ROLLING BACK THE ROLLBACK | 17.04.2014
Central European University | School of Public Policy
Spaces & strategies for reviving democracy and open societies in Europe
Economic Regime in Greece | 17.04.2014
A. INTRODUCTION
Dear organizers, dear colleagues and friends,
It is a great honour for me to be here with you today and also a great opportunity to communicate all this knowledge and intellectual vigour during this great conference. Please allow me to congratulate you and thank you for organising this thought-provoking event.
I will briefly make a series of comments in an effort to draw a picture on the social and economic developments which occurred over the last 5 years in the EU, the European South, and especially my country, Greece.
My basic argument is that austerity failed and will continue to fail to address social and economic issues in Greece and in the EU. I will close my intervention by putting forward a series of proposals for further discussion.
B. ROLLBACK OF DEMOCRACY IN THE EU, THE EUROPEAN SOUTH, GREECE
Where does Europe stand today? Sadly one has to acknowledge that the EU is weaker in economic, political and social terms. The prevalence of austerity or ‘growth friendly consolidation’, as it was the ‘mantra’ of Jean Claude Trichet:
- has triggered new negative centrifugal forces in decision making, as debtor states have delegated their economic sovereignty to unaccountable institutions,
- the morality play used by the Franco-German duo in the wake of the crisis to play for time and cope with the collapse of their banks unleashed preexisting nationalist stereotypes that still poison solidarity among nations,
- the euro has become a symbol of division, not of a common and prosperous promise for the future,
- popular support for the EU has reached an unprecedented low,
- inequality, especially among generations has surged, but worse,
- progressive political powers have been locked up in a intellectual superstition and for a long period denied institutional alternatives needed to halt the recess and assist the vulnerable and the poor social groups across the EU.
Given the above, I will make a set of remarks in the a series of broader categories
1.Economic Policy and Austerity Dogma
As many scholars have noted, there are four ways to escape the financial crisis: inflate, deflate, devalue and default. As it was the case for the Gold Standard era, the Eurozone could neither inflate or devalue. Austerity became the EMU’s primary mechanism of adjustment. The problem with austerity is that it has never produced the expected results. The cases of Romania, Estonia, Bulgaria, Latvia and Lithuania illustrate massive welfare loss, high unemployment and migration rates. The recovery of loss during austerity was never reached, high deficits and cuts in unit labor costs and the public sector produced ambiguous results.
As Mark Blyth summarises, “austerity remains an ideology immune to facts and empirical refutation. This is why it remains, despite any and all evidence we can muster against it, a very dangerous idea” (Blyth, 2013:222-226). Moreover, austerity encompasses a series of dangerous paradoxical beliefs; simultaneous devaluations and cuts create more debt, income inequality grows, debtors lose and creditors win (inflationary bias of democracy) and what is true for the whole is not true for the parts because if all member states implement austerity, no one will spend and recession will deepen (Blyth, 2013: 6-8). The burden of entrenchment is levied on the middle class, whose dependency on government services and transfers safeguards social cohesion. Unfair distributions and poorer social services provide skewed resources and jeopardize the foundations of democracy in societies. The pursuit of balanced budgets drives states to ‘take from their middle classes in the form of higher taxes, what these classes now save and invest, among other things in public debt.’ (Streeck, 2012).
Moreover, intergenerational justice is threatened, as current savers cease to pass their savings to their children and citizens cut down on social services that promote social mobility, as education. For instance, thousands of families in Greece make concessions on education and health expenses, 3 million are deprived of social insurance, a fact that contributes to the increase of the number of early school leavers (age 18-24) and the people facing chronic health problems from 2008 and onwards (Living conditions in Greece survey, April, 2013).
From an economics perspective, in Greece, a fatal cocktail of measures comprised of cuts on spending and higher taxation prolonged the slump and doomed the economy to contraction. Decrease in domestic demand helped the current account to balance, however, Greece’s exports have been slow downed due to high costs of borrowing and the liquidity crunch. Today, even the IMF has admitted policy mistakes applied in the case of Greece (case of negative fiscal multiplier).
Allow me to highlight why internal devaluation does not produce results in Greece: it is the export sector that becomes the main engine/driver of growth when domestic demand collapses. If exporting companies are locked up in a liquidity crunch, their products remain relatively expensive and they cannot produce innovative tradables, hence they lose in competitiveness. Bringing the labour costs down while keeping borrowing and energy costs high does not make the companies more attractive or competitive at the international level.
To add more on the austerity debate, you might be more familiar with the cases of REBLLs (Romania, Estonia, Bulgaria, Latvia, Lithuania). Almost all of them were inward looking economies, they had no incentive to export, consumption was driving growth and their banking sector became merely foreign. In reality, the banking sector was dettached from the world of real economy and industrial investment and they supported consumption and construction bubbles, accompanied by nonproductive assets. When the crisis broke out, the foreign banks used the REBLLs assets to cover loses from elsewhere.
It was in Vienna in 2009 when the Troika, the Western Banks, Romania, Latvia and Hungary committed to austerity policies as a trade off for keeping their banks solvent. What followed was the prologue of the Greek, the Irish and the Portuguese crisis: it was all about saving the banks by dumping the burden on the public sector balance sheets. Your country had the bitter privilege of a preview of the European South crises (double-digit contraction in GDP, public sector wages were slashed, domestic consumption collapsed, cuts in social services caused havoc and taxes were increased – leading to massive tax evasion).
The Latvian case provides us with a useful example. 3 months ago Latvia joined the eurozone as the 18th member of the Union and after she had kept her currency pegged to the euro. Macro-economic stabilization and fiscal adjustment may have returned but at a bitter price, when 4-5 % of the working population has migrated and the country has lost ¼ of its GDP, as it is the case for Greece today.
2. Institutional asymmetries
Preexisting institutional assymmetries and macro-economic imbalances did not favor precise forecasts about the depth and the duration of recession. In reality, they exacerbated contradictory interests within the Troika actors, the Troika versus the national governments and the European Parliament versus the Troika.
Arguably, fiscal fecklessness of the Southerners was the symptom rather than a cause; a more thorough look on the institutional asymmetries embedded in the Single European Market and the EMU, especially between the northern and the southern states, reveal significant gaps in the capitalism models adopted.
For instance, the coordinated continental economies of Germany, Belgium, Austria and the Netherlands follow different patterns of labor relations, collective bargaining, skills acquisition, inter-firm relations and competition, technology transfer, intra-firm relations with employees and stakeholder protection than the Mediterranean mixed market economy players (Greece, France, Italy, Portugal, Spain); what has driven export-led growth in the North (coordinated wage bargaining, sophisticated systems for skills formation and capacities for continuous innovation) was absent in the South (fissiparous trade unions, firms compete less on quality and more on cost, little focus on skill formation) as Peter Hall has argued.
When we focus on the welfare-state models, it is also evident that the ‘continental-conservative’ model addresses poverty through effective redistribution, provides generous unemployment benefits combined with strict employment protection legislation. Workers and their families enjoy a credible insurance system in contrast to the “Mediterranean model” (Greece, Italy, Spain, Portugal) were entitlements are segmented, the system is poorly redistributive with small impact on poverty reduction and employability and unemployment benefits are both low.
3. Efficiency of the Austerity Programs
As for the efficiency of the programs, Ireland has proclaimed success, Portugal is on its way out of the financial assistance and the Greek government is getting ready as we speak to issue its first government bonds after a 4-year isolation from the international financial markets. If one wants to be generous with the Troikas can see success in the current account and in the case of Greece an unprecedented fiscal adjustment which succeeded in bringing the budget deficit from 15,6% of GDP in 2009 in 2.6% in 2013.
However, it remains to be seen whether this ‘success’ is sustainable, given the general economic slowdown, the decline of exports in Greece and the slow recovery of the banking sector. Needless to say that Greece, despite this proclaimed success, is in a different trajectory due to its ailing public administration and some episodes of political instability related with the rise of the populist Left as well as the fragility of the current conservatives-socialists governmental coalition.
Second, there is evidence today that the manufacturing sector and industrial production were left outside of programs of structural readjustment, hence the tradable sector declined in the period from 2008 to 2011.
Although, according to conventional wisdom, the EU managed to converge the fast growing low income peripheral countries, the impact of the financial crisis has challenged the EU integration cohesion and convergence model, as today, growth for the peripheral weaker economies can only happen as an episode of external demand. Organizational, institutional and technology transfer is delayed in times of social and political instability, whereas the net inflow of capital for countries like Greece, Spain or Italy comes either from the EU structural funds or the tourist sector. The latter impedes much needed diversification of production and services.
If Greece had been able to increase the volume of its exports similarly to that of Spain or Portugal, i.e. by about 3 percentage points, this would have given a boost of about 5 percentage points to its GDP” (Alcidi & Gros 2013)
4. Inequality and Poverty
Speaking of a rollback, in the case of Greece and according to a Friedrich Ebert Institute research paper, in just 4 years, key indicators of living standards went back to where they were 15-20 years ago: national income, average earnings, median household incomes have been slashed.
There is also a recorded massive setback in purchasing power standards relative to the western-European standards. Although Greece converged towards the Western – european average 14.7% below the western living standards, today it has fallen back to the 60’s, having reached 34.3% below average. In other words, a considerable gap has been generated between Greece and the western European states.
Poverty seems to have affected families with children, hit by massive unemployment, whereas extreme poverty has reached 9.8% and 16.3% of child extreme poverty (224euros/month as a threshold. There is a recorded unmet access to public health (6.3% in 2011), while immigrant children of low income families or no income seem to be at risk.
Social impact of the bailout programs is huge: jobless growth, inequality and poverty reaching 22.3%, whereas extreme poverty has reached 14.3% (33.7% in unemployed workers)
If we focus on unemployment, prolonged recession has literally deregulated an already fragmented and unequal labour market – almost 4 million workers in Greece are in precarious jobs, whereas 3 million Greeks cannot afford their social insurance payments due to the rising costs of employment. (labour – intensive sectors like construction collapsed) – flexible and unofficial labor is surging due to the increase of the tourist sector.
Social Expenditure. Before the crisis, social expenditure in Greece had been rising significantly (much faster than GDP, which in turn rose faster than the EU average), however we still witness today gross inefficiencies / viability issues in core programmes, income support and social care to the poor and other vulnerable groups were neglected, serious gaps exist in the social safety net. In reality, the crisis increased the demand of social protection but the austerity reduced the supply of social protection but the policy debate has continued to be dominated by the protests of providers of social services, and of recipients of higher pensions little (if anything) has been done to protect users of essential services, or to improve support to low incomes, or to strengthen the social safety net in other ways.
According to Matsaganis, things might have been better if the victims of the recession could at least rely on the public provision of health and other social services (free of charge – or nearly so – at the point of use) given the extend of waste and inefficiency before the crisis, it would not have been impossible to cut costs while at the same time maintaining an adequate quantity and quality of service, but the opposite has happened: austerity cuts have been indiscriminate, reforms have been disruptive and/or have raised co-payments, some suppliers have reacted to arrears by withholding supplies, some workers have reacted to wage cuts by reducing effort
5. Corruption and state inefficiency
Slump in the social rollback: the usual suspects: values and institutions suffer first as low trust, corruption, stifling bureaucracy (e.g. ease of doing business), business culture (e.g. short-termism etc.), Tax evasion and corruption, size of shadow economy largest in the EU, tax administration poor (but improving), policy relevance huge: “If Greece collected its VAT, social security contributions and corporate income tax with the average efficiency of OECD countries, tax revenues could rise by nearly 5% of GDP” (OECD 2011).
estimated share of self-employment earnings not reported to.
Inland Revenue lower in Greece (approx. 40%) than in the US (approx. 60%) share of self-employment: 8% in the US vs. over 30% in Greece
6. Democracy and Sovereignty
European decision making has been transformed, as there is a clear shift to intergovernmentalism and towards a responsive rather than proactive management of the crisis. Although new institutions were introduced over the last 5 years (ESM, EFSM, ELA, Fiscal Compact, European Semester etc), these institutions demonstrate an unbalanced policy shift towards fiscal control rather than social and growth policy.
If we want to be fair, domestic political systems had not adequately introduced dilemmas and concepts related to EU policies. «Procedural legitimacy» (Bartolini), depending on the common understanding of how institutions and decisions are made, has not been communicated and politics have been displaced and discredited.
Regarding the role of the Troikas and the decision making apparatus during the crisis, it is now accepted that certain implications for democracy have occured.
First, we witness the resurgence of sovereignty debate. When exposure to affluent capital flows and cheap credit makes sovereignty porous, the accumulation of debt threatens the capacity of the state to spend, protect the vulnerable and maintain ownership of the introduced reforms.
Second, the Troikas cannot be held accountable by the European or national institutions, with the exception of the EC vis-a-vis the European Parliament. The European Commission has functioned as the agent of the Eurogroup rather than the protector of EU member states economic and political interests. Only recently the EP conducted a series of investigations on the role of the Troikas and approved a very interesting report, which, in my opinion, paves the way for the future of technical and financial assistance to EU member states.
Third, political alternatives have been minimised. Austerity undermines the cosmopolitan dimension of the European Polity and nurtures nationalism and exceptionalism, two skeletons that the EU has kept in the closet for more than 60 years. Indeed, there is no room for “loyal opposition” when there is no alternative to what authorities decide” (Collignon, 2013). Today’s politics, as Olaf Cramme has pointed out, are trapped in a void due to the legacy of EMU controls and the accumulation of debt. This is narrowing the much needed policy space and undermines political competitions, as conservatives perceive austerity as a morality play and the progressives try to humanize the inevitable. At the end of the day, the voter cannot distinguish ideological differences.
As long as fiscal policy remains national and monetary policy is exercised by the ECB, alternative or dissenting political choices will be suppressed. In addition, this deficit also reveals the contradiction between pursued efficiency and needed legitimacy: as long as fiscal policy decisions remain local, the EU will not be able to address collective problems related to its macroeconomic status or its growth potential. For instance, the current size of the EU budget limits any growing-out-of-the-crisis potential or shock absorbing capacity. Simultaneously, the peoples of the member-states will keep questioning the legitimacy of decisions made at the EU level that have a severe impact on their lives and dictate high unemployment levels, poverty and contraction. Therefore, the combination of efficiency and legitimacy constitutes the core problem of economic governance in Europe. Recent data on citizens’ attitude toward the EU (demonstrated below) are alarming. Even the traditionally pro-EU French citizens are becoming more skeptical against the EU as economic recession grows.
Bail-out decision making has been introduced to the legislature literally overnight and en masse and quite often, in a state of emergency, leading to last minute bargaining, political turmoil and illegitimate negotiations with strong business and professional interest groups. Citizens feel disempowered and disconnected with their elected representatives and their government which is often presented as a puppeteer of the lenders and has no room to manoeuvre. The loss of this vital policy space for the sovereign, provides the populists with arguments to challenge the established political systems and take advantage of people’s fury, as we have witnessed in Greece with the rise of the right-wing and left-wing populism.
Additionally, decrease in public support for the EU reaches 31% across the member states (48% in 2007), whereas in Greece, the tough measures and austerity challenge the pro-EU endurance of an unequal and austerity-ridden society, reaching 16%, when in 2007 public support was at 47%. In Portugal is 22% (55% in 2007) and 26% in Italy(49%) and in Spain (59% in 2007) and 31% in France (49% in 2007). Paradox: high support for the euro (58% in Greece….. Tsoukalis p. 61)reflects an equilibrium of terror, a fear of a worse economic meltdown and the lack of institutional and economic alternatives.
C. IS THERE AN ALTERNATIVE?
A closer look at the early stages of the Eurozone crisis is compelling: the EFSF and the ESM were created literally over a weekend (9-10 May, 2010) by supranational actors like the ECB and the European Commission, under the pressure of the United States, in an effort to avert the contagion effect of the Greek crisis on other indebted members of the Eurozone. According to De Burca (2013) the path of austerity “will continue to undermine the prospects for the EU’s future as a legitimate political system” not only by alienating voters but also by undermining the global perception and reputation of the EU as the carrier of welfare capitalism. To this, the move away from austerity would equal the departure from disintegration scenarios and pessimist forecasts.
Democratic politics is deprived of its popular pillar and citizens do not perceive their governments and their leaders as their agents, but as delegates of unaccountable international organisations and entities (IMF, ECB, EC), insulated from electoral pressure. The transformation of national parliaments into executors tailored to pass last-minute decisions by the European Council and the Troika poses a threat to the core of representative democracy; it also distances the citizenry from domestic and the European political institutions.
Arguably, legitimate is the sovereignty generated by rules and democratic institutions rather than power decisions. If the ultimate goal of modern sovereignty is ‘to accept the (legitimate) finality of our government’s ruling even when we disagree’ (Ignatieff), then in a de-legitimized Europe, the only way forward is to use through-put legitimacy to improve the quality of decision making and input legitimacy in order to increase the democratic input of the citizens from and towards all levels of governance.
To this, obsolete ideas about sovereignty that object the principle of moral pluralism and promote the interests of one or of a small group of member states will result to the Union’s dramatic disintegration. For the contemporary sovereigns, reluctance to democratic reform, ignorance of market failures and indifference of the need to collectively reform the financial system, constitutes a road to dependence and state failure.
The euro is more than an economic project but if the majority of the Europeans associate the existence of the Eurozone with austerity and joblessness, there is no orthodoxy that will dictate why people should not become masters of their own destinies and seek radical political and economic alternatives.
This is why the “policy without politics” model (Schmidt, 2012) can no longer serve the purpose of contemporary sovereignty, which requires more citizen inputs, better EU policy outputs and the introduction of transparency and accountability mechanisms (‘throughput legitimacy’).
So what can be done? – food for thought
- Articulation of a new economic alternative. Finance should serve the purposes of competitive and participatory real economy in the form of the access to new forms of credit for the small and medium enterprises that constitute the backbone (99.8%) of the European economy. (ECB to buy national bonds, European Monetary Fund, Banking Union to finance more investment projects in the Southern Periphery)
- Fiscal union (tax and transfer at the EU level – more transparency in public administrations and tax collecting agencies)
- Debt Restructuring for Greece should come out of the closet, at least in the form of a realistic conditionality
- Abolishment of the Troika and its replacement with a quasi-permanent group that will be providing technical assistance (e.g. Task Force) in the long run, aligned with national goverments and bureaucracies (e.g. participation of Committee of the Regions, European Commission, OECD etc)
- Pursuit of social cohesion and solidarity that do not rely on ethnic or national homogeneity but are deployed around family needs (minimum income, youth guarantee schemes, social safety net)
- Reconnection with cosmopolitan values and articulation of a bold vision for Europe. The abandonment of the holistic vision of Europe does not mean departure from the vision of United Europe to the vision of centrifugal or fragmented Europe. The maintenance of federalist-type laments in today’s Europe just widen the gap between the mainstream, especially the progressive parties and the growing Euroskepticism of the middle class. An acknowledgement of a poly-centric community in which “different policy communities have different rules and different degrees of integration for their members” (Vivien Schmidt) would provide space for the peripheral countries to establish new cooperation zones where labor mobility, tax regulation, health care systems, labor markets and education would be harmonized to produce jobs, opportunity and growth.
