Europe from the periphery

Paul Sweeney: These days, Europe appears to be a cold place viewed from the periphery in Ireland. We are being bailed out and supported in many ways by the Troika of the EU, ECB and IMF, but the terms imposed upon citizens largely reflect the liberal economic perspective. We are four long years into austerity. Indicators are no longer falling, but little is rising, particularly green shoots.

At this inauspicious time, a progressive vision for Europe demands a strong focus by progressive parties and organisations on the European Social Model and a clear understanding what is meant by the abused word “competitiveness.” This small western island hjas been laid low by liberal economics but,with European solidarity and support, rather than punishment and austerity, can rebound as a model member state. As progressives, we also need to consciously set out to restore the wage share in national income to improve equity, social cohesions, personal income distribution, longer term wealth distribution, macroeconomic stability and the composition of aggregate demand.

Persuading Voters that the Post-War European Social Compact is Alive and Well

Economic and social progress in Europe since the war has been remarkable. Living standards and improvements in housing, health and peoples’ security have been excellent. There had been a consensus with conservatives that national income and wealth would be shared, but with the prolonged crisis, growing numbers of conservatives no longer want to share. The cake is no longer growing – thanks to their policies - and they want to keep more of it for themselves.

But the best way to grow national income is though social solidarity, education, investment, efficient public services and equitable incomes.

Re-building the European Social Model must be the priority of all progressive forces in Europe. Many Europeans fear that governments are neglecting citizens and are obsessed by appeasing the financial markets; have a very narrow view of “competitiveness”; and with fiscal rectitude. This means that the Post-War European Social Compact appears to be dying or dead for increasing numbers of European citizens.

Apparent confirmation of its death was given by the key unelected European leader, Mario Draghi, who was quoted in the Wall Street Journal earlier this year as saying that “Europe's vaunted social model is "already gone”." Thus a clarion call for all progressive parties must be that the European Social Model is very much alive. Not alone will it continue to be a core objective in progressives’ policy implementation in government, but we should guarantee that the Social Model will be enhanced in line with economic and social progress.

The prolonged ineptitude of European leaders, predominantly conservatives, in dealing with the crisis effectively has undermined public confidence in the European project. The failure of austerity measures has led the same leaders to pursue them with more vigour, instead of learning from their mistakes. The Fiscal Compact will exacerbate the problem.

Mr. Draghi also argued that “austerity, coupled with structural change, is the only option for economic renewal”. Like ancient Greek priests, appeasing the gods with sacrifices, he wants to feed even more of our living standards to the markets, saying "Backtracking on fiscal targets would elicit an immediate reaction by the market."

On top of this deep crisis, there are great challenges with ageing populations straining pensions, rising health costs, environmental issues and much more. There is a hollowing-out of the middle with the growth in “Cool Jobs and Crap Jobs” worldwide. Solid pensionable jobs like banking, computing, parts of accounting, engineering etc. are being de-skilled and outsourced from Europe. The polarisation of jobs is a vital area which has to be addressed.

Some of these challenges may mean doing things very differently, but all can be overcome. Revitalising the Social Model is the key to rebuilding confidence in Europe. One step in this direction is to have a clear understanding of one of the most abused concepts in modern economics- “competitiveness".

Competitiveness is Poorly Understood

The most abused word in modern political economy is “competitiveness.” It is not just that each economist has a different definition, but even the same economist may define it in several ways. For most of them and for many institutions it is simply a description of short-term movements in wages. A more sophisticated definition is of short run movements in unit labour costs, but both are too often ideological, using easily available data to beat up workers and trade unions. This is now a tired abuse of what can be a helpful concept in modern economics in measuring national economic progress. Unless we all subscribe to the same understanding, we must avoid this abused word/concept.

A good definition (as given in the 2003 European Comission Report on Competitiveness) is: “Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment on a sustainable basis.” But this does not inform on how to measure it.

I suggest the complexity of the issue is best understood by examining the work of Ireland’s tripartite National Competitiveness Council, which represents unions, employers and Government (albeit with only one-eighth union representation). It produces an annual Benchmarking or Scorecard report covering Ireland’s competitiveness performance in a comprehensive and coherent way. It has a collection of statistical indicators against a whole-of-economy comparison to 17 other economies and the OECD or EU average. Costs and labour costs are included but they are only a small part of the overall measurement of a country’s competitiveness. It is deeply disappointing that sophisticated analysts such as the OECD, IMF etc. still define competitiveness only in terms of unit labour costs. But perhaps it is deliberately ideological?

It is worth remembering that only 9% of EU GDP is exported (measuring the exports in value added, not gross, terms), which means EU countries are very largely competing with themselves. We do buy European, already! However, competitiveness is worth benchmarking, if done properly.

A View from a Troubled Western Island

It is essential to avoid the core/periphery break up in Europe. Ireland grew from one of the poorest of the poor in Europe to one of the richest in twenty years, thanks in no small part to its membership of the Union. It is facing enormous economic problems at present, but provided we get support in facing our staggering and perhaps insurmountable private banking debts, Ireland will recover and revert to become a net contributor to the Union’s funds.

Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations”. However, these debts are not ours, but those of the private defunct banks, which our sacked government guaranteed, in our name, without our consent.

Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.

Today Irish taxpayers are repaying the bank creditors (EU banks and hedge funds) of the six Irish banks which were socialised. This is an impossible task for 1.8 million people at work, where GDP has collapsed by over 13 per cent between 2008 and 2011, GNP by over 16 per cent and domestic demand by a staggering 24.9 per cent and is still in decline. Unemployment is at 14.6 per cent. When discouraged workers, those who would like to work full time, are included the official figure rises to 25 per cent. Youth unemployment is soaring and long term unemployment is 60.3 of the total.

When the trade unions first met the ECB, EU, IMF Troika in late 2010 when Ireland was placed in Examinership, we pointed out that Ireland has many core strengths, but that the bailout package agreed by the Government with them made the economic recovery very difficult. We said that the deflationary impacts of the measures in the package are such that growth has little chance of reviving. This has been proven to be correct - unless one gives credence to the technical definition of “the end of recession” with a few recent quarters of very weak growth in GDP. It will take many years to makes up for the fall of 13 per cent at current rates, especially with citizens’ taxes diverted to fund the apparently endless private bank bailout.


The previous government tried an experiment in Internal Devaluation because there could be no devaluation in a single currency area. Fortunately, this strategy failed.

Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. Overall, the average employee who remained in work saw no decline in real hourly earnings from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises. The real losses were the considerable numbers (a huge 14 per cent fall) who lost their jobs. A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours” (see Walsh, Kieran “Wage bill change during the recession: how have employers reacted to the downturn?” Statistical and Social Enquiry Society of Ireland, February, 2012)

This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which averaged 14 per cent) provided there is support for substantial change, which is occurring.

The relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. It is crucial that the core economies which are performing well, act in solidarity and not in punishment to the underperforming peripherals.

Nor should we entertain the idea of a ‘two speed’ Europe, which could allow an inner core to move towards closer economic and political union supposedly “to protect the Union as a whole.” To move in that direction is to abandon solidarity and to miss this opportunity to build a cohesive Europe.

Restoring the Wage Share of National Income

The share of national income going to wages has fallen considerably in most developed countries since the early 1970s. There has been a slight reversal in recent years, but it is forecast to fall back again. One explanation for the falling labour share and rising share to capital might be that there has been an intensification of capital investment. However, against that, there has been a huge improvement in human capital with all countries seeing major increases in educational and skills attainment. It seems that the investment in human capital is not being rewarded by increases in labour’s share of national income. As less national income is going to workers, this has a secular impact on aggregate demand and thus on growth.

The issue of the decline in labour income share involves equity, social cohesion and personal income distribution, longer-term wealth distribution, macroeconomic stability and the composition of aggregate demand.

The “American Dream” of the next generation enjoying a higher standard of living than their parents has been dead since the early 1970s. Since 1975 US workers’ median incomes have not risen. There are hard lessons to be learned from America. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from Asia which reduced the cost of living. It was further masked by the growth in dual-income families, where there had only been one earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class”.

The fall in labour’s share of national income was also driven by globalisation, accelerated by technology, falling prices in transport and instant communications. In turn, these trends were accentuated by liberalisation of borders and markets, especially labour markets.

The value of the fall between 1973 and 2011 is substantial in monetary terms. Even with the smallest decline which as in France of 3.5%, it is still a transfer of €71bn from labour’s share of GDP to capital. For Germany it is €137bn.[Click to enlarge table below].

The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.

There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Simultaneously, people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. The aversion of many governments and major institutions like the IMF and OECD to progressive income taxes which they now pejoratively term “taxes on labour” means that if acted upon, taxation will fail to be a redistributive mechanism. It also means that the great polarisation of incomes will continue unchecked and citizens will grow even more angry and frustrated.

A Common Fiscal Policy is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash. I would go for tax coordination rather than harmonisation where member states can set rates, within bands, though a common tax base for companies makes sense in a single market.

Conclusion

The real irony in Europe is that this deep crisis was caused by neo-liberal economic policies. Yet it is conservatives who are in power in most member states. They are prolonging the crisis with the same old failed policies and general incompetence. Some are even reverting to narrow nationalism. Instead, bold action with an EU-wide stimulus and policies informed by a longer term vision of European solidarity is required.

There is a lesson in this for us all. That is to replenish our vision by going back to core ideas, sticking to them in a principled way and being innovative in our policy responses.
Part of this post is based on a a presentation given to a meeting of progressive groups, parties and individuals in the French Parliament on Friday March 16th entitled "The Renaissance of Europe". It was sponsored by four EU think-tanks: FEPF, Jean Jaures, Friedrich Ebert Stiftung and Italianieuropei. This event will be followed by seminars in Rome and Berlin in advance of the Italian and German elections.