WORLD VIEW:Those who supported financial model that caused recession are now demanding collective austerity, writes PAUL GILLESPIE
THE EUROPEAN Union’s austerity politics deepened this week as Germany and France agreed to trade off treaty change on sovereign debt for lighter budgetary rules, the UK led the way with expenditure cuts and French strikers continued their street protests against the consequences. The Irish Government’s hopes of pioneering a growth-friendly consolidation policy whereby cuts set the scene for recovery were dashed as the economy contracted.
The global financial crisis brings these developments together, raising many questions about whether the EU’s strategy of imposing austerity in the middle of a recession makes sense. If everyone cuts simultaneously, how can growth occur? If spending cuts rather than debt restructuring or tax increases are to the fore, which social groups gain and which lose? What happens to the political accountability and legitimacy of governments, indeed to popular democracy, in these circumstances? Can a reinvigorated transnational politics within the EU pose alternatives?
This is a battle of ideas as well as interests. A disabling fatalism about resisting this common strategy affects attitudes in Ireland and elsewhere in the EU – notwithstanding the protests.
Alternative proposals are not expressed politically across the whole system and few link-ups exist between different national settings. This is felt especially among social democrats and those further to the left. The space they could occupy is filled increasingly by right-wing populism and Euroscepticism.
The possible alternatives are not only left-wing, although current orthodoxies and political alignments make it seem so. Insofar as austerity politics are imposed by German interests, they attract resentment elsewhere.
Mainstream economists like Adam Posen, Martin Wolf or Kevin O’Rourke, who question the wisdom of universal austerity policies and say they will lead to a declining spiral of low growth and deflation in the main capitalist economies, base their case on economic fundamentals rather than politics.
Keynesians like Paul Krugman say premature withdrawal of the stimulus policies and co-ordinated interventions which staved off collapse in 2008-9 risk creating a double dip recession with much deeper unemployment and a second banking crisis.
Nouriel Roubini adds that current account imbalances are leading to currency and trade wars. These coincide with major geopolitical change towards a more multi-polar world.
The same voices that gave us the disastrously flawed growth model of financialisation, globalised manufacturing outreach, growing inequalities and extended credit/debt based on ostensibly efficient markets now demand collective austerity through simultaneous budgetary balancing. (The share of total income going to the top one1 per cent of earners in the US, which stood at 8.9 per cent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 per cent.)
This model is gone for good, wracked by its own contradictions. It needs to be replaced by one based more on ecological sustainability, social equity and a different distribution of world power.
That is a huge challenge, requiring intellectual critique, policy innovation and political action. In the EU, there is an opportunity to raise such alternatives, but those who caused the crisis have a deep interest in avoiding paying for it, while those on whose ideas the discredited model was based are unwilling to accept the blame.
Analytical voices outside the conventional channels can help clarify this task. Three such contributions from the European University Institute in Italy, where I am a visiting fellow, are worth hearing. Mark Blyth, a professor of international political economy at the Watson School in Brown University, gave a lecture last week on Europe and the financial crisis. His discipline brings an understanding of how politics, power and institutions shape economics in an uncertain world.
He is scathing about the shortcomings of faulty risk analysis, in which “regulatory authorities refused to even acknowledge the colossal asset bubbles forming in their economies”. The banks benefit from an austerity regime that makes the public pay for their mistakes – and mostly the poorer 40 per cent. Banks and their bondholders should be forced to take the main hit in a new (class) politics of redistribution (see his excellent video http://vimeo.com/15061570).
A working paper by Dorothee Bohle from the institute’s Schuman Centre analyses the crisis of the euro zone, finding that “a continent, which, in order to satisfy markets, is engaged in simultaneous budget cuts . . . is likely to enter a downward cycle of slow growth, reduced revenues and new budget cuts”. She argues that orderly debt restructuring is a real alternative.
In that case, this week’s Franco-German deal to propose a treaty change on debt restructuring makes sense; but it needs a much stronger political system at EU level to insist on such priorities, rather than the existing depoliticised regime.
It would channel conflict between the winners and losers of integration within the EU, rather than about it.
A report from the centre’s monitor on EU democracy examines how a stronger transnational party system could help in this task. One of its authors, the Irish political scientist Peter Mair, hopes such initiatives can ensure that although politics now regularly disappoints voters because national governments are deprived of policy autonomy, democracy doesn’t come to disappoint them as well.