldly: “The agreements reached with Greece remain valid.”

But demanding further structural reforms now misses the point, let alone the democratic will of the Greek people. There is a certain complacency behind such remarks since Germany itself cannot simply rest on the labour market reforms of Gerd Schröder ten, 15 years ago and needs to put its own house in order. Tsipras is not alone in pointing out that debt relief/write-off – agreed at the 1953 London conference – lay behind West Germany’s economic revival post-war (along with central bank independence, monetary reform etc).

Some market commentators argue that, because Germany has effectively been forced to concede quantitative easing by the ECB, it will dig in its heels over concessions on debt to Greece – partly to avoid a backlash from its own voters. But, as Paul De Grauwe and others have pointed out, denying the reality of the impossibility of servicing sky-high debt simply “condemns Greece to many more years of misery and will encourage extremist political movements in the country even further.” And, we might add, not just there but all over Europe.

Tsipras, in his victory speech last night, sounded a positive note about the EU and negotiating a mutually beneficial outcome – not imposed from the technocratic centre but via a national demos. The outlines of a deal may be, some suggest, debt relief via longer maturity, lower interest, agreed measures to stimulate productive growth linked to serious administrative reforms and, above all, more jobs generating more tax income.

All of this is for later. What matters now is that, for the first time in Europe since the global financial crisis began in 2008, voters have opted to challenge the rather cynical, hopeless mentality and policy-fix of the EU political elites and reasserted democratic sovereignty inside the European house.

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