Is there an alternative to today’s European mainstream economic policy?
This conference which looks for an alternative economic policy takes place at a time when more and more people in Europe contest the current economic policies. Either by voting for populist parties like in Italy or by demonstrating in the streets like in Bulgaria citizens sanction the different governments for the implementation of Europe’s austerity policy. These protests are definitely not only caused by European policies, but they are one of the reasons of the present European political crises. If we do not want to alienate even more citizens from Europe and its institutions we have to act quickly and thoroughly. Otherwise the famous historian Mark Mazower will be right, when he writes: „A future may lie ahead in which the European project is associated with unemployment, stagnation and tyranny“ !
In my contribution to this important economic conference, I do not want to present a comprehensive alternative economic strategy for Europe. Instead, I would like to put the current orthodox economic policy in its ideological framework and show that our alternative is based on economic experiences, on facts and on values, which are dear to the Social Democrats of Europe. And we, as Social Democrats, want to put forward an economic concept which respects our principles and global obligations.
Only by changing policies, Europe can gain trust again. And only then, Europe could be identified with employment, sustainable growth and democracy. Europe must be part of all the national reform projects and no longer seen as an outside intervention. Europe and especially the European Commission and specifically the Troikas must no longer play the austerity watchdog or fiscal discipline police. All levels of Europe from the small communities to the Brussels institutions must cooperate on the implementation of fiscal responsibility and investment into growth and jobs at the same time. And this combination makes the difference to the austerity policy of today.
Economic growth and jobs
Economic growth and jobs must be in the centre of Europe’s economic debate. For a prosperous future we need both, but we also need growth and jobs of a rather special nature. Moreover, it is not only growth and jobs that we need, however crucial they are. In order to get growth and jobs, we need more fairness and more equality in the distribution of income and wealth; we need more inclusion; we need supervision and control of the financial markets. Inclusive growth must also be job-rich growth. We need growth for jobs and jobs for growth.
We could also simply paraphrase what Hervé Kempf wrote in his recent book „Fin de l’Occident, naissance du monde“: La politique à mener n’a, dans son principe, rien de mystérieux. Elle s’ordonne selon trois axes: reprendre la maîtrise du système financier, réduire les inégalités, écologiser l’économie.“
Control of the financial markets
Yes, there is nothing mysterious about the changes we must make to our economic policy. We need only to observe the causes of the present crisis and look at the periods of successful economic performance. Of course many factors have changed, some evolved, while others sank into oblivion. We have a much higher degree of globalization and years of extensive liberalization behind us, especially regarding the financial markets.
It seems very true, that without new rules for regulation and control of the financial sector, including banks and shadow banking, we cannot create growth which will lead to sustainable jobs. A fundamental question raised by recurrent financial crises is how to ensure that the financial markets serve growth and development rather than being a constant source of instability and disruption in pursuit of self-interest.
A lot has been done in the European Parliament to regulate the financial markets and many members of the S&D Group have are playing a key role in this legislative work. And we do hope that the Banking Union with its European supervision of banks will soon come into reality and will contribute to such long-awaited economic stability.
Revising the trend of rising inequality
One of the causes of the crisis and, at the same time, the backbone of much of the present unrest, is the unequal distribution of income and wealth. There is widespread concern that, up until now, economic growth has not been fairly shared. The current economic crisis further widens this gap between rich and poor. And this disparity came after many years of increasingly successful efforts to close the gap especially during the welfare period after the Second World War.
There is no doubt that this rising „income and wealth gap“ is one of the reasons for the lack of growth and the ever rising unemployment. There is an close interdependence between the rising inequalities and the reduction of growth rates during the past decade. (And the stagnation of incomes for the lower and middle income groups led to a rising private indebtedness and in consequence to housing bubbles, at least in the US.)Without an active policy of redistribution we cannot solve our economic problems and we will continue to have social, economic and, in many cases, political instability. For us, in the S&D Group, the fight for more equality and fairness is one of our fundamental battles.
There are many economic, as well as social and political arguments for an active redistribution policy in Europe and world wide. Having a population with gross inequalities of wealth causes economic inefficiencies. For example, if too many people are too poor there will be limited markets for the output of industry and agriculture and this will limit the growth potential of the economy. And what is more – when societies become imbalanced, social unrest increases. This intrinsic sense of fairness requires basic economic equality.
In this connection Alan S. Blinder is correct when he – in his book „After the Music stopped“ – is demanding priority for fairness: “ People’s sense of fairness demands and deserves the higher-order, drop everything kind. Because fairness normally matters more than anything else, it should be an obsession with policy makers.“
The S&D group has this „obsession“, it is an essential part of our political convictions and strategy. In this respect we need decisive action against tax evasion and tax fraud – in Europe and beyond – and we need important steps towards harmonization of our income and wealth taxes, in order to gain sovereignty on our tax policies.
The recent proposals presented by the European Commission, as well as key decisions taken by the G20 ministers go in the right direction. But now we have to implement these decisions. As demonstrated by a study commissioned by the S&D Group, tax evasion and tax avoidance may cost the governments of the EU Member States €1 trillion a year. And an enormous amount of money could be delivered to the fiscal authorities if only a quarter of the „lost“ taxes could be recuperated. Tax evasion violates notions of fairness and equal treatment and undermines the idea of reciprocity which lies at the heart of the social contract between taxpayers and the state. And the effects of inequality is increasing with the extent of tax evasion.
The importance of public expenditure
Aside from income, we need also to pay attention to the expenditure side. In many countries redistribution relies primarily on public expenditure, especially as regards social issues, education, health services etc. Very often the distributive effects of public expenditure are more significant than the ones stemming from taxes.
However, we should not only be concerned with the redistribution effect but also with the importance of public goods for the advancement of society and of common values. We have to fight against the neo-liberal, very often Darwinist concepts of our societies. ( And even Darwin himself underlined that with certain „animals“ like the human beings, cooperation plays an important role to build their society. And Daniel Cohen argues, that if the Homo economicus beats the Homo ethics and empathicus, society becomes inefficient.)
This anti-state and sometimes anti-society ideology is very dangerous. It was Margaret Thatcher who once said, there is no such thing as society. This was in line with Vaclav Klaus‘ thinking, when he said there is no social market economy or with Chancellor Merkel’s when she asked for a market driven democracy.
As Socialists and Democrats we reject such a concept. As Lionel Jospin once said we want a market economy, but not a market society. And this market economy should be a social market economy for it to function well. Yes, John Maynard Keynes was right when he thought about an active state in order to have full employment. I know that there is a neo-liberal ideology which wants to declare Keynes dead. Not that we should not go beyond Keynes. Yes we should, but we should not go behind Keynes. Full employment remains on top of the agenda as well as the concept of decent jobs and fairness.
Retreat from public purpose
Of course the ideologues of the right do not like Keynes particularly when he wrote in1933 the following sentences: „The decadent international but individualistic capitalism, in the hands of which we found ourselves after the (First World) war,“ – and we could add at the end of last century – „is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous – and it doesn’t deliver the goods.“ Yes, indeed he did add that we have difficulties to put an alternative in place. But Keynes, himself, showed at least some inclination towards an alternative, and more effective, direction. But his arguments unfortunately have been more and more disregarded.
Michael Sandel in his book „What money can’t buy“, is referring to these fundamental changes: „These uses of markets to allocate health, education, public safety, national security, criminal justice, environmental protection, recreation, procreation, and other social goods were, for the most part, unheard of thirty years ago. Today, we take them largely for granted.“
But we must confront these realities of today and not take them for granted. We have to recognize, that there was not only a “ Washington’s retreat from public purpose“ as Jeffrey Sachs is writing in “ The Price of Civilization“, but also many European countries,often supported by the European Commission, which have retreated from public purpose. And in many ways, this retreat continues – from Cameron’s extreme position towards Europe to Merkel’s more sophisticated line, combining a soft pro-European line with a hard austerity strategy – at least for the other Euro countries!
If would be utterly wrong do declare, the bigger the state the better for the society. But it is as well wrong and dangerous to promote the formula, the smaller the state the better for the citizens. Lets not argue about the usefulness of a small versus a big state, but lets work for public budgets (including the European budget) which can fulfill the major economic, social and political tasks in today’s worlds of global competition. Lets combine the necessary expenditures for our infrastructure including education, science and research, an active labour market policy and the redistributive tasks of public expenditures and we can find the right level for public expenditures. ( leaving aside the necessary expenditure for foreign and defense policies etc.)
Europe and global responsibilities
So, how should we see then Europe’s role and opportunities in view of fast progressing globalization and diverse emerging nations? Do we have a moral right to continue – by enhancing growth – to pollute the air and to extract as many resources out of our soil and our seas as we please? No, we do not have that right anymore after many centuries of overexploitation and over-polluting. But we do have the right and obligation to care for our citizens and their wellbeing. And therefore we have to fight for the „greening“ of our economy and for sustainable jobs. For us, modernization of our economy is closely connected with respect for the environment and inter-generational responsibility. And our strategy must be closely linked to combating poverty and inequalities globally.
Therefore, we must use all existing and new resources with care and respect for future generations. We need our research and development capabilities, as well as involvement of new technologies in order to restructure our industry and to create new industries in a sustainable way. In this respect I am happy with the importance attributed to this expenditure in the future EU budget, even though the amounts allocated by our heads of state and government are much too low to face the challenges Europe is facing.
In this regard we have to define a new industrial policy for Europe. We need to preserve a vital industrial sector in the EU and should not rely only on -financial- services, which very often make our economies more fragile and volatile. This is clearly demonstrated by the problems of the City of London and the failures of the banking sector in the Republic of Cyprus. Again, if we want to modernize and develop our industry we need correctly oriented public spending – we need investment in education, research, technology and material infrastructure.
Private and public investment
Private investment often depends on public investment and therefore we must fight against any systematic reduction of public expenditure in Europe. And for this reason,we plead for a „golden rule of public investment“. Investments, especially those which contribute to the fulfilment of the 2020 targets should be exempt from the calculation of the national public deficits in the framework of the Fiscal Treaty. Economic policy, or constant work on increasing our competitiveness, is meaningless if we stick to inflexible rules. It should be about reaching the targets we have set and more flexibility in the method applied in this respect is necessary.
Lack of flexibility due to ideological constraints often leads to wrong conclusions. For example various Troikas and other economic advisers representing neo-liberal backgrounds had mistaken perceptions about the multiplier effect of their proposed measures. They did not realize that the multiplier of public expenditure or expenditure cuts is higher or lower in different economic scenarios. In the end, the chief economists of the IMF had to recognize this and they seem more and more skeptical towards a radical and too fast reduction of budget deficits.
If we, as the S&D group, fight for more flexibility and more time for adjustment in the national stabilization programmes, it is not because we have no clear programmes and visions for our economic future. No, it is because we reject the rigid ideology of budget cuts and short term balancing of our national budgets. Behind these inflexible policies stands a vision of our society, which is in contradiction to our concept of a modern, reformed welfare state and of Social Europe. The ideology today is on the right, not on the left.
Only slowly and lately the EU Commission is leaning towards a more reasonable and flexible line. In view of the continuing and obvious failure to reach the targets and the forecasts concerning growth and deficits, the Commission had to change its strict and unrealistic course. Otherwise they would sanction individual countries for the failure of the Commissions policies. But we have to go further and define a more active growth strategy. This would be economically useful, socially necessary and politically wise.
The wrong approach of austerity
Wolfgang Münchau was right, when he recently stated in an article headlined: „Austerity is the obstacle to real reform“ that „in Europe, the word reform is as misleading as it is ubiquitous…. By putting fiscal consolidation first, the political establishment took a big gamble against what we know from history“. As the S&D Group, we are against this kind of gamble. We rather prefer to learn from history.
Centre-left policies are vital for economic growth and creation of jobs. And, by respecting citizens‘ needs and expectations, reforms can be more easily implemented. As leader of the S&D Group I am very happy that „our“ independent Annual Growth Survey, which was undertaken without any political influence from our side, goes exactly in this direction. Our political and moral mind-set, as well as the values we cherish, coincide with economic arguments and reasoning.
Less or more government?
Let me briefly come back to the role of governments and of the EU, as such. By the right side of the political spectrum Social Democrats are often criticized for their resistance towards „structural reforms“. If, behind the term „structural reforms“ are hidden mainly cuts in wages and social expenditure, as well as devastation of state authorities, then the criticism is perfectly correct. But for us, structural reforms mean the creation of an active and efficient(!) state, including a lively social dialogue and well founded labour market reforms.
In this respect I want to mention two economists, Nouriel Roubini and Stephen Mihm. They end their book „Crises Economics“ with a clear statement on the role of public authorities:
„Paradoxically, making free markets function better, and enabling workers to be more flexible and more mobile in a global economy where „creative destruction“ will be the norm, requires more, not less government.
Government can use monetary policy and increased regulation to keep booms and busts from occurring.
It can provide a broad social safety net to help make workers more productive and flexible. It can implement tax systems that will reduce inequalities of wealth and income.
Finally, government will need to take a bigger role in more closely coordinating their economic policies so as not to create the kind of imbalances that produce crises in the first place.“…
Social democracy is a reform movement!
In the actual reform debate in Europe Neo-liberals very often present themselves as reformists and they put Social democrats in the anti reform corner. This is nonsense. But we are against the destruction of the principles of the welfare society and we fight for a socially oriented Europe. We are pleading for an active social dialogue on the national and the European level.
On the other hand we should take the criticism of many citizens and also business of an all to often inflexible and bureaucratic state serious. We need political systems which, while protective of the weaker and our values and policies, are reacting quickly and efficiently to the needs of citizens and investors. In many of our states we need these kind of structural reforms, which may include labour market reforms.
But again, structural reforms for us have a broader meaning and must not undermine basic achievements of Social democracy and labour unions. We can clearly see, that many of the most successful countries in Europe have a strong social dialog, active unions, targeted employment policies, especially for the young and extensive social rights.
The role of labour market reforms
Therefore the call for labour market reforms should not be used to destroy sound labour relations, but to improve these relations and try to get more people and especially the young into jobs. And the reforms should also be used to fight against the growing number of precarious jobs. These reforms should be done and defined after detailed studies of the successful labour market structures and not been based on ideology.. We have to stick to the concept of „flexicurity“ in its whole approach. It is about flexibility and (!) security. And therefore labour market changes should be connected with an active labour market policy!
In this respect we can learn a lot also from Germany and other economically successful smaller countries. It is mostly not the measures Merkel and the present German government tries to impose on other countries. From the extensive social dialogue, workers participation to the model of dual education and Kurzarbeit, Europe and many member countries could profit from adapting their policies along these characteristics.
No country is perfect, and the rising numbers of precarious jobs and the recent „poverty report“ for Germany show the weaknesses also of the German economy and society. But this country is much less organized according to the line of Merkel’s advice to the other member states, than along the lines of a developed and reformed welfare state. With all the failures and mistakes Germany and some smaller countries can present good examples to other countries including the necessity of maintaining a viable industrial structure and of a strong social dialogue.
We must leave the stereotype discussions between the „South“ and the „North“. We should look to the facts and develop partnerships between regions, cities and other institutions across Europe. This kind of partnership is specially important for the trade unions. They have to develop an intensive dialogue about best practices on and in the labour markets. And together with their political friends they can fight against undermining social partnership and collective bargaining. Together we can fight for the optimal conditions, including on the labour market to create sustainable jobs and raise the productivity of our economy.
And here we come back to Europe. The EU must take this job of coordination and implementation of sound economic policies seriously. At the same time we must not neglect the other factors of viable and effective crisis prevention and management, particularly the social side of the coin. This side has been all too often „forgotten“!
And the disregard of the social concerns of European citizens is our particular criticism towards the European Commission. Much resistance against a bigger role of the Commission has its origin in the one-sided Commission pressure for less state and more liberalization, which sometimes leads to outright privatization. Exactly that kind of policy is responsible, to a bigger extent, for the resistance to necessary reforms than peoples‘ fundamental unwillingness to change.
In the meantime we see an even growing resistance against austerity, national inequalities and rigid public structures but also against „outside“ interference from the EU. Europe is seen not as a reform partner, but as an intruder and national politicians as executers of Merkel, the Commission and the Troikas. Recent election results, like those in Italy and many mass demonstrations from Bulgaria to Portugal show this discontent.
In this respect we must not just call for more Europe. If it is more of the same, it will not help. And therefore we should also not rush into a new constitutional debate and start a new Convention. We would certainly fail with such an approach. We have to work in the present constitutional framework, but we must define and develop a more socially responsive Europe and a new relationship between „Brussels“ and the different political levels in the member states.
In addition we must find new communication lines between the citizens and the public sphere, including the European level. And we have to win back the middle classes, who see themselves deprived from stepping up the ladder of economic and social success. A more social Europe is not only one which is fighting against poverty and for the lowest income groups, but also one who takes up the concerns of the middle class in fearing to lose economic and social status benefits. We need a lot of rethinking and brainstorming how to a achieve that reorientation, but we cannot continue according the principle: business as usual.
At the beginning I wondered if there is an alternative to today’s European mainstream economic policy. My answer is, yes there is! But no single country can jump out of this mainstream policy individually, as it would be sanctioned by the others, the European Commission and especially the markets. Only together can we opt for another strategy.
I am still puzzled why there is no stronger willingness and readiness to dare an alternative option jointly. Many national politicians look at their national problems and define national remedies, but they do not see the chances of a collective, European strategy. With a coordinated European policy the fight for more growth and against unemployment would be less costly and harmful and more effective. We have to convince many of our national politicians, that change is not only necessary and desirable but also possible – in a joint European framework.