Note from the LeftEast editors: this article was originally published in collaboration with the Balkan web-portal Bilten.org.
For the past five years the bureaucracy in Brussels has been embroiled in constant political and institutional struggle to rein in the economic crisis and ensure the stability of capital accumulation. Its strategic plan has relied above all on pushing through structural reforms and fiscal discipline. The insistence on such structural reforms is nothing but a euphemism for cutting workers’ rights, lowering wages and restricting collective bargaining. At the same time member states are required to follow austere fiscal discipline by implementing stricter budgetary rules and fiscal controls. National compliance in fulfilling fiscal measures is strengthened by the threat of sanctions from Brussels.
The results are visible across Europe in the rising unemployment figures and poverty rates, as fiscal discipline becomes the order of the day, differing only in intensity and scope from one country to another. It leads to harsh social spending cuts, decreasing employment and lowering wages in education, health and social security. It also means raising the revenue side of budget, often with the introduction of regressive value added tax, predominantly hitting the poorest. The aim is to achieve a balanced budget, appease financial markets and placate nervous lenders regardless of the negative social effects.
The Constitutionalization of Austerity
The regulatory framework for such unquestioned acceptance, rigorous implementation and almost complete compliance of structural and fiscal economic norms was created in the first years of the crisis. It introduced rules that endowed the European institutions with more powers and a broader capacity for intervention in the economic policies of the member states. A new and more stringent model of European governance was promoted with the reforms of the Stability and Growth Pact from 1999.[i] In September 2010, at the request of finance ministers of the European Union, the procedure of the European semester was adopted.
During the European semester every April each Member State submits budget plans to the European Commission. The European Commission then decides whether the budget plans are in compliance with the annual standard provided for each country and in June makes recommendations for each member state. In July, the European Council analyzes and completes the recommendations. In the following year the commission’s reports assess the success of the recommendations. The European semester also includes a corrective mechanism in the form of the excessive deficit procedure, which is invoked when a member state breaks the prescribed rule preventing government deficit from exceeding 3 percent of gross domestic product.
In March 2011 there followed the adoption of the Euro-Plus Pact (also called the Competitiveness Pact), with the intention that member states voluntarily propose a list of reforms to reinforce fiscal stability and enhance competitiveness (e.g. suspension of wage indexation to inflation rate, increase of age threshold for retirement or harmonization of European tax policy). But there is nothing voluntary in the two fundamental legislative packages that reformed the Stability and Growth Pact.
The first package, Sixpack (entered into force in December 2011) introduced five regulations and one directive that enable the commission to undertake stronger supervision over budgetary procedures of the member states, speed up and clarify implementation of the excessive deficit procedure, specify procedures of macroeconomic imbalances and introduce the possibility of sanctions. Two additional legislative packages, Twopack (entered into force in May 2013), only further elaborate how the process of monitoring and coordination cedes even wider powers to the European Commission over the budgets of member states.
The final act of strengthening the legal position of the European Commission vis-à-vis member states was the adoption of Fiscal Compact (also called the Fiscal Stability Treaty) that is directed towards the tightening of the existing Stability and Growth Pact. But the Fiscal Compact was signed as an inter-governmental treaty and not adopted as part of European Union law. The reason for this lies in the fact that the provisions of the Fiscal Compact fall outside the legal authority of the bodies of the European Union. Member states signed the contract in March 2012 and it entered into force in January 2013, after which each member state had to then ratify the agreement (the Czech Republic, United Kingdom and Croatia did not ratify it).
This legal circumventing of existing rules only testifies to the backdoor machinations and non-democratic mechanisms aimed to impose austerity from the highest echelons of European power and exclude any interference in the program of structural reform and fiscal discipline. The Fiscal Compact imposes severe fiscal constraints on member states’ government budgets and public debt, by quantifying its prescribed limitations in detail.[ii] The implementation process falls under the supervision of the European Commission, which can initiate proceedings against legally or fiscally irresponsible member states. If a member state signed the compact but did not harmonize its legislation with it, it can be brought before the Court of Justice and sanctioned up to 0.1 percent of gross domestic product.
Narrowing of democratic space
Since the outbreak of the crisis, the transfer of national authority in the sphere of public finance to the European supranational level has marked a sharpening of the neoliberal political consensus within the European Union. Imposing the new regime of fiscal rules and sanctions, the European institutions (first of all the European Commission) resolutely engaged in managing the process of capital accumulation by excluding any potential intervention of national states. Political decision-making is thus being limited through unrepresentative supranational bodies more accountable to international financial institutions than the societies they are supposed to govern. The executive autonomy of European technocrats has become ever wider aiming to create favorable conditions for the reproduction of capital and rise of activities in international markets.
Echoing the noises of volatile market trends, European technocrats are forcing national authorities to implement structural reforms and fiscal austerity in order to reduce labor costs and put an end to the so-called ‘profligate’ public spending. In this framework the management of national economic policy does not leave a lot of room for local actors to develop an independent political approach (even if one could find those willing to undertake such a task!) but rather places them under permanent pressure to follow decisions devised at a European level of authority. This usually entails attacks on the institutions of the welfare state (e.g. labor laws or guaranteed health care) with the surfacing of various social antagonisms and conflicts but within a very narrowed democratic space. Thus the crisis becomes paralyzing, state intervention increasingly unfeasible and the character of government (national or supranational) ever more authoritarian.
Such an anti-democratic transformation of power stems from the main concerns of European authorities. In the context of an escalation of crisis their primary focus became keeping the value of the euro and money in general by means of preventing public spending, potential inflation and the possible loss of the value of money. Therefore it was necessary to fortify restrictive monetary policy within a rigorous framework of fiscal policy. In this way the European Commission gained greater control over national budgets while member states lost political capacity to increase public investment spending as one of the methods to counteract the devastating consequences of the crisis. It clearly exposes the European orientation towards accumulation strategies directed at protecting financial capital, pampering financial markets and preserving the price of securities and other financial assets.
In doing so it is not surprising that official economic expertise has resolutely supported the European Commission in the process of establishing a strict accumulation regime, providing the ideological basis for future decisions. In the analysis of the Directorate General for Economic and Financial Affairs in 2009, structural reforms were described as the most powerful measures to prevent the crisis in the long term, stimulate economic growth and enhance labor productivity.[iii] And in the monthly report from June 2010 the European Central Bank stated that fiscal consolidation in the long run has “undisputed” benefits. Although “some negative short-term effects on real GDP growth” may appear, determined implementation of the fiscal consolidation makes such costs insignificant. The anticipated successful method of fostering economic growth through fiscal consolidation is described by the oxymoron “expansionary fiscal contraction”.[iv]
Juncker investment plan
After five years of structural reforms and “expansionary fiscal consolidation”, these policies have manifested results in the form of chronic economic stagnation. The growth rate in the European Union is relatively low (1,3 percent in 2014), and in the euro area is even lower (0.9 percent). The level of investment activity in the European Union in 2013 was 15 percent (430 billion euros) below the pre-crisis peak (varying from 25 to over 60 percent in hardest hit members).[v] Although discussions on public investment and the encouragement of greater fiscal spending have been present for some time, it only became a plausible option after the European parliamentary election. But even this proposal has been undertaken in a distorted way, relying on private investment sheltered by a form of public bail-out.
In November 2014 the newly elected European Commission, led by Jean-Claude Juncker, came out with an ambitious plan to realize 315 billion euros of new investments in the three-year period between 2015 and 2017. This supposedly represents the third arm of the so-called “virtuous triangle”[vi], alongside the implementation of structural reforms and fiscal consolidation.
Juncker’s investment plan starts by reallocating 8 billion euros from existing budget funds. This money is actually collateral for 16 billion euros of European Commission guarantees that are intended to help out private investors to borrow more easily and participate in otherwise risky and massive long-term infrastructure projects. In addition to 16 billion euros of guarantees, the European Investment Bank allocated another 5 billion euros. By combining these resources the Commission established the European Fund for Strategic Investments worth 21 billion euros. It represents the basis for the issuance of the European Investment Bank bonds in the amount of 63 billion euros that would in turn encourage five times larger private investments worth 315 billion euros.
This specific public-private partnership, conceived through the financial engineering of the conversion of a relatively small amount of public money into a large amount of private investment, has sparked a lot of skepticism both regarding the scope of investment and its orientation. It envisages new investments in strategic infrastructure (energy and digital technologies), transport infrastructure, education, research and development, innovation, youth employment and environmentally sustainable projects. The larger part (240 billion euros) of anticipated investments is reserved for long-term projects, while a smaller part (75 billion euros) should encourage investment in small and medium enterprises.
But the private sector immediately expressed doubt regarding the viability of the proposed plans. Analysts from Societe Generale Bank warned that even if the plan is fully implemented it would encourage growth of only 2.4 percent over three years. Realizing higher economic growth would require much larger investments. In addition, the probability of full success of the plan with a leverage ratio of 15 is overly optimistic.[vii] On the other side of the private sector, as a reflection of “real” economy, Benoit Potier, the chairman of the European Round Table of Industrialists and CEO of gas company Air Liquide, stated that the right question is about defining investment priorities. As head of the company, he “decided first where growth was to come from, then where investment was needed, and only then how it was to be financed.”[viii]
In saying this, Potier only confirmed that the primary issue for the private sector in participating in these projects will be increasing their rate of profit, while the European Commission (at least declaratively) aims to realize “high socio-economic returns”.[ix] The European Commission seems to be oriented to creating new jobs, infrastructure for economic growth and encouraging innovation. But it does not mean that actors in capital markets are not interested. Investments in long-term projects could still be attractive to pension funds, insurance companies or investment funds. At the same time they would be engaging in less risky investments (e.g. European Investment bank bonds) because of the public guarantees and realizing a higher interest rate than those currently available in financial markets for their target assets (government bonds).[x]
Infrastructure projects in the European periphery
Investments in infrastructure are most needed in the European periphery because potential investors consider these countries too risky while nation-states do not dispose of enough money to finance them. But the Board of the European Fund for Strategic Investments makes decisions on choosing projects based on their economic feasibility and certainty of return without focusing on geographical or sectoral priorities. Private investors can also choose from a number of projects to invest in. This means they will avoid countries with a higher risk and be more prone to direct their finances to richer and more secure places, those that already have an economic advantage.
Far more interesting is the question of the relationship between investment and fiscal consolidation. It opens up the problem of the usefulness of any future completed projects. There is little sense to build a research center, or to equip a hospital or school if austerity measures will reduce the resources allocated for their functioning or there will not be anyone to work in these facilities. Contrary to the declarative goal of achieving higher social returns, it seems more likely that Juncker’s investment plan is directed at preserving the economic stability of the eurozone and not to contribute to a revitalization of the crisis-ridden economies.
After five years of draining the European countries (especially those on the periphery) through austerity measures, European authorities are ambitiously trying to trigger private investments in public infrastructure. It is worked out thorough a debt model grounded in public guarantees. This reflects the constraints of the European Union law that does not allow for a common fiscal policy focused at redistribution of income and direct transfers to less developed countries. Such debt model will probably lead to rising investments in the European center and sustain the stability of the eurozone, but it will not magically revive economic activity across all of Europe.
The long-awaited economic recovery is only possible by abandoning austerity measures and engaging in direct public investment both on national or supranational level (e.g an adequately capitalized European Investment Bank, which can initiate public investments in countries with the greatest economic difficulties). Employing this direct approach would mean breaking the political constraints on public budgets, but would also bring the transfer of power from financial capital to centralized state decisions on planning and developing strategies. This kind of public macro-coordination is for now strictly prohibited by the fiscal policies of Brussels. And without political power to call into question dominant political restrictions and initiate economic developments in favor of the whole of society, a malfunctioning Europe is headed down the road of dissolution.
Domagoj Mihaljević graduated from the Faculty of Economics and Business of Zagreb University. His research interests include history of socialist Yugoslavia, political economy of transition and the theory of state. He has written for Zarez, Bilten, Slobodni filozofski, the Croatian edition of Le Monde Diplomatique, and Austrian Kusrwechsel.
[i] The Stability and Growth Pact should have guranteed the implementation of the Maastricht criteria (government deficit below 3 per cent and government debt below 60 percent of gross domestic product) to maintain fiscal discipline within the European Monetary Union. But during 2003 Germany and France suspended the provisions of the contract and broke the rule on government deficit. Their example was soon followed by other countries. This meant that the Stability and Growth Pact became a dead letter. When financial crisis escalated, European bureaucracy used this as a convinient proof that the source of the crisis lies in the excessive fiscal laxity and simultaneously took it as an argument for the imposition of a stricter fiscal framework.
[ii] For example, the structural government deficit must be less than 0.5 percent of GDP for member countries with public debt above 60 of GDP, or less than 1 percent of GDP for member countries with public debt below 60 percent of GDP. But in the same it is quite ambigous what are the criteria for determining the structural deficit.
[iii] Directorate-General for Economic and Financial Affiars, 2009. Economic Crisis in Europe: Causes, Consequences and Responses. Luxembourg: Office for Official Publications of the European Communities, p. 5. http://ec.europa.eu/economy_finance/publications/publication15887_en.pdf
[iv] ECB, 2010. “Monthly Bulletin”, No. 6, June 2010, p.85.
[v] Special Task Force (Member States, European Commission, European Investment Bank) on Investment in Europe, Final Task Force Report, European Commission, http://ec.europa.eu/priorities/jobs-growth-investment/plan/docs/special-task-force-report-on-investment-in-the-eu_en.pdf
[vi] An investment plan for Europe, European Commision, http://ec.europa.eu/priorities/jobs-growth-investment/plan/docs/invest_in_europe_en.pdf
[vii]Societe Generale, 2015. “Euro Zone: In the Grip of Secular Stagnation?” Econote, No. 28 (March 2015), p. 17. https://www.societegenerale.com/sites/default/files/documents/Econote/Econote%20N28_mars15_Secular%20stagnation-ENG.pdf
[viii] Sarah Gordon, 2014. “Industry chiefs question Juncker investment plan”, Financial Times, December 4, 2014, http://www.ft.com/intl/cms/s/0/1423a226-7bc1-11e4-b6ab-00144feabdc0.html?siteedition=intl#axzz3ah1uKBAG
[ix] BBC, 2014. “Juncker receals ginat EU investment plan”, BBC, November 26, 2014, http://www.bbc.com/news/world-europe-30205776
[x]Franzel, J., Firzli, M. N., 2014. “Infrastructure Investment: Harnessing long-term Capital for Local Development”, Public Management Magazine, December, pp. 16-19. https://www.academia.edu/9521811/Infrastructure_Investments_Harnessing_LT_Capital_for_Local_Development
