The TASC-FEPS Annual Conference, “Reconstructing the European Economy”, took place in Dublin on the 14th of June 2013. Speakers probed the roots of the ongoing economic, social and political crisis in Europe, before advancing alternative evidence-based policy proposals focused on employment generation and institutional reform. Cooperation among EU member states, not competition, was the resounding call.
The conference took place in the context of stagnant growth and rising unemployment across Europe. Six years into the Great Recession and it is clear that a policy of endless austerity is serving the interests of the financial sector and large corporate exporters, to the detriment of the working people of Europe.
A change of course is long overdue, austerity should give the way to expansionary fiscal policies both at European and national levels in order to create jobs and achieve economic growth. In addition, economic growth would become a more effective vehicle for reducing government debt and deficits. For this to be achieved at the national level, however, requires a certain degree of coordination at the EU level – more federalism and democratically accountable institutions must be our goal.
Deficiencies in the EU’s institutional makeup are a constant barrier to progress. Fiscal union without political union has fostered structural competitiveness imbalances between core and periphery member states. Undervalued exchange rates in West and North Europe and overvalued exchange rates in South and East Europe have led to current account imbalances which, in turn, have resulted in unsustainable capital flows from core to periphery. Furthermore, a ‘one size fits all’ fiscal and monetary policy stance failed to take account of the differing deficit requirements across member states.
The neoliberal diagnosis and policy response is based on a misrepresentation of the roots of the crisis. This is not a public debt crisis as such, but a crisis of socialised private debt. In any case, the debt burden is unsustainable and the imposition of the fiscal pact rules, which have no analytical basis, will only serve to further entrench stagnation and unemployment through the implementation of the excessive deficit procedure. Similarly, tax reliefs, low corporate tax rates, and attractive tax regimes – characteristics of a tax haven – should be viewed as an unsustainable industrial policy over the long-term; after all, ‘taxes are the price we pay for civilisation’.
An effective alternative policy platform would advocate cooperation – a shared response – rather than competition in an effort to correct structural competitiveness imbalances. Instead of suppressing wages in the periphery, German wages should be allowed to rise; this would allow the periphery to increase exports and reduce imports.
Whilst Germany has pursued a strategy of wage led growth the European periphery has adopted a credit-led growth model, with negative consequences on personal and household debt that people are carrying. These two models have created significant imbalances across Europe which can only be addressed by moving away from wage moderation in Europe. Wages across Europe should rise at least with labour productivity and wage growth in Germany should be higher than that of the periphery.
Furthermore, industrial development – focusing on small indigenous enterprise – should be prioritised in the periphery. Investing in indigenous industry can create sustainable employment over the long-term, but requires a progressive taxation regime. A progressive realignment of the taxation system should be carried out in tandem with financial sector reform – a financial transaction tax achieves both aims. Further revenues to finance an investment stimulus can be generated by way of a coordinated increase in corporation tax rates and a clamp down on tax evasion.
Greater federalism and fiscal transfers from core to periphery are essential to a functioning EMU. Furthermore, an effective European monetary policy would end ECB independence and institute greater democratic accountability. Bank resolution is a priority; unsustainable and illegitimate debts must be written down.
Read the list of 10 concretes proposals that could bring job creation and economic growth back on the agenda:
- Stimulate aggregate demand and supply in order to create jobs and increase growth across Europe. This is achieved by increasing government spending (including public investment) and stimulating private investment.
- End wage repression across Europe: the ability of Germany to keep unit labour costs lower than the European periphery is one of the main causes of current account imbalances within Europe. To this end, German wages should be allowed to rise, thus allowing the periphery to increase exports and reduce imports.
- Fiscal policy should not be a “one-size fits all” policy and should not exclusively be a tool for balanced budgets, fiscal policies should also be used as counter-cyclical policies.
- Industrial policies: Since the mid-1990s, financial investment between firms and the financial market has increased. This trend has been mirrored by stagnant productive investment in Europe. The state plays an important role in financing industrial development and innovation in Europe. Public investment should be redirected towards employment-focused innovative activities. Public investment is essential for crowding-in private investment and should not be reduced, particularly during a recession.
- European Investment Bank (EIB): in order to reverse the decline in private investment the lending scope of the EIB should also be widened.
- Progressive taxation: industrial investment also requires a progressive realignment of the taxation system. This should be carried out in conjunction with financial sector reforms in order to reduce profitable hedging and to redirect resources from the financial sector towards innovative investment in the real economy.
- Institutional reforms of the EMU: only through institutional reforms it will be possible to clearly redefine a set of economic policy objectives and bring Europe on a more viable developmental trajectory where job creation and growth are at the core. In addition, EMU-level fiscal policy and a much greater EU budget are required.
- European fiscal and labour authorities should be instituted in order to achieve collective wage determination, to push for a common labour policy, and to coordinate national and supranational fiscal policies.
- The Stability and Growth Pact is in need of modification. There is a need for a Full Employment, Growth and Stability Pact, and this pact should be an active ingredient in achieving high levels of aggregate demand required to sustain high levels of economic activity.
- Monetary policy: an effective European monetary policy would end the independence (and deficient accountability) of the European Central bank (ECB). Monetary policy should in integrated into democratic policy making.