Thursday, November 24, 2011

A social-democratic response to the Eurocrisis

By Jamie
New Left Project
24 November 2011

I went to a talk last night, organised by the Cambridge University Labour Club, discussing European centre-left responses to the eurozone crisis, which yesterday spread to Germany. The panellists were Emma Reynolds MP, Labour shadow minister for Europe; Axelle Lemaire, a parliamentary candidate for the French Parti Socialiste; Carsten Sieling, SDP MP for Bremen, who had just flown in from working in the Bundestag's budget and financing committee; and Prof. Andrew Gamble, head of politics and international studies at Cambridge and author of, among other things, The Spectre at the Feast: Capitalist Crisis and the Politics of Recession.

In their analysis of the crisis and its implications, Gamble's comments were the most interesting. We'll get to them below. But it was also useful to compare how the British, German and French centre-left currents are developing their responses. There was, as you might expect, a lot of overlap in their presentations. All expressed concern that the crisis would provoke a "populist" anti-Europe backlash. Emma Reynolds noted that the far-right Dutch politician Geert Wilders has started blaming Greeks as well Muslims for the Netherlands' problems. In this context Axelle Lemaire was keen to stress that the crisis was not a European one, but was a product of "national" policies: it is a debt crisis, not a 'euro crisis'.

All agreed, too, that the centre-left parties needed to co-operate much more closely on developing a coordinated solution to the crisis. Reynolds noted that the centre-left currently leads only one EU government (Denmark). It is critical that this changes, she argued, because the European right is unable to resolve the crisis. Austerity, all three politicians agreed, couldn't work, because it kills growth. Reynolds and Lemaire also agreed that although austerity right now can't work, spending cuts will be needed at some point to deal with the deficit.

After each politician had made their fluffy opening remarks about the need for coordination and cooperation to develop a response to the crisis at a European level, it was interesting to see how quickly divisions emerged. The most obvious was fault-line was between the British MP and the representatives from France and Germany, centred on the role of finance. Both Lemaire and Sieling stressed the need for much stronger financial regulation, prohibition of some of the more exotic financial instruments that played a big role in causing the 2008 crisis, and instituting a financial transactions tax. Sieling pointed out that world GNP increased from $22bn in 1990 to $63bn in 2010, while over the same time period the market in derivatives increased from $2bn to $600bn – completely disconnected from any real-world productive activity. The relative size and profitability of the financial sector had, he said, to be shrunk. Lemaire agreed that the UK needed to reduce its dependency upon the City.

Throughout all this Reynolds was raising her eyes and when she talked, in turn, the French and German politicians whispered and giggled to each other. She emphasised the importance of the City to Britain's economy, and repeated the Labour leadership's position that a financial transactions tax imposed only at the EU level would simply lead to financial business fleeing to locations outside Europe. Sieling strongly disputed this point, arguing that according to the EC proposal all transactions involving a party located within the eurozone would be taxed, meaning that an EU-level financial transactions tax would only cause mass capital flight if Mercedes-Benz, the big banks, etc. decided to pack up and leave Europe. This isn't plausible, which is why even German conservatives have come out in support of the tax.

Lemaire also talked about the need to crack down on the shadow banking sector, which accounts for over half of all financial transactions, and tax havens, and criticised Britain for protecting several of the latter.

In terms of solving the short-term euro crisis, there seemed to broad agreement on the need for greater European integration. The German SPD favours the European Central Bank becoming the lender of last resort and issuing Eurobonds. Meanwhile Germany itself should stabilise public finance and reduce its deficits, not through austerity but by raising the income tax for higher earners and increasing corporation tax. The latter, he stressed, ought to happen in a co-ordinated fashion across Europe. Finally, the SPD is advocating a "Marshall Plan" for Europe's southern hemisphere, which needs investment to stabilise. Lemaire spoke favourably of a European "federalism", although she said that in the current climate that was a scary word, and so the political goal for now should be greater "integration".

Reynolds meanwhile criticised Cameron for trying to "face two ways" on Europe, attempting to have a say in shaping European institutions and policies while at the same time repatriating powers to placate the eurosceptics on his backbenches. It was notable however that she didn't use the same rhetoric about European integration and federalism that the German and French panellists did. This is partly because, she observed, the British public is quite eurosceptic: she cited polls showing that the British are broadly sympathetic to the (stated) goals of the EU, but are sceptical of its institutions. Indeed a recurrent theme of the discussion was the democratic deficit at the EU-level, and decisions being taken by technocrats rather than democratically accountable officials. Sieling frankly acknowledged that there is currently virtually no democracy at the EU-level and, along with Lemaire, argued that any centre-left response to the crisis would have to address these structural problems.

Andrew Gamble opened with: "As crises go, this one is really big." It's a crisis for the entire international economy. The euro can survive, he thinks, but the time is save it is rapidly running out. Politics and markets operate at different speeds, and the latter want a solution much faster than politics is able to deliver. Indeed the fundamental conflict at the heart of the crisis is that bond markets want what democratic politicians can't get their populations to accept.

We know, he stressed, how to resolve the crisis. Known technical solutions exist – he referred to George Soros' article for the Financial Times for some examples. But these require the ECB to act as lender of last resort for the eurozone, which is ruled out by treaties and opposed by Germany. This is a structural flaw in the euro: it is a monetary union without being a fiscal one. Markets are now testing ECB and German resolve to maintain the union, treating member states as if they had separate exchange rates, effectively pointing out de facto productivity rates differ enormously across the eurozone. Fiscal union would be the obvious way to resolve this problem. Without fiscal union the only option is austerity, which isn't a real option because there is no growth and people don't accept it, which is why it isn't working.

Euro countries therefore face an "existential choice". For Germany the dilemma is whether to rescue the euro with major treaty change, or allow it to collapse. Both options have huge implications, and significant costs. In Britain, Cameron has two coalitions to manage: with the pro-Europe Liberal Democrats, and with the eurosceptics inside his own party, who now amount to as much as a third of backbench MPs. Hence his current policy of trying to be out of the EU and in it at the same time. Currently the trajectory appears to point towards further British disengagement from Europe, which is itself contributing to the crisis insofar as a co-ordinated solution would be stronger with Britain's involvement. Disengagement from negotiations about how to resolve the crisis won't, however, spare Britain from the effects should the rescue fail.

The "easy" part – itself very difficult – is resolving the short-term crisis through the ECB. The "difficult" part will be establishing long-term institutions to prevent it happening again: a fiscal union and political integration. Gamble himself prefers this federalist option. He pointed out the US federal government spends about 20% of national income, compared to about 1% at the European federal level. This needs to be increased to at least 5-10% – but doing that will have enormous consequences for the nation state. Are nations ready for that? If not the eurozone should be dismantled and reconstituted on a different basis.

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