Eurozone’s future must involve break with austerity

June 24, 2017

The article below is an abridged version of a speech given by Emma Clancy on behalf of Sinn Fein at a European United Left-Nordic Green Left (GUE/NGL) conference on the “Future of the EU” in Donostia/San Sebastian on June 5. It was first published at emmaclancy.com.

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The European Commission, a European Union institution responsible for its day-to-day operations, released a “reflection paper” in late May on deepening the EU’s Economic and Monetary Union (EMU).

There is one positive element of this reflection paper — the Commission finally admits that the status quo, and the divergence it has led to, is unsustainable and has to change.

But the proposals to deepen the EMU entirely fail to address the problems caused by the structural flaws of the eurozone, which are becoming clearer and are now acknowledged by mainstream economists.

The reflection paper is not so much a new proposal from the Commission as it is the product of a political compromise between German chancellor Angela Merkel and French President Emmanuel Macron, arising from their recent discussions.

Reading between the lines, we can see the longstanding French demand for some limited financial transfers is proposed, in exchange for not taking action against the huge and destructive German current account surplus — and for handing over yet further economic powers to the Commission.

The German surplus is the cause of existing debt crises in the eurozone and will be the cause of future crises. If one country is constantly exporting more than it imports, other countries — in this case, the EU peripheral countries — will have to import more than they export.

This does not just hurt the so-called periphery. German workers also suffer the consequences of this strategy as their wages are kept permanently low, often at poverty level.

But while the EU’s “rules” set a limit for current account balances of plus-6% of GDP, no sanctions have been imposed against Berlin. This is despite Germany exceeding this limit for 21 consecutive quarters and for 31 out of 40 quarters since the start of 2007.

The idea that every eurozone country should adopt an export-led growth model should not only be rejected because it is based on exploitation, but also because it is economically impossible.

Ireland

The Irish state is the poster child for EU countries with a “memorandum of understanding” imposed on them to impose spending cuts in terms of its recent economic recovery. The narrative goes that the Irish state followed all the EU rules, swallowed the structural reforms and experienced export-led growth.

Leaving aside the fact that last year’s ludicrous 26% growth rate in GDP was based on Ireland’s facilitation of high levels of corporate tax avoidance, there has been some jobs growth over the past two years.

It is important to note that these growth areas for jobs have not come from foreign direct investment or the Irish government’s tax-haven strategy. Growth took place in the agriculture and food sectors, and in accommodation and tourism.

This growth was based on two related factors. The first was the devaluation of the euro as a result of the crisis. The second was the relatively higher economic growth in Britain and the US, the Irish state’s two largest trading partners.

Devaluation of the euro was critical to the recovery experienced in the Irish indigenous sector. The relative growth in the US and Britain was also influenced by the fact that these two states are not constrained by the Fiscal Compact rules that aim to limit debt. Borrowing in the US and Britain did not fall below 3% since 2008.

But the specific circumstances of the Irish state also mean this recovery cannot be transposed or replicated in other member states of the EU.

It also poses significant risks, especially the risk of a significant devaluation of sterling as a result of Brexit. The devaluation of sterling post-Brexit would likely have a devastating impact on Ireland’s fragile recovery.

The Irish recovery happened in spite of, not because of, the EU austerity recipe.

What Ireland is actually a poster child for is the role currency devaluation can play in recovery when you are trading predominantly with other currencies.

Exchanging rights?

Despite acknowledging that the EMU’s status quo is unsustainable, the Commission declares its firm support for continuing the European Semester and the Fiscal Compact.

Probably the three most significant aspects of the reflection paper from our perspective — all of which have been floated before — are its proposal to create a European Unemployment Insurance Scheme, the proposal for an EU finance minister and for an “investment protection program” to ensure public investment is maintained during an economic downturn.

In typical Commission fashion, the idea of a European Unemployment Insurance Scheme is dangled to gain public support. But the trade-off is the “harmonisation” of labour relations and anti-worker reforms.

As for the proposed “investment scheme”, it is contradictory nonsense to create a scheme to protect investment during economic downturns while at the same time insisting on keeping the macroeconomic straitjacket of the Fiscal Compact firmly in place.

Limited transfers would require permanent structural reforms for EU member states under the supervision of an EU finance minister.

We do not oppose redistributive transfers to the so-called peripheral states to correct the imbalances that damage our economies. And of course we are in favour of protecting investment levels in the crisis-hit countries.

But these measures are utterly insufficient to address the underlying structural problems in the EMU and they all demand trade-offs in rights, democracy and popular sovereignty.

So there will be a deepening of two major discussions in the EU in the near future – one on the EU budgetary capacity and one on improving social rights, linked to these proposals in the reflection paper.

We do not oppose transfers to correct imbalances caused by the euro, but we will oppose them if they are linked to conditionality. Social rights cannot be dependent on economic performance or a state’s following of the fiscal rules. Rights are rights.

The left in Europe should not fall for the trap of surrendering more ground to the Commission in exchange for these crumbs from the table.

Deregulation

At the same time as you have these plans for deepening the EMU based on permanent austerity, and the dubious economic model of export-led growth, we also have a drive to dismantle the limited financial regulation that was enacted after the Great Financial Crisis.

We have a new drive, too, for the public to again bail out the banks. We can see it both in the Commission green-lighting the recent Italian bailout using a loophole in the Banking Union legislation that you could drive a truck through. It can also be seen through the European Banking Authority and European Central Bank recently pushing the idea that public funds should be used to solve the “non-performing loan” problem.

The challenges for the left in the coming period will continue to be defensive to try to halt the march of permanent austerity. We need to prevent the deepening and expansion of the EMU.

In the short term, we need to campaign for effective sanctions against current account surpluses; for investment to be excluded from the fiscal rules; to try to reject the attempt to incorporate the Fiscal Compact into the treaties at the end of this year; and for a real public investment plan to stimulate growth.

We are open to examining options for fundamental reform of the euro towards flexibility mechanisms or other possibilities. Some of the ideas outlined in Nobel Prize-winning economist Joseph Stiglitz’s book on the future of the euro are definitely worthy of consideration by the left.

But the option of an exit from the eurozone should also be viable and supported for member states that choose to do this as a result of their economic circumstances. By the same token, states who want to remain within the eurozone should not be blackmailed or kicked out of the common currency against their will.

We have all seen the elites across the EU celebrating the election results in the Netherlands and France, fostering a sense of triumphalism and complacency when what we should all be experiencing is alarm at the growth of the far right. But it is not inevitable that popular anger at the status quo is channelled into the far right.

We face the urgent challenge of developing, communicating and organising around a program that can win popular support. The effective, bold and principled Labour campaign in Britain under Jeremy Corbyn’s leadership is something we can learn a lot from across Europe.

Corbyn successfully managed to shift the debate from a narrow discussion on the terms of the British exit at the start of the campaign, to one about what kind of country do people want to live in and in what kind of world?

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