BY GEORGE IRVIN
January 24, 2012
After the 2008 crash, social democrats briefly rediscovered Keynes; a few even talked about the imminent demise of neoliberal ideology. But as the strength of the centre-right grew and neoliberal parties were returned to power in the wake of Europe’s sovereign debt crisis, ‘austerity’ politics triumphed. Social democracy, fearful of being deemed insufficiently prudent, appears to have capitulated to the logic of balanced budgets and cuts in welfare provision.
In Italy, the PD supports Monti’s so-called ‘technocratic’ government; in France, François Hollande has led the PS into battle under the banner of fiscal responsibility; in Germany, the SPD derides Keynesian-type remedies; in the UK, Ed Balls announces that if Labour comes to power he will not reverse the cuts. Never mind Spain, where Zapatero’s ill-fated PSOE failed to generate jobs, or even The Netherlands, where the PvdA until relatively recently held Ministry of Finance in a right-wing coalition.
For several years, the EU centre-right has successfully ridden a wave of fear and xenophobia. As austerity bites and jobs, pensions and benefits become less secure by the day, the right consolidates its grip on power by blaming the crisis on profligate politicians who tax away the money of hard-working citizens to the benefit of undeserving foreigners. Deeper austerity reinforces such views and worsens the situation.
The average voter has been conned into accepting austerity for two reasons. First, he or she faces a choice between cutting spending and going into greater debt—typically at usurious rates of interest. With jobs scarcer and employment less secure, the prospect of greater personal debt is quite terrifying. Crucially, voters have been sold the view that the government budget must balance just like a household budget, a view that most European social democratic politicians have failed to challenge—with disastrous consequences.
This Micawberesque view of state finances is utterly misleading. At a time when domestic households and firms are trying to rebuild savings (deleverage), unless there is a miraculous export boom, increased government savings can only be compatible with lower national income; ie, with even greater unemployment and uncertainty. As the Japanese economist Richard Koo (RWER 58 ‘The world in balance sheet recession’) has warned, if Europe is not to follow the Japanese down the path of 20 years of stagnation, massive economic stimulus is required.
Social democrats know that three issues are of utmost importance: finance, jobs and global warming. A reckless financial sector which caused the crisis continues to reward itself with outrageous pay, while dergulation and the bonus culture has made the EU (starting with the UK) more unequal. Next, high unemployment has been endemic in the EU since well before the 2008 financial crisis; it cannot be cured by supply side measures, by a ‘deregulated job market’. And although climate change seems a longer term problem, if we are to contain it action must be taken now.
These issues are linked. More jobs can be generated by a massive public works programme aimed at energy conservation and new sources of sustainable energy generation. Additionally, the impact of global warming on poorer countries must be addressed through an international transfer of resources.
How can such a programme be financed? Consider only two measures: an FTT and more efficient tax collection. First, the EU has started to take seriously the notion of a Tobin (or Financial Transactions) tax—once an FTT is implemented, the revenues could be used as a massive boost for public investment and overseas transfers. The European Commission (EC) estimates annual revenue to be of the order of €57bn per annum, assuming securities transactions involving an EU-based financial institution were taxed at 0.1 per cent and all OTC derivatives deals at 0.01 per cent. (Using an across-the-board tax of 0.1% on all euro trading globally, I estimated the upper bound on revenue to be €200bn per annum, so the EC estimate appears to be very cautious.)
In addition, there is a serious tax gap in Europe —the difference between what should be paid by law and what is actually paid. Total EU GDP is approximately €12tr per annum, and one recent and comprehensive source puts the tax gap at 8% of Europe’s combined GDP. For VAT alone, another study puts the gap at €100bn, so an upper bound estimate for the total gap would be in the region of €1tr. On the assumption that the tax gap will not be closed oversight, taking half this figure, or €500bn per annum, as available for economic stimulus seems reasonable. (Note that I have said nothing about expanded public borrowing, jointly backed Eurobonds, or even quantitative easing—all of which could be used to generate further funds for expansion.)
In short, there is no financial constraint on creating new EU jobs and greening Europe through public investment.
How would such a stimulus be viewed by the financial markets? Until recently, the answer would have been negative; indeed, fear of the financial markets has been one of the main reasons why economic policy in Europe has been so conservative. But times are changing, and as the IMF has argued recently, ‘austerity’ is no longer to be welcomed. Indeed, some argue that financial markets are turning against austerity and Merkosy-style ‘governance’, which is seen as a most serious threat to the EU’s wellbeing.
The lesson for social democrats is that their real fight is with those seeking to impose further budgetary austerity on Europe. To paraphrase my old colleague Howard Reed, it’s time to put an end to the suicidal economic policies currently wreaking havoc with our economic and social fabric.