Fighting austerity Reclaiming the European

Project

ISS Development Research Seminars 2012-13

Social Policy after the Financial Crisis11 December 2012Marica Frangakis

Nicos Poulantzas Institute

Outline

Definition of concepts; theoretical issues Etymology – Ideology – Hegemony Policy vehicles for the implementation of

austerity in the EU Fiscal consolidation – Liberalisation – Privatisation Implications of austerity for the economy and

for society Deepening recession – Unemployment - Poverty Reflections on outlook and alternatives

Etymology – Ideology – Hegemony: Where do the terms come from, how are they used & to what effect “Austerity” (most looked up-word in 2010) : “non-

indulgence, ascetism, self-denial, self-discipline, plainness, sobriety, puritanism, solemnity, strictness, etc.’ (Collins Thesaurus of the English Language, 2002)

Capture of terms linked to universal values: Implicitly, notion of public debt is rejected, as ‘inherently bad/wrong’ analogy with private debt

Rationale - If it is prudent for individuals to avoid getting into debt, would it not be wise for governments to do the same? If a government does become indebted, would it not be best for it to suppress expenditure &/or increase public receipts, so as to reduce, if not extinguish, the public debt?

Public debt fetichism – rationale and fallacies Robert Skidelsky: Does debt matter? Fallacies – 1. Governments have “monetary sovereignty’;

2. Reducing the public deficit shrinks the economy; 3. Public debt = transfer of wealth from taxpayers to bond holders, not a net burden; 4. No connection between size of public debt and price government must pay to finance it; 5. Low borrowing costs for governments do not necessarily reduce interest rate the cost of capital for private sector

Ideological undertones - Attempt by financial industry to shift public discourse from the need for radical changes in the financial sector to the ‘living-beyond-one’s means’ accusation in order to secure more bail-outs for the banks and deflect pressures for financial policy reform

Austerity: economic necessity or political project? Theoretical presumption - The effect of any government

deficit is mitigated by compensatory changes in the representative agent’s spending decisions. Hence, reducing government deficit allows the private sector to consume more. Also, high public debt ratios reduce the rate of growth through a rise in savings and through the crowding out of private investment supply side considerations

Fallacy - As Keynes argued long ago, running a government deficit is a necessity, especially if it is held domestically, since it provides the private sector with new funds for saving and a means to save (interest-bearing government bonds), thereby increasing private sector wealth and reducing the need to save from current income, i.e. leading to increased demand and consumption. More so at a time of crisis and recession

Hegemony - The power of the narrative “… our fundamental outlook about the economy, at the level of

the average person, is closely bound up with stories of excess borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years” (Robert J. Shiller, The Great Debt Scare)

Eurobarometer Social Climate Index – evaluation of the current situation (range from -10 to +10)

EU27 - 2012, -0.8; 2011, -0.6; 2010, -0,7; 2009, -0.7 Highest values (2.8) in Benelux, Nordic, Austria and Germany

Lowest values in Southern and Eastern countries; Greece – the lowest ranked member state in 3 out of 4 years (-5.8)

Uncertainty about recovery+decline in income/confidence = holds back new investment & household consumption

EU austerity policy vehicles Stability and Growth Pact - Upper limits on public deficit

(3% GDP) & public debt (60% GDP) + ‘excessive deficit procedure’: adjust via fiscal austerity or face sanctions;

Austerity policy becoming stricter since beginning of crisis ‘Fiscal compact’ - Changing national legislation,

preferably via amendments to EZ member states’ constitutions, to include: (i) ‘debt brake’ – max. allowed structural (cyclically adjusted) budget deficit 0.5% GDP; (ii) debt reduction roadmap - each year government debt to be reduced by 1/20th of difference between actual level and 60% GDP benchmark; (iii) sanctions on non-complying countries to be imposed by European Court of Justice: interest-bearing deposits/fines (Treaty on Stability, Coordination and Governance)

Austerity and conditionality “Within the new framework of the European semester, the

European Council endorsed the priorities for fiscal consolidation and structural reform. It underscored the need to give priority to restoring sound budgets and fiscal sustainability, reducing unemployment through labour market reforms and making new efforts to enhance growth” (E.C., 24/25 March 2011, Conclusions, p. 2)

‘Austerity’, a multifaceted policy = fiscal consolidation + labour market reform + market liberalisation’

EU/IMF Programmes for Greece, Ireland, Portugal, Hungary, Latvia and Romania

Conditionality for monetary support = ECB and Outright Monetary Transactions & for fiscal aid = EFSF & ESM

Economic implications of austerity Fiscal consolidation – Cutting down goverment consumption

impacts negatively on output/economy – The larger the multiplier, the greater the effect

IMF: “… the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2 … the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher in the range of 0.9 to 1.7 (WEO Oct 2012: 41-43)

Public & social expenditure cuts: more negative effects than raising taxes; ‘frontloading’ fiscal cuts: harsher/more protracted negative effects on output than gradual consolidation; long-run hysteresis effects

As GDP debt ratio explodes and financial pressures

GDP growth rates 2008-2012 (% pa; 2005 market prices)

EU27 UK Germany France Italy Ireland Greece Spain Portugal

2008 0,3 -1 1,1 -0,1 -1,2 -2,1 -0,2 0,9 0

2009 -4,3 -4 -5,1 -3,1 -5,5 -5,5 -3,1 -3,7 -2,9

2010 2,1 1,8 4,2 1,7 1,8 -0,8 -4,9 -0,3 1,4

2011 1,5 0,9 3 1,7 0,4 1,4 -7,1 0,4 -1,7

2012 -0,3 -0,3 0,8 0,2 -2,3 0,4 -6 -1,4 -3

Slovenia SlovakiaCzechRepublic Poland Hungary Bulgaria Romania Estonia Latvia Lithuania

2008 3,4 5,8 3,1 5,1 0,9 6,2 7,3 -4,2 -3,3 2,9

2009 -7,8 -4,9 -4,5 1,6 -6,8 -5,5 -6,6 -14,1 -17,7 -14,8

2010 1,2 4,4 2,5 3,9 1,3 0,4 -1,6 3,3 -0,9 1,5

2011 0,6 3,2 1,9 4,3 1,6 1,7 2,5 8,3 5,5 5,9

2012 -2,3 2,6 -1,3 2,4 -1,2 0,8 0,8 2,5 4,3 2,9

Public debt/GDP ratio, 2008-2012 (%)

EU27 UK Germany France Italy Ireland Greece Spain Portugal

2008 62,2 52,3 66,8 68,2 106,1 44,5 112,9 40,2 71,7

2009 74,6 67,8 74,5 79,2 116,4 64,9 129,7 53,9 83,2

2010 80,2 79,4 82,5 82,3 119,2 92,2 148,3 61,5 93,5

2011 83 85 80,5 86 120,7 106,4 170,6 69,3 108,1

2012 86,8 88,7 81,7 90 126,5 117,6 176,7 86,1 119,1

Slovenia SlovakiaCzech Republic Poland Hungary Bulgaria Romania Estonia Latvia Lithuania

2008 22 27,9 28,7 47,1 73 13,7 13,4 4,5 19,8 15,5

2009 35 35,6 34,2 50,9 79,8 14,6 23,6 7,2 36,7 29,3

2010 38,6 41 37,8 54,8 81,8 16,2 30,5 6,7 44,5 37,9

2011 46,9 43,3 40,8 56,4 81,4 16,3 33,4 6,1 42,2 38,5

2012 54 51,7 45,1 55,5 78,4 19,5 34,6 10,5 41,9 41,6

An extreme case (so far) – The Greek economy in collapse

2007 2008 2009 2010 2011 20120

20

40

60

80

100

120

140

160

180GDP Final consumption expenditure Gross capital formationDomestic Demand Gen. govt debt (% GDP)

Social implications of austerity - Channels Labour market: unemployment;

underemployment – inactivity – flexibility The ‘lost’ generation - NEETs Long-term unemployment Wages: moderation and deflation; wage

share on a long-term downward trend Commodification of public services – esp.

education and health – through liberalisation and privatisation

Financial distress - poverty/social exclusion

EU27 employment & unemployment

EU17EU27

BEBGCZDKDEEEIE

ELESFRIT

CYLVLTLUHUMTNLATPLPTRO

SISKFI

SEUK

0 10 20 30 40 50 60

11.710.7

7.512.6

7.37.7

5.49.6

14.725.4

26.210.711.1

12.914.2

12.45.1

10.86.6

5.54.3

10.417.3

6.98.6

147.77.77.8

23.923.4

18.830.3

20.713.7

8.119.1

29.957

55.925.5

36.529.3

31.924.3

18.629.9

16.89.8

8.527.8

39.123

17.530.1

18.823

20.6

Unemployment rates (%) Oct 12 Youth (<25) Unemployment rates (%) Oct 12 Total

Share of ‘Neither in employment nor in education or training” (NEETs) among 15-24 year olds (%)

Long-term unemployment rate as % of active population 2008 & 2012

Flexibility - Underemployment & hidden unemployment (million persons)

Wage moderation/deflation (% pa)

EU27 UK Germany France Italy Ireland Greece SpainPortug

al

2008 0,8 -1,5 1,3 0,2 1,3 8,8 -1,1 4,4 1,4

2009 0,7 1,4 -1 1,3 -0,4 3,9 1,2 4,3 1,9

2010 1,1 0 1,4 1,5 1,9 -0,9 -3,7 -0,4 0,3

2011 0,7 -0,7 2,2 1,5 0 0 -4,4 -0,3 -1,4

2012 0,5 0.3 1,3 0,3 -0,3 -0,9 -6,4 0,2 -3,2

Slovenia SlovakiaCzech

Republic Poland Hungary Bulgaria Romania Estonia Latvia Lithuania

2008 2,9 4 2,2 5,6 1,9 7,3 14,5 4 2,4 4,3

2009 -1,7 3,7 -2,9 -0,2 -5 4,9 -5,9 -1,8 -11,6 -6,7

2010 5 4,5 5 3,3 -2,7 8,2 1,5 1,1 -5,6 -2,4

2011 0,6 -0,6 3,5 0,9 -0,1 2,2 -4 -3 11,7 -1,7

2012 -0,6 -1,5 1,7 1,2 0 4,1 0,2 1,8 0,7 1,2

Wage share as % GDP at current factor cost

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201162

63

64

65

66

67

68

EU27 Linear (EU27) EU17 Linear (EU17)

Commodification of public services Healthcare and education – ‘citizenship rights’ –

commodification goes back to 1970s, picking up in 1990s and escalating in current crisis

Europe 2020 targets for education – Reducing early school leavers to less than 10% (14% 2011) & increasing tertiary education attainment to more than 40% (35% 2011)

Experience points to the fact that the use of market mechanisms or greater reliance upon the private sector does not lead to reduced costs, nor to greater efficiency.

Instead, it results in increased inequalities in terms of access and quality of services, especially for the poorer sections of the population, as well as in worsening conditions for those employed in these sectors

Financial distress of EU households by income quartile of household 2000-2012

Changes in proportion (%) of people at risk of poverty or social exclusion (AROPE) 2008-2010

Children in poverty – Social transfers make little difference

Political implications of austerity – Fragile legitimacy of European project under question

The case of Greece - The political system in flux: Electoral results 2009, 2012 (% share of votes)

2009 6 May 2012 17 June 2012

New Democracy 33.48 18.85 29.66

SYRIZA (Radical Left Alliance)

4.60 16.78 26.89

PASOK (Panhellenic socialist movement)

43.92 13.18 12.28

Independent Greeks (split from ND)

-- 10.6 7.51

Golden Dawn (fascists) -- 6.97 6.92

Democratic Left (split from SYRIZA)

-- 6.11 6.26

KKE (Communist Party) 7.54 8.54 4.50

LAOS (extreme right wing) 5.63 -- --

The games financial markets play…

Overall … Austerity – Based on theoretical fallacies with regard to the

nature of the public debt and the implications of fiscal contraction for the economy and for society

More of a political project, aiming at increasing the flexibility of the labour market and the shrinking of the social provisioning role of the state; the ‘political economy of the crisis’ reading

The ‘fiscal profligacy’ narrative needs to be displaced The experience of the EU and esp. of its peripheral states

reveals the failure of the current regime to revive the economy and to address the social ills – instead, undermining cohesion

Right & Left are facing each other in the restructuring of the political system/project; danger of the rise of the populist and fascist right in the face of the fragmentation of the Left; actors

Reflections on alternatives Short-term measures - (i) Change in the narrative – regain

the hegemony; (ii) abandonment of austerity policy – fighting poverty and inequality; (iii) reinstatement of public services - incorporation of social welfare objectives in economic policy; (iv) reversal of the deterioration in worker rights and employment protection regime; (v) kick-starting the economy especially in the periphery

Long-run project – (i) Foster long-term policy of sustainable development designed to deal with divergences within EU; (ii) adapt EMU to serve long-run goals; (iii) strengthen worker rights and restructure institutional framework, so that antagonistic wage policies are avoided; (iv) regulate finance

Reclaiming the European project – To the extent that the current regime precludes socially progressive solutions, need to change the EU radically; reclaim the European project