The EU in the rear view mirror

I voted Remain in the referendum not because I loved the EU but because I thought the UK outside the EU would produce sub-optimal economic results. During the referendum campaign, and especially after the result and in the tortuous build up to Brexit itself, many leftwing Remainers have been drawn into a mostly uncritical support for the EU system, as if it was fundamentally a progressive project and an unassailably good thing. Now that the UK has left and its no longer necessary to defend the Remainer trenches I think it’s time to take a more objective assessment of the EU and its direction of travel. Looking at the EU in the rear mirror and freed from the need to talk up the case for Remain it’s time the Left acknowledged that the system at the core of the EU is not progressive.

I spent twenty years from 1990 working full time on various EU programs and project and I came to know its system quite well, and over time I became increasingly uneasy about the way it was developing. As the 2008 financial crises, the Euro crisis of 2010 and the Greek debt crisis all unfolded my doubts about the EU system grew and I came to the conclusion that its design was fundamentally flawed. The key problems as I saw it was the result of creating a single market and a single currency whilst not creating a political and social union. In fact I came to believe that creating such a social and political union was almost impossible as social solidarity and functioning democratic institutions all seem to only work when built on top of the community of national solidarity. I cannot see how it is possible to build a transnational political system that is both democratic and based on a system of material social solidarity, and if that is the case then the Single currency, and big parts of the Single Market system become very problematic.

This means that we now have on the one hand a system in the EU in which all barriers to the free movement of capital have been removed as the single market guarantees the free movement of goods, capital [money], services, and labour, which are actually all just different forms of capital. On the other hand there is no material social solidarity in the EU, no cross border funding for social programs, no pooling of tax revenues between rich and poor member states. This means that as the dynamic of capital accumulation shifts people, money, jobs and prosperity around the EU the poor and economically peripheral regions have to finance the resulting social costs locally and with only local resources. This is not a social union.

On top of the incomplete (and probably impossible) social union the single currency system is inherently flawed because whilst fiscal policy and sovereign bond issuance remains nominally in national silos the currency and the economic policy of the block is managed by essentially undemocratic institutions like the European Commission (I have written about this in a lot more detail here and here) and the European Central Bank (which is undemocratic by design – see here for more background). This means that the setting of key economic policies, such as the balance of tax, revenues and spending by nationally elected governments in the EU is now legally constrained by rules set by, and instructions issued from, non elected and non democratically accountable political entities. This in my opinion is not a good thing and is in effect the final triumph of Ordoliberalism (I wrote an analysis of the role of Ordoliberalism in the EU).

The undemocratic institutions that sit above national governments in the EU issuing mandatory instructions about economic policy have consistently demonstrated a commitment to a particular set of economic policies which promote cheaper and more flexible labour conditions (i.e. lower wages, greater job insecurity and weaker collective bargaining), reducing social provision such as pensions and unemployment benefits, and promoting privatisation and cuts to social health care. This consistent pattern of behaviour by the EU was barely acknowledged by much of the Left in its rush to defend a Remainer position.

When the current system was designed at Maastricht in 1992 the convergence criteria it was based on reflected the dominant economic ideology of the 1990s, as well as reflecting the general economic conditions that prevailed at the time. This was enshrined in the Stability and Growth Pact (SGP) in 1997 which set numerical ceilings for the budgets of members of the Single Currency with a mandatory legal treaty commitment that EU member states must keep their budget deficits below 3 per cent of GDP, and public debt to GDP ratios below 60 per cent. That seems to have been based on the prevailing standards of 1997 in the EU, but neither threshold has any sound basis in economic theory and the permanent constriction of public spending regardless of economic conditions makes no sense. The imposition of a rigid, and ultimately counterproductive, framework of rules restricting national sovereignty was the clumsy fix for the architectural weakness of the world’s first currency that is not backed by a functional government.

When the inevitable Eurozone crisis of 2010 erupted the public debt levels of many members states increased sharply, partly as a result of bank bailouts but mostly as a result of increased spending on social programs such as unemployment benefits and a sudden fall in tax revenues. This pattern of deficit funded increased spending has been the response to all economic down turns in the developed economies since WWII. It is the correct response, which is to allow government debt to rise so public expenditure can rise and act as an automatic stabiliser for the economy. Unfortunately the prevailing ideology of the EU system, embedded deeply in it’s institutions, is based on Ordoliberalism which is built on the belief that preserving the integrity of the currency and avoiding inflation is more important than implementing stimulus spending during a recession. The post Maastricht system meant that in the period immediately after 2008 the EU responded to the sudden deep recession caused by a collapse in credit not with a stimulus package, as in the USA, but with a contractionary package ludicrously labelled as ‘Expansionary contraction’.

The result was a severe double-dip recession in the EU, a huge rise in unemployment, poverty and social suffering, followed by continuing stagnation. Currently the Eurozone is teetering on the edge of another recession after 10 years of anaemic low growth

In 2005 the Stability and Growth Pact had been loosened due to political opposition to the rules from powerful member states, but in 2008 the post- crisis response was to further tighten the system of controls over member states spending, this happened in two waves of legislation in 2011 (the SixPack) and 2013 (the Two- Pack) and as a result of the Fiscal Compact inter-governmental treaty of 2011. All these measures, which dramatically increased the power of the European Commission over the budgetary decisions of member states, means the Commission can issue ‘recommendations’ to member states about how to change their public spending. If these ‘recommendations’ by the Commission to a member state are ignored the Commission has the power to punish and fine the recalcitrant government. These changes strengthened the EU fiscal rules but weakened the democratic decision-making process at a member state level because now whatever the electorate in a particular member state votes for their democratically expressed wishes could be overturned by a higher power.

“Elections change nothing” – Wolfgang Schäuble 2014 then German Finance Minister and President of the Eurogroup

Fiscal policy is one of the most important ways a state has to redistribute wealth, and contain or reduce income and wealth inequality, and using deficit public spending where necessary to counter economic contraction and support the vulnerable and poor is the central pillar of social democracy. The constraints imposed by the Stability and Growth Pact system have directly limited the ability of member states to redistribute wealth and as a result social democracy is legally constrained in the EU.

The Stability and Growth Pact system actively promotes the transfer of wealth from labour to capital, a process that has intensified through the Macroeconomic Imbalance Procedure introduced as part of the Six-Pack. Under this system the specific policy measures demanded by the Commission have focused time and time again on limiting wage growth, increasing the threshold age for receiving a pension, privatising state owned enterprises and healthcare, promoting longer working hours, demanding a reduction in job security, and cutting funds to social services.

Below is a table showing all the country-specific recommendations under the Stability and Growth Pact and the Macroeconomic Imbalance Procedure since 2011 and it clearly shows that in addition to consistent demands for reductions in public spending, the Commission has specifically singled out pensions, healthcare provision, wage growth, job security and unemployment benefits for attack. Does this look like the program of a progressive political project?

The content of Country-Specific Recommendations from the Commission under the Stability and Growth Pact and the Macroeconomic Imbalance Procedure 2011-2018

The architects of the euro were aware of the many “spillover” effects that imbalances in one economy can have on others in a currency union. However, the EU institutions have focused single-mindedly on pursuing internal devaluation and reducing “wage rigidities”. The deflationary impact of a state or states running a large current account surplus has been largely ignored.

The economic justification for the EUʼs pre- and post-crisis austerity policies is based on the fringe theory of “expansionary austerity” that has been decisively disproved. The calculation of the structural deficit (the discretionary spending by a government minus cyclical factors) that is used to determine whether a state is breaching the 3 per cent deficit target since the introduction of the SixPack is highly contested. The fact that the structural deficit is “unobservable” has led to bizarre situations such as the Excessive Deficit Procedure the Commission opened against Italy in 2018 in fear that the stagnant Italian economy was at risk of overheating.

Public debt is not inherently “good” or “bad”. The literature claiming that once a certain threshold of public debt has been reached (90-100 per cent of GDP), the GDP growth rate will decline, is inconclusive and disputed. The level of debt is not as important so long as the state is able to continue rolling over and servicing its debt, and if it can issue debt in a currency it controls. In the current context of prolonged ultra-low interest rates, there is little to no cost to borrowing but clearly it is very problematic that the member states of the single currency cannot issue debt in a currency they control.

Rather than idealising the current European project the Left should be seeking its dismantling. It is not clear given the huge weight of the European institutions, and the costs and risks of exiting the single currency, if the EU system as it currently exists can be reformed in any significant way. While Europe is locked into its current system it will continue to generate intense social and economic tensions which will express themselves as populist political insurgencies. Further and deeper union, which must by necessity require social union and very substantial cross border tax flows, appears to be very unlikely indeed. An obvious alternative solution to the current deep structural problems and blockages would be to repatriate powers over fiscal policy to nation states in the EU and that would mean – probably – dismantling the single currency, a devilishly risky and complex project. Currently the  European Left broadly favours the first blocked option, trying to build a deeper social union, whilst the populist European Right favours national solutions and a weakening of the EU system. The former looks impossible while the latter is proving more attractive and plausible to EU voters.

The Left for too long has been committed ideologically to preferring international systems and projects to national ones, and enthusiastically embraced the weakening of the national state by projects like the European Union. This was, I think, founded on a false belief that all of capital is now globalised and foot loose, and can thus simply escape any national Left project by relocating elsewhere. There has-been some interesting work done recently persuasively arguing that the knowledge centres that modern high value capital is dependent on are in fact relatively immobile and as a consequence the arena for national progressive action is much bigger than much of the Left thinks it is. It’s time for the Left to reconsider the ideology that rejects national political action and prioritises transnational projects (and hence views the EU as an essential progressive project), and instead to embrace once again the notion of national political projects.