Whither Democratic Capitalism?

THE ERA OF CAPITALIST DEMOCRACY

Among the many books devoted to the period of persistent crisis that has followed the financial collapse of 2008-10 there is one, by the German economic sociologist, Wolfgang Streeck, which stands out for the track record of its author and the breadth and empirical depth of its analysis.

Streeck, coming from an education informed by both Marxist and mainstream approaches, has for many years been regarded as the leading scholar in the field devoted to the origins, characteristics and fate of Germany’s ‘coordinated’ capitalism, one of the most important variants of democratic capitalism. Across key areas of that country’s economic life there has been for many years a close interaction between the state, labour and capital. It has been an arrangement apparently so successful that it came to be called ‘the German model’. It has been held up for copying by others-if they could. But the last ten to fifteen years or so has seen its relative decline.

In that period, Streeck has cast his net much wider to take in the political economy of what can be called ‘the OECD world’, comprising all the most developed economies. In particular he is interested in the forms of the democratic state and the characteristics of capitalism which have developed in those countries since World War Two, and in the emergence of the politico-economic regime of neo-liberalism. His recent book, ‘Buying Time: The Delayed Crisis of Democratic Capitalism’ (Verso, 2014), surveys that period, and concludes that the struggle between capitalism and democracy finds itself in new economic and social crises, and in a state of representative democracy much weakened by global neo-liberal victories.
It can now be difficult to remember that democracy as a political system did not become widely accepted as feasible and enduring until after World War Two. Prior to that there were widespread fears that a democratic state in which the will of the majority, and therefore including the middle and lower classes, was politically paramount would result in excessive demands upon the profits of capital. In short, the threat to an established order was seen as arising from the working classes. Capital was expected to take a passive role. In fact, as we will see, it was the warriors of capital who became the predators.

THE POST-WAR SETTLEMENT

In the context of New Deal legislation in the United States, and welfare state programs, building on Keynesian economic theory, in the United Kingdom (the first such was as early as 1942, to boost the war effort), Streeck begins his story with the political settlement between the state and capital

which developed in the late ’40s and ’50s.

In basic terms, in the new Keynesian era, this consisted in the state, setting taxes at levels that were acceptable, being able to intervene in the business cycle to ensure stable prices, full employment and sufficient aggregate demand for goods and services. Thus were satisfied the economic demands of the electorate, creating stable conditions for expanding and profitable production and consumption. This in turn provided the operating conditions, and the political accommodation between state and capital upon which capitalism depends. When necessary the state financed these demands by running budget deficits.

The price that capital paid was the tax rate and the intervention in labour markets of both the government and organised unionism for the provision of full or close to full employment, for unemployment benefits and other social services, wage-setting and other regulations on labour conditions, health and education services, etc. Lasting from the forties to the seventies, the period was called by the French ‘les trentes glorieuses‘ and it was the era of the ‘tax state’.

The threat to this pact was that social demands for additional services-health, education and so on- and for a bigger slice of the profits pie in the form of higher wages, would together result in high tax and low profit levels which would make capitalist enterprise unsustainable.

Economic growth began to falter in the late sixties to early seventies, partly because of the oil price rises of the period but at the same time as demands for higher wages and better services, symbolised by the worker-student disturbances known as ‘May ’68’, were growing. Industrial disturbances went to new levels as the seventies passed. To maintain political peace and stability, governments were increasingly forced to raise taxes, to create money, to run budget deficits and to intervene in the economy and society to attempt to meet a ‘revolution of rising expectations’. It was the beginning of the era of the ‘debt state’.

Economies went into an apparently intractable state of stagflation: low economic growth combined with rapidly rising inflation and debt-financed budget deficits. A far-seeing Hungarian Marxist economist, Michael Kalecki, had prophesied back in 1943 that capitalists would come to think that workers were too demanding once they had forgotten the deprivations of unemployment (M Kalecki, ‘Political aspects of full employment’, Political Quarterly, 14,4, 322-31).

THE ADVENT OF NEO-LIBERALISM

Faced with what the Trilateral Commission, an international body of corporations, union representatives and academics from Europe, North America and Japan called, in 1975, ‘the ungovernability of the democracies’, (Michel Crozier, Samuel Huntington, Joji Watanuki, The Crisis of Democracy: the Ungovernability of the Democracies, New York University Press, 1975) the age produced a new political philosophy-perhaps better, an old one refashioned for the times: ‘neo-liberalism’.

New theorists, especially economists James Buchanan and Milton Friedman, the latter from the very market-oriented economics school at the University of Chicago in the US, and, in the UK, Ralph Harris, with the think-tank, the Institute of Economic Affairs, were strongly influenced by the views of Friedrich Hayek and Ludwig von Mises. Austrian economists and political thinkers, they looked back to the liberal age of market laisssez faire and a minimum role for the state, of the nineteenth century.

Political actors, such as governments, bureaucrats and unions, were described as self-seeking utility maximisers who used public power and a bloated public sector for their own interests. The only answer was to return to the competitive efficiencies of the market, populated by rational, self-interested homo economicus, shorn of any social setting. It must be freed from state intervention and regulation.

Only that amount of government was necessary which would provide the minimum which the market needed-property rights, price stability, labour regulation, education for training. In fact it needed to provide one thing more, which neo-liberalism tended to overlook: a basic political accomodation between labour and capital which would ensure stable social conditions for capitalist production, consumption and profit-making.

The new movement, which started in the late seventies and continues to the present under the name of ‘neo-liberalism’ (‘economic rationalism’ in this country is much the same), has been breathtakingly successful, commencing with the political reigns of Margaret Thatcher in the UK and Ronald Reagan in the US. The full employment objective was diluted or abandoned, markets were deregulated, public utilities privatised, trade unions were attacked, unionism dismantled: the triumphs of Thatcher against the coal miners and Reagan against the aircontrollers were signal victories.

Private health and private education were to be encouraged. Publicly owned assets were to be privatised. Apart from favourably disposed political parties and governments, the instrument of the new regime, the new ‘historical actor’, was the corporation, and, in particular, the giant, trans-national corporation. But the neo-liberal world took time to emerge.

During the eighties governments sought the social peace which capitalism needs by debt and inflation, since as prices go up existing debts decrease in money value, making it easier to produce yet more credit by still further inflation and thus the means to meet rising social demands. But by the mid to late seventies annual inflation rates in the OECD had typically reached some 15%, too high to be sustained.

To control inflation, central banks, notably the US Federal Reserve under Paul Volcker, pushed interest rates to new highs, around 20%, resulting in sharp deflation, deep economic retractions and widespread unemployment. Yet, despite the social dislocation all this incurred, neo-liberal parties proved capable of winning elections.

Strikes fell from an index level of about 500 in 1970 to 100 or less in 1980 and have declined to almost zero since then. In the face of strong corporate and governmental attacks, unionism faded to near impotence throughout most of the OECD.

The new levels of unemployment sparked the need for more social welfare payments and thus the need for new public resources to pay for them. The answer was higher deficits and raised public debt and the move from the ‘tax state’ of ‘les trentes glorieuses‘ to the ‘debt state’ of the eighties and nineties. Higher taxes were now politically risky and ways needed to be found to generate new funds. The lead here again was taken by the US.

THE RISE OF THE FINANCE INDUSTRY

A highly productive target for deregulation was found in the financial system. Many restraints upon both the structure of the industry and its practices were gradually removed, starting in the eighties, at the same time as the US government had to deal with the fiscal results of the Reagan tax cuts. Since tax, a sign of bigger government, was now a ‘bad thing’, the cutting of tax now became a ‘good thing’, despite its effects upon the deficit.

Liberalised finance rapidly found new markets around the world, often in unexpected places, and the resulting expansion of financial activity generated new resources and hence increased tax revenues, relieving the fiscal problem. There is no reason to believe, however, that the policy makers who supervised the wholesale deregulation of the finance industry expected the astonishing expansion of the financial system which in fact occurred.

The most detailed examination of the changes in the role and importance of the finance industry during this period is available for the United States, where the work of Greta Krippner is particularly valuable (for example, her Capitalising on Crisis, Harvard University Press, 2012). The discussion which follows is focussed upon the experience of the United States, the leading economy, but similar evidence can be found across the OECD (Jacob Assa, Financialisation and its Consequences: the OECD Experience, Finance Research, 1,1, January 2012)

While, from 1950 to 2000, employment in the US finance industry, including insurance and real estate, stayed at only about 5-7% of the national total, its share of total corporate profits rose from about 10% to the extraordinary level of about 40%, most of the gain occurring after 1982. But parallel changes were also taking place in non-financial firms in relation to how they used their retained earnings and cash flows and structured their activities.

Thus, in non-financial firms, the ratio of profits earned from financial activities compared to those from non-financial operations rose from about 20% in the late seventies to about 50% by the century’s end, most of the rise occurring after the mid eighties. In short, non-financial corporations were finding it increasingly profitable to trade in the financial markets rather than in their established industries.

All of this was accompanied by a new view in academic and industry circles as to how to evaluate a corporation. Historically, this had been with reference to the returns from sales relative to costs over the medium to long term. But, with financialisation, the firm was seen as a bundle of assets, which could be separated and combined in a number of ways. Hence arose the doctrine of ‘shareholder value’ as the criterion of worth, and the firm’s valuation being seen as the sum of the worth of each of its distinctive bundles. These in turn could be sold off as separate firms. CEO’s

were expected to focus on the short-term and maximise ‘shareholder value’, and for doing so their rewards skyrocketed.

The organisational changes were dramatic. The period saw the emergence of corporate raiders like Slater and Walker and of the hostile takeover, proliferating into the M&A (merger and acquisition) industry of today, fostering the greater concentration of industries. Thus, it was increasingly the case that industries were made up of a small number of giant corporations and a large number of small to medium ones, against whom the large ones were able to exercise market power. The supermarket industry in Australia is a familiar example.

Neo-liberal theory, together with US legal development by Supreme Court Justice Bork and others, saw the large firm as the most productive and efficient unit in capitalism and thus contributing the most to economic value. The neo-classical idea of competition being marked by struggle of many small firms was superseded. The large corporation had arrived as the historical actor to be promoted.

‘Financialisation’ both assisted, and was assisted by, the faster trend towards globalisation that picked up in the eighties and nineties as trade barriers around the world were gradually removed. This was particularly the case with the attraction from overseas of much higher levels of investment in US Treasury bonds and thus the injection of new sources of debt finance for the US public exchequer. This was a conscious aim of US policy, partly to obtain repayment for the military protection which it provided to client states.

So it actively sought recycling of oil revenues in the form of ‘petrodollars’ from Middle Eastern states which it supported strategically, and still supports. In more recent years this investment in US Treasuries has extended rapidly to Asian countries-China and Japan, with about equal shares, now together own about 16% of US public debt.

The liberalising of the financial markets and the neo-liberal validation of free trade eased the path for giant corporations in another way. Freed from financing constraints, they now roamed the world, ‘shopping’ for locations best suited to their interests in terms of wage levels and conditions, access, skills, infrastructure, regulatory and environmental laws and, very importantly, tax arrangements.

Countries with what giant corporations regarded as social, employment, regulatory and taxation regimes unfavourable to what they regarded as the rationality of the market were placed at a severe disadvantage. More and more the market was king, and institutions like the International Monetary Fund, the World Bank, and, especially, the newly established World Trade Organisation, worked to make the global trading environment more favourable to the market and the interests of giant corporations.

And financial liberalisation also created another situation, quite unexpected, but eagerly accepted by policy makers, which was to have a crucial and, in critical ways, disastrous effect upon the economy and its management.

‘PRIVATISED KEYNESIANISM’

Throughout the period from the late seventies debt levels remained high: for twenty years from then until the late nineties the gap between government expenditure and tax revenue for a sample of twenty OECD countries remained at about 20% of GDP. Governments began in the nineties to react to this situation by bringing down public spending. This was also in the face of increased resistance to higher taxation, so the old dilemma had returned. Thus began ‘the consolidation state’ , under Clinton, where policy was directed to bringing public expenditures and revenue closer together, essentially by cutting spending.

Developments in the finance industry brought an unexpected relief in what the British scholar Colin Crouch has called ‘privatised Keynesianism’ (‘Privatised Keynesianism: An Unacknowledged Policy Regime’, The British Journal of Politics and International Relations, 11, 382-399, 2009).

Searching for new markets, newly liberated finance increasingly turned to the consumer, and thus began an unrivalled period of consumerism which, with a gap during the financial crisis, continues to this day. The pursuit of the ‘good life’ was turned more and more to the purchasing of goods and services, the opening up of new ways of consumption and the repackaging of needs which had previously been met by public services. The state had received a let-off: it was eagerly grabbed by policy makers searching for ways to save the public purse.

By going into debt, readily paid for with credit cards or some other form of debt imaginatively invented by eager financial firms, individuals could be encouraged to look after themselves. As finance devised novel means to allow the consumer to satisfy previously out-of-reach desires, it also found ways to privatise education, health care, social services, insurance, pensions and superannuation and so expand its markets.

The result was, as we have seen, both an extraordinary spread of finance’s activities and an extraordinary rise in the share of total profits enjoyed by those in the finance industry. This was particularly the case for the half-dozen or so major international finance houses, now enabled to trade around the world across the gamut of financial activities-Goldman Sachs, JP Morgan, etc.

It was no longer necessary for the state to satisfy these needs; individuals were now free to do it for themselves. ‘Freedom of choice’, ‘customised satisfaction’ and ‘risk management’ were the watchwords of the day, seized upon by governments happy to offload what had formerly been their responsibilities.

Deficits expanded but the genie would not readily return to the bottle. By the turn of the century more and more innovative ways of packaging loans and mortgages, involving highly complex statistical formulas, had emerged. Debts were ‘securitised’ and placed into bundles which could be bought and sold in ways which seemed to show that the market could indeed find creative and effective solutions to the problems of public finance.

So long as markets were free from regulation-and in the nineties during the Clinton administration the last shackles were removed from finance and banking-financiers found that they could trade bundles across the world provided the buyer was confident they could find further purchasers (which depended, of course, on those others having the same confidence). The new codewords- ‘futures’, and ‘options’, and ‘derivatives’- were abuzz.

In fact, it turned out that it was not so easy to establish the relative risk values of these bundles of securities: it took time, and time was at a premium in fast moving markets where earnings depended on the speed with which bundles could be turned over. This is not the place for a sketch of the 2008-09 financial crisis but that is what the new world of finance led to-and a gaze into the abyss.

SOME RESULTS OF NEO-LIBERALISM

It is instructive here to consider some of the other developments which had been occurring during the thirty years of the neo-liberal era from 1980 to 2010:

  1. the capture of the gains of productivity by capital
  2. increasing inequality of income and wealth
  3. the onset of ‘post-democracy’

The capture of the gains of productivity by capital: Again, while trends have been similar throughout the OECD, the most detailed information is available for the leading country, the US. Streeck points out (ibid., Chap 2) that, for the US during the period from 1945 to 1975, the levels of productivity, household income and average hourly wage rates had grown at the same rate (in fact doubling, 1945=100, 1975=200), but from 1970 to 2010 productivity shot upwards to 400 while wages stayed at about 200. In short the gains from higher productivity had been appropriated by capital.

In this same period, household income showed a modest rise to 250 but this was entirely due to increased female participation and longer hours, accompanied by a decline in the already relatively weak levels of unionism. Since the 1980s the economic lot of the American worker has scarcely changed in spite of all of the neo-liberal desiderata of increased labout input and intensity, greater ‘flexibility’ and worsening of employment conditions being present.

Increasing levels of inequality of income and wealth: It is not surprising that this pattern reveals also increasing inequality, although productive research is only relatively recent. The book by the French economist, Thomas Piketty, Capital in the Twenty First Century, (Harvard University Press, 2014) has thrown much-needed light on the reemergence of stark inequalities of both income and wealth not seen since before World War I. It has triggered a debate across the world.

Streeck highlights some of the statistics which have come to light over the last few years. In 2010 no less than 93% of US income created went to the top 1 % of taxpayers, and 37% went to the top 0.1%. The figure for the top 1% had risen in about ten years from 45% during the Clinton era economic expansion.

At the same time, the rewards paid to corporate leaders soared. In the crisis year of 2011 the hundred highest-paid managers in the US received on average $14.4million, or 320 times the average American income. The pattern was similar in other countries. Streeck quotes the chairman of Volkswagen as having received 18.3 million Euros in 2011. (Streeck, ibid, 53-4)

As to wealth, Streeck quotes Larry Mishel of the Economic Policy Institute as showing that almost 82% of the increase in assets between 1983 and 2003 went to the top 5% of taxpayers while the bottom 60% lost the equivalent of 7.5% pf the total asset increase. Studies for other countries, including Australia, show rising imbalances in the distribution of wealth. The inequality of wealth generally is much greater than that of income.

Yawning inequality, both income and asset, is an issue which leftist political parties have been slow to take up, as we shall see.

The onset of ‘post-democracy’: Along with effecting changes in economic inequality, neo-liberalised capitalism has displaced the democratic welfare state of the Keynesian era and its social compact. This has been accompanied by a constant and sometimes dramatic decline in voter participation. This is especially the case with those who could be expected to have personal interests in social benefits and in redistribution of income and wealth from the top to the bottom of society.

In all the Western democracies voter turnout increased throughout the fifties and sixties, but since then has fallen by an average of no less than 12%: from 84.1% in the sixties to 72.5% in 2000-2011. (The trend is apparent even in Australia with its compulsory voting). Those from lower socio-economic groups are the least likely to vote. The more recent the election the more likely there will be a lower turnout rate. In the United States no more than 50% vote in national elections.

Streeck argues that, although some revisionist theories have speculated that lower electoral participation reflects increased satisfaction, the exact reverse is the case. There is a strong negative correlation between voter participation and regional unemployment and welfare dependence.

As an example, in Germany’s large cities, the district-by-district variation in turnout has increased in every election since the 1970s, with the lowest turnouts in high immigrant, high unemployment, low income, high benefit areas. So dire is the situation that parties rarely campaign there, thus pushing party platforms further towards the centre.

Declining voter participation is a sign not of satisfaction but of resignation: the losers cannot see what they can get from a change of government. At the bottom of society the TINA (‘there is no alternative’) politics of globalisation has arrived. And the key result for the relations between democracy and capitalism? The less hope the broad mass of voters have in elections, the less those like the giant corporations who exploit the markets and follow their unappeasable needs have to fear from a political backlash.

The result is what Colin Crouch has called ‘post-democracy’ (Post-Democracy,, Polity Press, 2004). He points out that especially in the English-speaking world, democracy has been essentially defined as ‘liberal’ democracy-where electoral participation is the main form of mass communication, there is extensive freedom for lobbying, especially business lobbying, and political arrangements seek to avoid interfering in the capitalist economy.

But it has tended to become replaced by ‘post-democracy’, by which he means that while elections can and do change governments, electoral debate is a ‘tightly controlled spectacle’. This ‘poli-tainment’ is stage-managed by professional teams skilled in persuasion and allowing in only a small range of issues selected by the competing teams. The electorate participates in a passive, even apathetic way, while real political affairs are shaped in private by interaction between elected governments and elites overwhelmingly serving business.

All of this, of course, increases the distance between the mass of the electorate and the concerns of political parties, and thus allows yet greater play for giant corporations to pursue their aims in the market.

THREE CRISES
‘The present financial, fiscal and economic crisis is the end point so far of the long neoliberal transformation of postwar capitalism. Inflation, public debt and private debt were makeshifts allowing democratic politics to sustain the appearance of a capitalism that delivered growth, with equal material advances for all, or even a gradual redistribution from top to bottom of market and life chances. Each, however, exhausted itself after roughly a decade, once the beneficiaries and administrators of capital began to find them too costly , making it necessary to replace them.’ (Streeck, ibid., 165)

What, then, might lie ahead?

In the present neo-liberal international regime trans-national corporations not only move around the world with ease, but with apparently equal ease persuade elected governments to do their bidding. They do this either directly or as a result of central bank and other technocrats foreseeing their interests (consider, for example, the now extensive debates on the technocratic, undemocratic dimensions of the European Union, and on the extraordinary steps in the interests of giant corporations taken during the negotiations on the Trans Pacific Partnership).

But unsolved problems remain for neo-liberalism which we can summarise as (Wolfgang Streeck, How will capitalism end?, New Left Review, May-June 2014):

  1. the crisis of economic growth
  2. the debt crisis
  3. the inequality crisis

The crisis of economic growth: Capitalism is faced with a persistent decline in the rate of economic growth, a situation made worse by the global financial crisis. Between 1972 and 2008 the average rate of growth for a sample of 20 OECD nations fell from about 4%pa to about 1%pa. As is well known, growth rates dropped during the crisis and have been struggling ever since.

Unemployment has also risen throughout most of the developed world, and in some emerging countries. Repeated calls from the IMF’s mast-top of sunnier times ahead are replaced by the sight of yet more clouds. How is the social reaction to higher unemployment and poorer social conditions to be managed?

The debt crisis: As we have seen, the budgets of OECD countries have drawn upon debt, both public and private to finance their extra spending, notably on welfare and social benefits, since the 1970s. Although some respite was gained in the late 90s and early 2000s by the exploits of financial engineering in ‘privatised Keynesianism’, leading to the financial collapse, the place of debt has been growing since then.

In mid 2015 all of the major economic areas of the globe-OECD, United States, Euro area, China, Japan show a negative fiscal balance of several percent of GDP, ie, expenditures exceed revenues, including debt, as a proportion of GDP (OECD, Economic Outlook, Volume 1, 2015). It is not clear how increasing levels of debt are to be managed in the future, nor how the markets will react to that condition, ie, will they continue to provide credit and at what interest rates? Everywhere austerity is preached, but can it be achieved in the face of widespread evidence of its ineffectiveness and increasing social dissatisfaction?

The inequality crisis: All of the now considerable amount of enquiry into the patterns of income and wealth returns much the same result: little if any slowing of the pace of greater inequality. Indeed for some countries, notably the US, the rate of growth of inequality appears to be increasing, despite a Democrat, and a black one at that, in the White House. Even the IMF declares that increasing inequality is bad for economic growth. Will all of this trigger social dissent, and if so, what will be done about it?

It is worth noting here that almost all of the steps in the advance of neo-liberalism which we have noticed in the US and OECD countries can be traced also in Australia, sometimes with leads and lags. The major difference which applies to Australia is that the neo-liberal program was largely introduced here by a centre-left party, the Hawke and Keating governments of the eighties and ninetimes, and sought to retain many of the Keynesian era worker/middle class entitlements. This led to a moderate consensus by both sides of politics in the 1996 electioin .Although this been strenuously attacked, and in many cases dismantled, by successive Coalition governments and to some extent by Labour governments, there remains a strong attachment in the electorate to that accommodation, evidenced by the damning public response to the Abbott government’s doctrinaire neo-liberal 1914-15 budget, and indeed to the economic and social policies of the whole Abbott period.

LOOKING AHEAD

Streeck sees no letup in the neo-liberal dislocation and commodification of social traditions and institutions which lie in the path of an unappeasable neo-liberal capitalism: rather, indeed, their intensification. He is gloomy about the prospects for democratic resistance to this trend and points to the erosion of sovereignties in the European Union, the second largest economic entity in the world, and to the virtually complete creation of neoliberal economy-societies in the UK and the US.

But, since neo-liberalism requires a state sufficiently strong to produce social and political amity, its very success will lead to intractable situations. His hope is for political and social disruptions which ‘gain time for the building of new capacities for political action, in the struggle against the anti-democratic neo-liberal project’…’the aim must be to repair for now what has been left of the European nation-state, to an extent that allows it to be used to slow the headlong advance of capitalist “land-grabbing”’ (ibid., 188-89)

It is too early, yet, to see what the leftist emergences in Greece, Spain and other countries, perhaps most notably, the UK and even perhaps in the US, mean for such a hope.

 

 

 

 

 

 

 

 

 

 

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Opportunities Lost? The European Crisis

A German Philosopher

In my article, Greece, Europe and Austerity, in Newsletter No 214, April-May, 2015-I outlined the Greek financial and humanitarian crisis as it is playing out in negotiations among the members of the Eurozone, the European Union, the European Commission, the European Central Bank and the International Monetary Fund. I alluded there to the crisis which the European project is itself undergoing and in this article I examine that crisis in more detail. I want to do that by reference to the writings of the highly influential, left-inclined German philosopher and public intellectual, Jurgen Habermas. In particular, I will quote from his most recent work on the issue (J Habermas, The Lure of Technocracy, Polity Press, 2015.)

Jurgen Habermas is regarded by many as the most important philosopher and social theorist since the Second World War and perhaps the most influential public intellectual in the world-the world, that is, outside the English-speaking countries. There, by and large, he is known only to specialist philosophers, political scientists, and legal theorists. In his own country, Germany, his every word is canvassed and discussed, and he has helped to shape many controversies, especially concerning his favourite project – European evolution within a world society. Writing out of post-Marxist critical theory he created a comprehensive reconstruction and development of Western philosophy and social theory, drawing upon major themes in European and English language thought

His work has profound political implications. It focuses upon the world making power of communication in ordinary languages and its potential for developing a more just, rational and humane world with a foundation in what he called discourse ethics. In addition to his work in philosophy and the social sciences he has written a very influential reconsideration of the relations between the philosophy of law and political theory.

Almost always welcoming in his approach to contending scholars and differing points of view, and optimistic and positive towards great world issues, notably the evolution of Europe, it is only recently that he has confessed to doubts about the final success of the European project. His general attitude to this he has aligned with a famous statement by no less than that well-known English conservative, Winston Churchill.

Speaking at the University of Zurich on 19 September 1946, as an observer, not a citizen, of Europe, Churchill-in a speech which Habermas described as amazing today ‘for the improbability and the visionary power of its far-sighted perspective’-said that ‘if Europe were once united in sharing of its common inheritance, there would be no limit to happiness, to the prosperity and the glory …’.

After evoking then present and future dangers, Churchill continued: ‘we must build a kind of United States of Europe…all that is needed is the resolve of hundreds of millions of men and women to do right instead of wrong ….the first step in the re-creation of the European family must be partnership between France and Germany’, and went on to sketch the necessary conditions for a European union (Ibid., x).

In the earlier article I outlined the patient, incremental path of negotiation and institution building which the nations of Europe have followed over the last seventy years. But Habermas has become disenchanted with the development of the Union and its institutions, especially since the economic and political crises that have engulfed the region, and most of the rest of the world, since the onset of the global financial crisis in 2008. He has become especiallly disappointed with the performance of his own country, Germany. To understand his reservations and criticisms we need first to review the economic crisis of the European Union, and the political crisis associated with the role and make-up of the major Europe institutions.

The Economic Crisis of the European Union

The European financial and sovereign debt crisis developed in 2009 after the onset of the Great Recession in the United States. This followed upon the stockmarket crash and sharp economic declines associated with the subprime mortgage implosion and the collapse of Lehmann Brothers in 2007-8. The economies of a succession of European countries went into recession, the specific causes and timing of each depending upon the particular circumstances of the country. This situation has been said to have been triggered by the Greek collapse attributed in large part to its very high levels of debt as a proportion of GDP, but in fact most of the European countries had been running high budget deficits and debt levels.

The ability of Europe to respond to the crisis was limited by the structure of the Eurozone as a monetary, not a fiscal, union. That is, while monetary policy could be coordinated across the zone, fiscal policy such as taxes and other economic obligations could not be.

In response to the crisis, the Eurozone set up ‘stability mechanisms’ under which member states contributed individually to providing funds which could be distributed to states in the direst need of assistance. The European institutions, the European Commission and the European Central Bank, were appointed to manage the disbursement of ‘bailout funds’. In practice, the arrangements have been handled in conjunction with the International Monetary Fund. Since 2008 ten states have been provided with funds totalling some E488 billions of which Greece accounts for about E246 billions.

All of the three administrative bodies-the Central Bank, the Commission and the IMF- are ‘technocratic’, appointed, not elected, bodies and thus have been placed in the powerful and ambiguous position of negotiating with and, in effect, dictating to, elected governments. This has sharpened what has been called the political crisis of the Union. It places the focus upon the democratic shortcomings of the Union as it has so far evolved. These have been the concern of Jurgen Habermas for many years. To understand those concerns we need to review, firstly, the treaties upon which Europe rests and, secondly, its key decision-making institutions.

The European Treaties

The two basic constituting treaties of the European Unions are the Treaty of Rome, which came into force in 1958, known as the Treaty on the Functioning of the European Union, and the Maastricht Treaty, in force in1993, known as the Treaty on European Union. As discussed below, important amendments were made to these treaties in the Treaty of Lisbon, effective 2009. Various revisions have been made in other treaties but these three contain the constituting provisions.

The Treaty of Rome sets out the basic principles of human and democratic rights, equality, the establishment of an internal market, a free trade area, the freedom of movement of people, services and capital, cooperation on foreign policy, and the Union’s key institutions.

The Maastricht Treaty clarifies various matters dealt with in the Treaty of Rome and, in particular, provides detailed arrangements for the establishment of the currency union, the Eurozone. These included the convergence criteria specifying the requirements to be satisfied by a member state wishing to enter the currency zone and replace their existing currency by the Euro.

A very important episode in the development of the Union was the attempt to pass a treaty establishing a constitution in a single text which would both embrace and extend the Rome and Maastricht Treaties. A text to achieve this, plus several other important provisions including passing into law the Human Rights charter and the extension of qualified majority voting, was signed by all the then member governments in 2004.

It was ratified by voting processes in 18 member states but was defeated in referenda in France and Holland in mid 2005, and this brought the process to an end. Much of the negative opinion in these and in other countries arose from dissatisfaction among the people that the whole process had been run by political elites. Another criticism was that the text of the proposed treaty was long winded and difficult to understand.

After a period of reflection proposed by Germany a new Treaty of Lisbon was signed by member states in 2007 and became effective in late 2009. This contained many of the provisions of the proposed Constitution in the form of amendments to existing treaties.

While these three treaties provide for the coordination of wide areas of policy they fall well short of political and economic union. The implications of this can be seen by examining the key institutions.

Europe’s Key Institutions

The main decision-making institutions of the twenty eight member European Union are:

1-The European Council

2-The Council of the European Union

3-The European Parliament

4-The European Commission

5-The European Central Bank

6-The European Court of Justice

1-The European Council, based in Brussels, is the summit comprised of the heads of state or government of the member states and the President of the European Commission, chaired by the President of the Council of the European Union. It sets out general objectives and priorities but does not legislate.

2-The Council of the European Union, in Brussels, consists of representatives of the executive governments of the member states and is in practice the upper chamber of a two chamber legislature, the lower house being the European Parliament. The representatives are ministers of the member states. The Council of Ministers, as it is often called, meets in several configurations depending on the subject matter to be discussed, eg, security and foreign policy, economic and financial affairs, health, etc. The Presidency rotates among member states. It is the main decision-making body of the Union.

On most matters, decisions are made according to a procedural innovation, qualified majority voting: from 2014 this requires a vote in favour by least 55% of all member states who constitute at least 65% of EU citizens, except for some policies like taxation and foreign affairs where the total of citizens must be at least 72%. In short, both the number of states and the number of citizens is taken into account.

For our purposes, a key aspect is that the Council of European Ministers represents and pools the interests of the current governments of the member states, not of the views of the citizens-it is not an elected federal body. In some respects it may be compared with COAG, the Council of Australian Governments, without the federal overarching powers of the Commonwealth Government.

3-The European Parliament, based in Strasbourg but primarily meeting in Brussels, works with the Council of the European Union as a legislature and passes the Union’s budget (currently about E120 billions). It is the Union’s only direct and democratically appointed body, representing over 500 million people-the second largest democratic legislature, after India, in the world. It is elected by universal suffrage every five years and has 751 members who sit according to political party groupings.

It has weaker powers than the Council and cannot introduce legislation, which is among the important functions of the Commission-see below. But its growing influence and power, notably in recent years, and its deep and broad political constitution based in the political wills of all of the citizens, have made it an increasingly formidable player in constitutional and policy fields.

4-The European Commission, located in Brussels, is the civil service or bureaucracy and, in addition, the executive of the Union. It is headed by a President proposed by the European Council and approved by Parliament. He is assisted by 27 other commissioners, nominated by member states.

Each commissioner is assigned a portfolio and the whole Commission has to be approved by the Council and the Parliament. Even though the individual commissioners are politically appointed and customarily have held political posts in their home state, they are expected to perform their duties in the interests of the Union, not of their member state.

The Commission has almost a monopoly on the initiation of legislation although this, in various ways, is becoming increasingly challenged through the growing power of Parliament. The Commission’s staff are all appointed. It is thus a technocratic body operating according to rules of administrative and scientific expertise.

5-The European Central Bank, based in Frankfurt, is the central bank for the Eurozone-the 19 member monetary union which uses the Euro as its common currency. It is headed by a President, and has a board of national bank governors. The Bank is also at the centre of the European System of Central Banks which is comprised of the national banks of the members of the Union.

It controls monetary policy in the Eurozone with the objective of price stability. There is no common governance or representation for the members of the Eurozone, but the Central Bank does effect some degree of coordination on political decisions concerning the euro and the eurozone through the Eurogroup. This is a committee consisting of the finance ministers of the Eurozone members. Thus, for example, there has been regular consultation within the Eurogroup on matters concerning the formulation and oversight of Greek and other bailouts. The Central Bank is another technocratic body-its management and staff are all appointed.

6-The European Court of Justice, based in Luxembourg, interprets European laws and decides legal disputes between member states, individuals and businesses. Its judges and officials are all appointed for their expertise, thus it is another technocratic body.

It is clear from the above that while important bodies of technocratic decision-making concerned with a wide range of powers and policies have been built up, the development of democratically elected centres of power representing both the citizens and the states of the Union have lagged far behind.

The difference in the relative strengths of the Parliament and the Council of the European Union are particularly stark. The Parliament is a true elected body in which elected representatives sit according to political groupings which have their associates within the member states. Thus there are groups of centre-right, centre-left, etc within the Parliament which have direct connections to corresponding parties within the member states and thus to the political views and opinions of the individual electorates. Only the Parliament expresses the democratic will of the citizens of all the member states yet it has no power to initiate legislation.

The Council, on the other hand, consists of the leaders of the currently existing governments or their representative ministers and thus directly channels the interests of those governments, and it is the key decision-maker.

That these might well not coincide with the views of their people is aptly illustrated by the failure of the Treaty on the Constitution even though individual governments were in favour.

The Fiscal Compact

Even prior to the Great Recession there had been voices raised, notably that of Jean-Claude Trichet, then President of the European Central Bank, pressing the need for greater economic integration than the existing monetary union. After the crisis began the movement in this direction became stronger and the Presidents of the Central Bank, Commission, Council and Eurogroup published a blueprint for a deep and genuine EMU (European Monetary Union) in November 2012. This set out proposals for the short, medium and long-term. Negotiations had been proceeding in parallel with this and a treaty was signed in March 2012. It came into force in January 2013 though various countries did not ratify it until later. The United Kingdom and the Czech Republic did not enter the Compact

Initiated and largely propelled by Germany, the Fiscal Compact imposes austere rules for fiscal behaviour. Government budgets are to be balanced or in surplus, with budget deficits not exceeding 3% of Gross Domestic Product, and strict criteria for managing budgets above that level. There are also tight rules for debt: member states with government debt/GDP ratios greater than 60% are expected to reduce it at a rate of at least 5% of the excess per year. The Compact contains complex rules for the management of deficit and debt such as an ‘automatic correction mechanism’ for bringing excesses into line.

For example, if a member state does not comply with the deficit or debt rules the European Commission will start an Excessive Deficit Procedure and set out proposals for the member state to commit to. The member state is then expected to respond and to map out a suitable ‘adjustment path’. In this and related situations European Commission and European Central Bank oversight in the fields of taxation and budgetary policy and related enforcement mechanisms could infringe upon the sovereignty of Eurozone member states. There have been many complaints of this in the Greek crisis.

Very significantly, the arrangements of the Compact do not provide for transfers of funds among its members who are expected to carry out adjustment programmmes entirely based on the financial resources available to them through existing arrangements. Thus a key aspect of a federal fiscal union is lacking because the basic political agreements which would allow for transfers among members have not been attempted.

Habermas’s Concerns

Habermas’s concerns about the progress and composition of the European project can be grouped under three headings:

1 The role of Germany, his own country

2 The trend towards what he calls ‘executive federalism’

3 The lack of political progress towards true democracy

The Role of Germany

One of the most important obstacles to the evolution of a more democratic union, Habermas thinks, is the part Germany, under conservative governments, has chosen to play. Germany is much the most dominant single player in Europe. For the twenty-eight member European Union, it accoounts for 16% of the population but a much larger proportion of total GDP: 22%. In the nineteen member Eurozone its significance is even more pronounced. There it has 24% of the population and 28% of the GDP. Its GDP per capita is E34,000 compared with an average for the Union of E27,300. Others are much lower: Greece’s per capita GDP is about E16,300.

Germany has benefited from the single currency Eurozone by dramatically increasing its exports: overall, it exports nearly 50% of its GDP, about half of which goes to European countries. Since the crisis began in 2007-8, because of these German export surpluses, the economic imbalances have been increased. It has been able to run, and has vigorously advocated, through the European Central Bank and other institutions, a ‘tight money’ policy with no or low budget deficits. Meanwhile other European countries have been floundering to try to rein in their spending and reduce budget deficits. Its exports have also benefited from the lower exchange rate of the Euro brought about by the poorer economic performances of other countries.

Its labour market has gained from the immigration of skilled young employees from the debtor nations where unemployment has soared. Again, the increase in interest rates of government bonds of the indebted countries has been matched by a decrease in those rates for German government bonds, thus lowering its financial burdens. Further, its financial institutions have profited by supplying the capital needs of governments running deficits.

In all these ways Germany has profited from the Union and the Eurozone. Yet, despite the harsh economic conditions and humanitarian crises in other countries brought on by austerity policies, it has been a strong, perhaps the strongest, champion of those policies. One of the most damaging aspects of bailouts was the transfer of debts in countries such as Greece from private institutions to the governments and therefore to ordinary taxpayers. This, of course, was very much in the interest of German (and also French) banks which had financed much of the deficit spending in debtor countries such as Greece during the pre-crisis period.

Germany was a very strong advocate of the Fiscal Compact which enshrines in Union and Eurozone agreements its own views on strict budgetary behaviour even though this might not be appropriate for another state and may even be to its detriment. There is a strong body of international expert opinion around the world that austerity in Europe has failed.

In all of this Habermas sees a fateful misreading of the past. As he says:

‘After the Second World War….the prudential reasons of regaining the international reputation it had destroyed through its own actions alone made it imperative for Germany ro promote a diplomatic alliance with France and to pursue European unification. Above all, however, the cautious cooperative policy of embedding itself in a context of neighbouring countries solved a problem with deeper historical roots whose reappearance we have good reason to fear. After the foundation of the German Empire in 1871, Germany assumed a fateful ‘semi-hegemonic status’ in Europe-in the words of Ludwig Dehios, it was ‘too weak to dominate the continent, but too strong to bring itself into line’. It is clearly in Germany’s interest to prevent a recurrence of this dilemma, which was overcome only thanks to European unification.’ (Ibid.,18).

To deal with the problems of the present economic crisis he sees the need for political initiatives, and in particular the need for Germany, and other European countries, to develop attitudes of solidarity:

‘Offering assistance out of solidarity is a political act that by no means calls for a form of moral selflessness that would be misplaced in political contexts.’

He then pointedly quotes Konstantinos Simitis, the Prime Minister of Greece at the time of its accession to the EU:

‘Solidarity is a concept’, Simitis said,’ that certain countries in the Union are not comfortable with. They associate it with an interpretation that concentrates exclusively on the need to support those countries that are not fulfilling their obligations. Yet reality necessitates a form of mutual support whose scope is not predefined by legal texts alone. ‘ (Ibid., 21).

Habermas goes on to provide an analysis of solidarity and its application, concluding:

‘If we want to preserve the monetary union, it is no longer enough, given the structural differences between the national economies, to provide loans to over-indebted states so that each can increase its competitiveness through its own efforts. What is required is instead a cooperative effort from a shared political perspective….Such an effort would require Germany to accept short- and medium-term negative redistributive effects in its longer- term self-interest. That would be an exemplary case of political solidarity in the sense outlined.’ (Ibid., 28).

The Trend Towards Executive Federalism

As we have seen, the only democratically elected body within the European Union and the Eurozone, the Parliament, plays a growing but still relatively minor practical role alongside the other key institutions, especially the politically appointed Council of the European Union, the appointed Central Bank and the appointed Commission.

The Council , consisting of the heads of member state governments or their ministers, takes precedence over the Parliament in many areas of policy making. Again, the Commission and the Central Bank have been intimately involved in all the most important and crises of decision-making which have arisen since the crisis began, now over six years ago. In some cases their actions have run exactly counter to the expressed views of elected national governments.

Moreover, the adoption of the Fiscal Compact with its complex, tightly defined rules governing budgetary deficits and government debt levels according to an economic ideology by no means generally accepted, has greatly added to this condition. The Commission and the Central Bank exercise very intense oversight of, and directly intervene in, the formation of the budgets and economic policies of sovereign states, without any recourse to the approval of an elected body, and well away from the gaze of the national publics.

All of this has been adopted on the basis of a fear that without such technocratic, rule-governed control the international financial markets would destabilise the Euro or the debt offerings of individual national banks, a fear which, it is true, is justified by plenty of evidence.

We can compare here the process which applies within the Council of Australian States (COAG). This was devised in the Keating government to bring some better form of coordination than had existed heretofore to the harmonisation of laws and regulations across the Australian States and Territories. In its development, however, it has placed great emphasis upon the role of Ministerial Councils.

Typically, complex issues are hived off from direct consideration by the Council itself, which consists of the Heads of Commonwealth, State and Territory Governments, to Ministerial Councils consisting of ministers in a particular policy area. These are assisted primarily by committees of intergovernmental officials who develop preferred policy paths. Very often in this committee work the lead role in this is given to the officials of the government which is regarded as having the most significant stake in the particular policy area.

Thus, for example, the Ministerial Council on Energy, consisting of the jurisdictional Ministers of Energy, for whom the processing is carried out by expert officials, handles all relevant cross-border energy issues, presenting solutions more or less for rubber-stamping by the full COAG. It is not difficult to see that such work, conducted well away from public view and comment, runs the risk of reflecting in-group views and ideologies relating to technical and economic issues and to the short-cutting of public oversight. The situation is much more stark in the European Union because of the lack of a political federal-like union.

Habermas has called the present governance arrangement in Europe one of ‘post-democratic executive federalism’, describing the situation where a group of countries have important parts of their functions taken over by appointed executives. There is apparent in this a loss of democratic legitimacy, restoration of which must involve the construction of some political configuration whereby two components – the views of citizens of the whole multi-government union taken as a unit, and the views of the citizens of individual states – are brought to bear on policy areas requiring decision. This is the case, of course, with federations such as the first one, the United States, and others, such as Australia.

As Habermas says:

‘Bringing the two competing principles of the equality of states and the equality of citizens into harmony within the framework of a nation-state was the invention of a two-chamber system and a corresponding division of powers. The Senate or second chamber can ensure a suitable form of participation in federal legislation through the competing legislation of the member states. The principle lf democracy finds full application in such a federal state precisely in virtue of the fact that the principle of state equality is adequately embodied in the second chamber’.

Europe has no second chamber as such. And he goes on to set out the two conditions that are required for a proper federal state:

‘…the first thing that is needed is the normative (ie in matters of national value) subordination of the states to the federal level. Second, that priority of the federal level over the individual states expresses the political identity of the people from which all political authority proceeds: it is in the final analysis the national citizenry as a whole that establishes and sustains a democratic federal state – not the governments of the several states (within it) or their citizens.’ (Ibid., 37.)

Which brings us to his third concern about the future of Europe:

The Lack of Progress Towards a True Democracy

Jurgen Habermas, in many more places than I have noted here, has criticised the technocratic governance of the Union and the Eurozone and the push by Germany and other of the major states for financial and economic arrangements governed by technical rules preferred by the international markets. Thus while they have effected ‘hard money’ forms of economic integration, notably in the quite recently adopted Fiscal Compact which seeks to place tight corsets upon national economic policies, they have shied away from extending political integration which would be required to give these processes true democratic approval.

Habermas argues that

‘…the trend towards implementing the blueprints for a true fiscal and economic union is being strengthened by pressure from the financial markets.’ … ‘However’, he says,’the politicians in charge are shying away from the conclusion that follows from this. The sovereign rights that are taken away from the national parliaments in the course of the planned fiscal reconstruction would have to be transferred to a democratic legislature at the European level.’ (Ibid., 76).

As noted above, there are two criteria for a true federal state: subordination of the states to the federal level, and the primacy of the national citizenry as a whole. But, as Habermas goes on,

‘As it happens, the citizens in Europe don’t want to fulfil either of these conditions. They don’t want a large-scale federal state…There are many reasons why the process of European unification is stalled. But the main one is the lack of the mutual trust that the citizens of different nations would have to show each other as a precondition for their willingness to adopt a common perspective that transcends national boundaries when making political decisions on federal issues.’ Ibid, 37)

As he says:

‘…governments and political parties have good reasons for hesitancy. Until now, the European project has been promoted over the heads of populations by the political elites more or less alone. And the citizens were content as long as the EU was a community of winners. But now the euro crisis, which is having different effects on the national economies and is conceived in polarizing terms from the perspective of the national publics, is reinforcing Eurosceptical right-wing populism everywhere. The polls show that at the moment it is not easy to win majorities for the overdue change in the Treaties.’ (Ibid., 77).

What, in essence, he proposes – noting in the process that ‘the formation of a federation composed of nation-states is already far advanced’ – is:

‘The European Parliament would also have to be able to introduce legislative initiatives, and the so-called ‘ordinary legislative procedure’, which requires the approval of both chambers, would have to be extended to all policy fields. In addition, the European Council – thus the assembly of heads of government who to this day enjoy a semi-constitutional status – would have to be incorporated into the Council of Ministers. Finally, the Commission would have to assume the functions of a government answerable to Council and Parliament in equal measure. With this transformation of the Union into a supranational polity that satisfies democratic standards, the principle of the equality of states and of the equality of citizens would be accorded equal consideration.’ (Ibid., 41).

There are not many open indications at present that Habermas’s vision will be accepted, but in focusing upon the present state of ‘post-democratic executive federalism’ and its implications he has sharply raised the stakes for further steps in the direction of democracy. There are many deep changes taking place in the European polities, not least in his home country, and in attitudes towards the central European institutions. Elections in several are looming and we can only wait and see the directions of change.

Opportunities Lost? The Crisis of the European Union by Gavan McDonell

A German Philosopher

In my article, Greece, Europe and Austerity, in Newsletter No 214, April-May, 2015-I outlined the Greek financial and humanitarian crisis as it is playing out in negotiations among the members of the Eurozone, the European Union, the European Commission, the European Central Bank and the International Monetary Fund. I alluded there to the crisis which the European project is itself undergoing and in this article I examine that crisis in more detail. I want to do that by reference to the writings of the highly influential, left-inclined German philosopher and public intellectual, Jurgen Habermas. In particular, I will quote from his most recent work on the issue (J Habermas, The Lure of Technocracy, Polity Press, 2015.)

Jurgen Habermas is regarded by many as the most important philosopher and social theorist since the Second World War and perhaps the most influential public intellectual in the world-the world, that is, outside the English-speaking countries. There, by and large, he is known only to specialist philosophers, political scientists, and legal theorists. In his own country, Germany, his every word is canvassed and discussed, and he has helped to shape many controversies, especially concerning his favourite project – European evolution within a world society. Writing out of post-Marxist critical theory he created a comprehensive reconstruction and development of Western philosophy and social theory, drawing upon major themes in European and English language thought

His work has profound political implications. It focuses upon the world making power of communication in ordinary languages and its potential for developing a more just, rational and humane world with a foundation in what he called discourse ethics. In addition to his work in philosophy and the social sciences he has written a very influential reconsideration of the relations between the philosophy of law and political theory.

Almost always welcoming in his approach to contending scholars and differing points of view, and optimistic and positive towards great world issues, notably the evolution of Europe, it is only recently that he has confessed to doubts about the final success of the European project. His general attitude to this he has aligned with a famous statement by no less than that well-known English conservative, Winston Churchill.

Speaking at the University of Zurich on 19 September 1946, as an observer, not a citizen, of Europe, Churchill-in a speech which Habermas described as amazing today ‘for the improbability and the visionary power of its far-sighted perspective’-said that ‘if Europe were once united in sharing of its common inheritance, there would be no limit to happiness, to the prosperity and the glory …’.

After evoking then present and future dangers, Churchill continued: ‘we must build a kind of United States of Europe…all that is needed is the resolve of hundreds of millions of men and women to do right instead of wrong ….the first step in the re-creation of the European family must be partnership between France and Germany’, and went on to sketch the necessary conditions for a European union (Ibid., x).

In the earlier article I outlined the patient, incremental path of negotiation and institution building which the nations of Europe have followed over the last seventy years. But Habermas has become disenchanted with the development of the Union and its institutions, especially since the economic and political crises that have engulfed the region, and most of the rest of the world, since the onset of the global financial crisis in 2008. He has become especiallly disappointed with the performance of his own country, Germany. To understand his reservations and criticisms we need first to review the economic crisis of the European Union, and the political crisis associated with the role and make-up of the major Europe institutions.

The Economic Crisis of the European Union

The European financial and sovereign debt crisis developed in 2009 after the onset of the Great Recession in the United States. This followed upon the stockmarket crash and sharp economic declines associated with the subprime mortgage implosion and the collapse of Lehmann Brothers in 2007-8. The economies of a succession of European countries went into recession, the specific causes and timing of each depending upon the particular circumstances of the country. This situation has been said to have been triggered by the Greek collapse attributed in large part to its very high levels of debt as a proportion of GDP, but in fact most of the European countries had been running high budget deficits and debt levels.

The ability of Europe to respond to the crisis was limited by the structure of the Eurozone as a monetary, not a fiscal, union. That is, while monetary policy could be coordinated across the zone, fiscal policy such as taxes and other economic obligations could not be.

In response to the crisis, the Eurozone set up ‘stability mechanisms’ under which member states contributed individually to providing funds which could be distributed to states in the direst need of assistance. The European institutions, the European Commission and the European Central Bank, were appointed to manage the disbursement of ‘bailout funds’. In practice, the arrangements have been handled in conjunction with the International Monetary Fund. Since 2008 ten states have been provided with funds totalling some E488 billions of which Greece accounts for about E246 billions.

All of the three administrative bodies-the Central Bank, the Commission and the IMF- are ‘technocratic’, appointed, not elected, bodies and thus have been placed in the powerful and ambiguous position of negotiating with and, in effect, dictating to, elected governments. This has sharpened what has been called the political crisis of the Union. It places the focus upon the democratic shortcomings of the Union as it has so far evolved. These have been the concern of Jurgen Habermas for many years. To understand those concerns we need to review, firstly, the treaties upon which Europe rests and, secondly, its key decision-making institutions.

The European Treaties

The two basic constituting treaties of the European Unions are the Treaty of Rome, which came into force in 1958, known as the Treaty on the Functioning of the European Union, and the Maastricht Treaty, in force in1993, known as the Treaty on European Union. As discussed below, important amendments were made to these treaties in the Treaty of Lisbon, effective 2009. Various revisions have been made in other treaties but these three contain the constituting provisions.

The Treaty of Rome sets out the basic principles of human and democratic rights, equality, the establishment of an internal market, a free trade area, the freedom of movement of people, services and capital, cooperation on foreign policy, and the Union’s key institutions.

The Maastricht Treaty clarifies various matters dealt with in the Treaty of Rome and, in particular, provides detailed arrangements for the establishment of the currency union, the Eurozone. These included the convergence criteria specifying the requirements to be satisfied by a member state wishing to enter the currency zone and replace their existing currency by the Euro.

A very important episode in the development of the Union was the attempt to pass a treaty establishing a constitution in a single text which would both embrace and extend the Rome and Maastricht Treaties. A text to achieve this, plus several other important provisions including passing into law the Human Rights charter and the extension of qualified majority voting, was signed by all the then member governments in 2004.

It was ratified by voting processes in 18 member states but was defeated in referenda in France and Holland in mid 2005, and this brought the process to an end. Much of the negative opinion in these and in other countries arose from dissatisfaction among the people that the whole process had been run by political elites. Another criticism was that the text of the proposed treaty was long winded and difficult to understand.

After a period of reflection proposed by Germany a new Treaty of Lisbon was signed by member states in 2007 and became effective in late 2009. This contained many of the provisions of the proposed Constitution in the form of amendments to existing treaties.

While these three treaties provide for the coordination of wide areas of policy they fall well short of political and economic union. The implications of this can be seen by examining the key institutions.

Europe’s Key Institutions

The main decision-making institutions of the twenty eight member European Union are:

1-The European Council

2-The Council of the European Union

3-The European Parliament

4-The European Commission

5-The European Central Bank

6-The European Court of Justice

1-The European Council, based in Brussels, is the summit comprised of the heads of state or government of the member states and the President of the European Commission, chaired by the President of the Council of the European Union. It sets out general objectives and priorities but does not legislate.

2-The Council of the European Union, in Brussels, consists of representatives of the executive governments of the member states and is in practice the upper chamber of a two chamber legislature, the lower house being the European Parliament. The representatives are ministers of the member states. The Council of Ministers, as it is often called, meets in several configurations depending on the subject matter to be discussed, eg, security and foreign policy, economic and financial affairs, health, etc. The Presidency rotates among member states. It is the main decision-making body of the Union.

On most matters, decisions are made according to a procedural innovation, qualified majority voting: from 2014 this requires a vote in favour by least 55% of all member states who constitute at least 65% of EU citizens, except for some policies like taxation and foreign affairs where the total of citizens must be at least 72%. In short, both the number of states and the number of citizens is taken into account.

For our purposes, a key aspect is that the Council of European Ministers represents and pools the interests of the current governments of the member states, not of the views of the citizens-it is not an elected federal body. In some respects it may be compared with COAG, the Council of Australian Governments, without the federal overarching powers of the Commonwealth Government.

3-The European Parliament, based in Strasbourg but primarily meeting in Brussels, works with the Council of the European Union as a legislature and passes the Union’s budget (currently about E120 billions). It is the Union’s only direct and democratically appointed body, representing over 500 million people-the second largest democratic legislature, after India, in the world. It is elected by universal suffrage every five years and has 751 members who sit according to political party groupings.

It has weaker powers than the Council and cannot introduce legislation, which is among the important functions of the Commission-see below. But its growing influence and power, notably in recent years, and its deep and broad political constitution based in the political wills of all of the citizens, have made it an increasingly formidable player in constitutional and policy fields.

4-The European Commission, located in Brussels, is the civil service or bureaucracy and, in addition, the executive of the Union. It is headed by a President proposed by the European Council and approved by Parliament. He is assisted by 27 other commissioners, nominated by member states.

Each commissioner is assigned a portfolio and the whole Commission has to be approved by the Council and the Parliament. Even though the individual commissioners are politically appointed and customarily have held political posts in their home state, they are expected to perform their duties in the interests of the Union, not of their member state.

The Commission has almost a monopoly on the initiation of legislation although this, in various ways, is becoming increasingly challenged through the growing power of Parliament. The Commission’s staff are all appointed. It is thus a technocratic body operating according to rules of administrative and scientific expertise.

5-The European Central Bank, based in Frankfurt, is the central bank for the Eurozone-the 19 member monetary union which uses the Euro as its common currency. It is headed by a President, and has a board of national bank governors. The Bank is also at the centre of the European System of Central Banks which is comprised of the national banks of the members of the Union.

It controls monetary policy in the Eurozone with the objective of price stability. There is no common governance or representation for the members of the Eurozone, but the Central Bank does effect some degree of coordination on political decisions concerning the euro and the eurozone through the Eurogroup. This is a committee consisting of the finance ministers of the Eurozone members. Thus, for example, there has been regular consultation within the Eurogroup on matters concerning the formulation and oversight of Greek and other bailouts. The Central Bank is another technocratic body-its management and staff are all appointed.

6-The European Court of Justice, based in Luxembourg, interprets European laws and decides legal disputes between member states, individuals and businesses. Its judges and officials are all appointed for their expertise, thus it is another technocratic body.

It is clear from the above that while important bodies of technocratic decision-making concerned with a wide range of powers and policies have been built up, the development of democratically elected centres of power representing both the citizens and the states of the Union have lagged far behind.

The difference in the relative strengths of the Parliament and the Council of the European Union are particularly stark. The Parliament is a true elected body in which elected representatives sit according to political groupings which have their associates within the member states. Thus there are groups of centre-right, centre-left, etc within the Parliament which have direct connections to corresponding parties within the member states and thus to the political views and opinions of the individual electorates. Only the Parliament expresses the democratic will of the citizens of all the member states yet it has no power to initiate legislation.

The Council, on the other hand, consists of the leaders of the currently existing governments or their representative ministers and thus directly channels the interests of those governments, and it is the key decision-maker.

That these might well not coincide with the views of their people is aptly illustrated by the failure of the Treaty on the Constitution even though individual governments were in favour.

The Fiscal Compact

Even prior to the Great Recession there had been voices raised, notably that of Jean-Claude Trichet, then President of the European Central Bank, pressing the need for greater economic integration than the existing monetary union. After the crisis began the movement in this direction became stronger and the Presidents of the Central Bank, Commission, Council and Eurogroup published a blueprint for a deep and genuine EMU (European Monetary Union) in November 2012. This set out proposals for the short, medium and long-term. Negotiations had been proceeding in parallel with this and a treaty was signed in March 2012. It came into force in January 2013 though various countries did not ratify it until later. The United Kingdom and the Czech Republic did not enter the Compact

Initiated and largely propelled by Germany, the Fiscal Compact imposes austere rules for fiscal behaviour. Government budgets are to be balanced or in surplus, with budget deficits not exceeding 3% of Gross Domestic Product, and strict criteria for managing budgets above that level. There are also tight rules for debt: member states with government debt/GDP ratios greater than 60% are expected to reduce it at a rate of at least 5% of the excess per year. The Compact contains complex rules for the management of deficit and debt such as an ‘automatic correction mechanism’ for bringing excesses into line.

For example, if a member state does not comply with the deficit or debt rules the European Commission will start an Excessive Deficit Procedure and set out proposals for the member state to commit to. The member state is then expected to respond and to map out a suitable ‘adjustment path’. In this and related situations European Commission and European Central Bank oversight in the fields of taxation and budgetary policy and related enforcement mechanisms could infringe upon the sovereignty of Eurozone member states. There have been many complaints of this in the Greek crisis.

Very significantly, the arrangements of the Compact do not provide for transfers of funds among its members who are expected to carry out adjustment programmmes entirely based on the financial resources available to them through existing arrangements. Thus a key aspect of a federal fiscal union is lacking because the basic political agreements which would allow for transfers among members have not been attempted.

Habermas’s Concerns

Habermas’s concerns about the progress and composition of the European project can be grouped under three headings:

1 The role of Germany, his own country

2 The trend towards what he calls ‘executive federalism’

3 The lack of political progress towards true democracy

The Role of Germany

One of the most important obstacles to the evolution of a more democratic union, Habermas thinks, is the part Germany, under conservative governments, has chosen to play. Germany is much the most dominant single player in Europe. For the twenty-eight member European Union, it accoounts for 16% of the population but a much larger proportion of total GDP: 22%. In the nineteen member Eurozone its significance is even more pronounced. There it has 24% of the population and 28% of the GDP. Its GDP per capita is E34,000 compared with an average for the Union of E27,300. Others are much lower: Greece’s per capita GDP is about E16,300.

Germany has benefited from the single currency Eurozone by dramatically increasing its exports: overall, it exports nearly 50% of its GDP, about half of which goes to European countries. Since the crisis began in 2007-8, because of these German export surpluses, the economic imbalances have been increased. It has been able to run, and has vigorously advocated, through the European Central Bank and other institutions, a ‘tight money’ policy with no or low budget deficits. Meanwhile other European countries have been floundering to try to rein in their spending and reduce budget deficits. Its exports have also benefited from the lower exchange rate of the Euro brought about by the poorer economic performances of other countries.

Its labour market has gained from the immigration of skilled young employees from the debtor nations where unemployment has soared. Again, the increase in interest rates of government bonds of the indebted countries has been matched by a decrease in those rates for German government bonds, thus lowering its financial burdens. Further, its financial institutions have profited by supplying the capital needs of governments running deficits.

In all these ways Germany has profited from the Union and the Eurozone. Yet, despite the harsh economic conditions and humanitarian crises in other countries brought on by austerity policies, it has been a strong, perhaps the strongest, champion of those policies. One of the most damaging aspects of bailouts was the transfer of debts in countries such as Greece from private institutions to the governments and therefore to ordinary taxpayers. This, of course, was very much in the interest of German (and also French) banks which had financed much of the deficit spending in debtor countries such as Greece during the pre-crisis period.

Germany was a very strong advocate of the Fiscal Compact which enshrines in Union and Eurozone agreements its own views on strict budgetary behaviour even though this might not be appropriate for another state and may even be to its detriment. There is a strong body of international expert opinion around the world that austerity in Europe has failed.

In all of this Habermas sees a fateful misreading of the past. As he says:

‘After the Second World War….the prudential reasons of regaining the international reputation it had destroyed through its own actions alone made it imperative for Germany ro promote a diplomatic alliance with France and to pursue European unification. Above all, however, the cautious cooperative policy of embedding itself in a context of neighbouring countries solved a problem with deeper historical roots whose reappearance we have good reason to fear. After the foundation of the German Empire in 1871, Germany assumed a fateful ‘semi-hegemonic status’ in Europe-in the words of Ludwig Dehios, it was ‘too weak to dominate the continent, but too strong to bring itself into line’. It is clearly in Germany’s interest to prevent a recurrence of this dilemma, which was overcome only thanks to European unification.’ (Ibid.,18).

To deal with the problems of the present economic crisis he sees the need for political initiatives, and in particular the need for Germany, and other European countries, to develop attitudes of solidarity:

‘Offering assistance out of solidarity is a political act that by no means calls for a form of moral selflessness that would be misplaced in political contexts.’

He then pointedly quotes Konstantinos Simitis, the Prime Minister of Greece at the time of its accession to the EU:

‘Solidarity is a concept’, Simitis said,’ that certain countries in the Union are not comfortable with. They associate it with an interpretation that concentrates exclusively on the need to support those countries that are not fulfilling their obligations. Yet reality necessitates a form of mutual support whose scope is not predefined by legal texts alone. ‘ (Ibid., 21).

Habermas goes on to provide an analysis of solidarity and its application, concluding:

‘If we want to preserve the monetary union, it is no longer enough, given the structural differences between the national economies, to provide loans to over-indebted states so that each can increase its competitiveness through its own efforts. What is required is instead a cooperative effort from a shared political perspective….Such an effort would require Germany to accept short- and medium-term negative redistributive effects in its longer- term self-interest. That would be an exemplary case of political solidarity in the sense outlined.’ (Ibid., 28).

The Trend Towards Executive Federalism

As we have seen, the only democratically elected body within the European Union and the Eurozone, the Parliament, plays a growing but still relatively minor practical role alongside the other key institutions, especially the politically appointed Council of the European Union, the appointed Central Bank and the appointed Commission.

The Council , consisting of the heads of member state governments or their ministers, takes precedence over the Parliament in many areas of policy making. Again, the Commission and the Central Bank have been intimately involved in all the most important and crises of decision-making which have arisen since the crisis began, now over six years ago. In some cases their actions have run exactly counter to the expressed views of elected national governments.

Moreover, the adoption of the Fiscal Compact with its complex, tightly defined rules governing budgetary deficits and government debt levels according to an economic ideology by no means generally accepted, has greatly added to this condition. The Commission and the Central Bank exercise very intense oversight of, and directly intervene in, the formation of the budgets and economic policies of sovereign states, without any recourse to the approval of an elected body, and well away from the gaze of the national publics.

All of this has been adopted on the basis of a fear that without such technocratic, rule-governed control the international financial markets would destabilise the Euro or the debt offerings of individual national banks, a fear which, it is true, is justified by plenty of evidence.

We can compare here the process which applies within the Council of Australian States (COAG). This was devised in the Keating government to bring some better form of coordination than had existed heretofore to the harmonisation of laws and regulations across the Australian States and Territories. In its development, however, it has placed great emphasis upon the role of Ministerial Councils.

Typically, complex issues are hived off from direct consideration by the Council itself, which consists of the Heads of Commonwealth, State and Territory Governments, to Ministerial Councils consisting of ministers in a particular policy area. These are assisted primarily by committees of intergovernmental officials who develop preferred policy paths. Very often in this committee work the lead role in this is given to the officials of the government which is regarded as having the most significant stake in the particular policy area.

Thus, for example, the Ministerial Council on Energy, consisting of the jurisdictional Ministers of Energy, for whom the processing is carried out by expert officials, handles all relevant cross-border energy issues, presenting solutions more or less for rubber-stamping by the full COAG. It is not difficult to see that such work, conducted well away from public view and comment, runs the risk of reflecting in-group views and ideologies relating to technical and economic issues and to the short-cutting of public oversight. The situation is much more stark in the European Union because of the lack of a political federal-like union.

Habermas has called the present governance arrangement in Europe one of ‘post-democratic executive federalism’, describing the situation where a group of countries have important parts of their functions taken over by appointed executives. There is apparent in this a loss of democratic legitimacy, restoration of which must involve the construction of some political configuration whereby two components – the views of citizens of the whole multi-government union taken as a unit, and the views of the citizens of individual states – are brought to bear on policy areas requiring decision. This is the case, of course, with federations such as the first one, the United States, and others, such as Australia.

As Habermas says:

‘Bringing the two competing principles of the equality of states and the equality of citizens into harmony within the framework of a nation-state was the invention of a two-chamber system and a corresponding division of powers. The Senate or second chamber can ensure a suitable form of participation in federal legislation through the competing legislation of the member states. The principle lf democracy finds full application in such a federal state precisely in virtue of the fact that the principle of state equality is adequately embodied in the second chamber’.

Europe has no second chamber as such. And he goes on to set out the two conditions that are required for a proper federal state:

‘…the first thing that is needed is the normative (ie in matters of national value) subordination of the states to the federal level. Second, that priority of the federal level over the individual states expresses the political identity of the people from which all political authority proceeds: it is in the final analysis the national citizenry as a whole that establishes and sustains a democratic federal state – not the governments of the several states (within it) or their citizens.’ (Ibid., 37.)

Which brings us to his third concern about the future of Europe:

The Lack of Progress Towards a True Democracy

Jurgen Habermas, in many more places than I have noted here, has criticised the technocratic governance of the Union and the Eurozone and the push by Germany and other of the major states for financial and economic arrangements governed by technical rules preferred by the international markets. Thus while they have effected ‘hard money’ forms of economic integration, notably in the quite recently adopted Fiscal Compact which seeks to place tight corsets upon national economic policies, they have shied away from extending political integration which would be required to give these processes true democratic approval.

Habermas argues that

‘…the trend towards implementing the blueprints for a true fiscal and economic union is being strengthened by pressure from the financial markets.’ … ‘However’, he says,’the politicians in charge are shying away from the conclusion that follows from this. The sovereign rights that are taken away from the national parliaments in the course of the planned fiscal reconstruction would have to be transferred to a democratic legislature at the European level.’ (Ibid., 76).

As noted above, there are two criteria for a true federal state: subordination of the states to the federal level, and the primacy of the national citizenry as a whole. But, as Habermas goes on,

‘As it happens, the citizens in Europe don’t want to fulfil either of these conditions. They don’t want a large-scale federal state…There are many reasons why the process of European unification is stalled. But the main one is the lack of the mutual trust that the citizens of different nations would have to show each other as a precondition for their willingness to adopt a common perspective that transcends national boundaries when making political decisions on federal issues.’ Ibid, 37)

As he says:

‘…governments and political parties have good reasons for hesitancy. Until now, the European project has been promoted over the heads of populations by the political elites more or less alone. And the citizens were content as long as the EU was a community of winners. But now the euro crisis, which is having different effects on the national economies and is conceived in polarizing terms from the perspective of the national publics, is reinforcing Eurosceptical right-wing populism everywhere. The polls show that at the moment it is not easy to win majorities for the overdue change in the Treaties.’ (Ibid., 77).

What, in essence, he proposes – noting in the process that ‘the formation of a federation composed of nation-states is already far advanced’ – is:

‘The European Parliament would also have to be able to introduce legislative initiatives, and the so-called ‘ordinary legislative procedure’, which requires the approval of both chambers, would have to be extended to all policy fields. In addition, the European Council – thus the assembly of heads of government who to this day enjoy a semi-constitutional status – would have to be incorporated into the Council of Ministers. Finally, the Commission would have to assume the functions of a government answerable to Council and Parliament in equal measure. With this transformation of the Union into a supranational polity that satisfies democratic standards, the principle of the equality of states and of the equality of citizens would be accorded equal consideration.’ (Ibid., 41).

There are not many open indications at present that Habermas’s vision will be accepted, but in focusing upon the present state of ‘post-democratic executive federalism’ and its implications he has sharply raised the stakes for further steps in the direction of democracy. There are many deep changes taking place in the European polities, not least in his home country, and in attitudes towards the central European institutions. Elections in several are looming and we can only wait and see the directions of change.

 

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Greece, Europe and Austerity

A new arrival

Greece accounts for about 2 per cent of the population of the 500 million who live inside the European Union – a 28-member political and economic union – and accounts for a similar proportion of its Gross Domestic Product. The EU produces about 20 per cent of global GDP; if regarded as a unit, it is the largest economic entity in the world.

In early February this year, Greece triggered convulsions throughout the EU and further afield when it elected a left-wing coalition, SYRIZA (the Greek acronym for “Radical Coalition of the Left”), as the majority party. SYRIZA became the first successful party in any European country forming government on a platform challenging the policies of “austerity”, that is, reducing spending and welfare payments.

Since the global financial crisis, austerity measures have been promoted by the major EU financial institutions. Uproar has followed through much of Europe. There have been fears of “Grexit” – the exit of Greece from the Euro Zone. Tense negotiations are now afoot among Greece, EU member states (notably Germany) and the Troika of the European Commission, European Central Bank and the International Monetary Fund.

How was it that such a small ant could nip the pants of such a large bull? To get some understanding we need to look back at the history of the “European idea”.

 

The European Idea

Beginning in the late 1940s and early 1950s, steps were taken to combat the intense nationalism which had spawned interstate rivalries and two World Wars, continent wide devastation and tens of millions of deaths and injuries. There was a strong sense of Europe’s place in the world, its influence over many centuries, the need to rebuild from weakness. The first concrete action was the setting up of the European Coal and Steel Community in 1952, signalled as the “first step in the federation of Europe”. Its six members were Belgium, France, Italy, Luxembourg, West Germany and the Netherlands. It had the aim of averting future wars by pooling the potentials of heavy industry.

In 1958, following the Treaty of Rome, the European Economic Community was established with a customs union. The Treaty also created the European Atomic Energy Community, with the same six members and the same strategic objectives. In 1967 a single set of institutions came into existence to govern the three communities of coal and steel, economic affairs and atomic energy. Denmark, Ireland and the United Kingdom joined.

In 1979 the first direct, democratic elections to the European Parliament were held. Greece joined in 1981, Spain and Portugal in 1986. The Single European Act of 1986 was passed that provided for a common market to be established in 1992 and the adoption of a common foreign and security policy. The twelve members became known as the European Communities.

With the break-up of the Soviet Union and the eastern bloc in 1990, East Germany became part of an enlarged Germany. Other new members were in prospect, notably from Eastern Europe. The Copenhagen Criteria, agreed in 1993, set out the conditions for new member states to join: a functioning democracy, respect for human rights, a developed market economy, among the most important.

Terms specifically included the aims of economic, monetary and political union. European citizenship was adopted. A single market set up a free trade area, freedom of movement for people, goods, services and capital, common policies on trade, agriculture, fisheries and regional development.

The Maastricht Treaty of 1993 established the European Union, the legal successor to the Communities and led to the creation of the single currency, the Euro. A crucial move towards economic integration was agreement on specific restraints on national economic performance requiring common criteria for inflation, government debt, annual deficits and the exchange rate. These were the stability criteria.

While these agreements fell well short of a fiscal union, they introduced a new level of interdependence.

By 2001 twelve countries had joined the Euro Zone (which is not the same as the European Union): the Zone contained those countries using the Euro as common currency. By 2009 there were four more and by 2015 there were another three.

The 19 countries had a population of over 330 million, two-thirds of the EU total. France, Germany, Italy and Spain account for over 250 million, Austria, Netherlands, Belgium, Greece and Portugal for another 60 million. The remaining eleven together total only 20 million.

Greece can be regarded as one of the middle powers in the Zone. Its economic weight is lower because its per capita income was less than half of that of richer powers. Greece has been declining since then. Greece is one of the fourteen countries most heavily involved with trans-European initiatives.

By 2015 there was a Parliament of Europe and regular elections throughout the Union. This political unit had a bureaucracy based in Brussels, the European Commission, free movement of people, free trade and a customs union. A common currency was circulating among the majority of members plus some other states outside the Union.

Economic institutions include the European Central Bank, a long term lender; the European Investment Bank, the world’s largest international public lending body; plus central legal institutions and a host of infrastructure embracing social, political, economic, scientific, technological and environmental matters.

Seventy years of patient negotiation and common action in pursuit of common goals had taken the European idea a long way. The idea had shown the benefits of coordination and scale. There are many problems which confront Europe but any consideration of the world’s geopolitical situation must start from the recognition of these achievements and this history of accommodation.

 

Recent political developments in Greece

In the general elections of October, 2009 PASOK (the acronym for the centre-left party) defeated the centre-right party, New Democracy. The two parties have competed for government since the fall of the colonels’ junta in 1974. The junta (1967-74) casts a long shadow over the Greek polity.

During its period in power in the early 2000s New Democracy had presided over considerable economic growth, fuelled by ever growing budget deficits well outside the budgetary limitations agreed with the European Union under the interdependent stability arrangements noted above.

PASOK was dismayed on taking office to find that the previous government had falsified statistics. The financial situation was much worse than had been thought. (Note: Greece, Italy and other European countries had used instruments devised by Goldman Sachs, JP Morgan and other financial intermediaries to hide their true financial positions).

International anxiety soon produced a sovereign debt crisis, a fear that the government would be unable to pay its debts, enter sovereign default and possibly leave the Euro Zone. The situation was made worse by the discovery that the country had been in recession for several years. Greek Government debt was downgraded to junk-bond status. Private capital was no longer available to Greek government borrowers. Greece had the highest budget deficits and debt to GDP ratios in Europe.

The Greek government owed very large sums to European institutions, member states and the private sector. A bailout package of €110 billion was quickly agreed by the Troika on condition that the Greek state would repay creditors who had taken commercial risks, in effect transferring risk and the pain of the bailout from the creditors to taxpayers and workers.

The urgency of the crisis resulted in a strictly technocratic arrangement by the regulatory bodies minus the democratic process as would normally have been the case. The bailout was provided by mid-2010 on condition that the Greek government adopt stringent austerity conditions (i.e. reduce spending), additional structural reforms, privatise government-owned assets, together with very sensitive cuts and freezes on public sector wages and on pensions. Failure to accept these conditions would have involved the aforesaid ‘Grexit’ . Riots, strikes and widespread opposition to these measures followed.

A year later, worsened economic conditions and the failure of the government to implement various of the conditions prompted the mobilisation, again by the Troika, of a second bailout loan of €130 billion. Terms of the second bailout were not agreed until February 2012 and envisaged the difficult task of repaying €240 billion by December 2014.

Austerity has been painful. GDP dropped by over 25 per cent, unemployment reached 28 per cent, youth unemployment was at 65 per cent. Wages and pensions had been cut. Many people were in great distress. Some spoke of a humanitarian crisis. Violent opposition broke out. Opinion polls showed that the left wing SYRIZA could win an election due for 2012. Alarm spread throughout Europe and beyond at the prospect.

SYRIZA’s rise has been rapid. Formed in 2004 as a coalition of left and radical-left parties, SYRIZA transformed itself into a single party containing what had previously been separate parties in 2012. Under a young, charismatic leader, Alex Tsipras, it won 27 per cent of the electorate to become the main opposition party to the governing coalition led by New Democracy and PASOK. In the 2014 European elections it had the highest vote. In late 2014 the political process failed to appoint, as then due, a new national President. The Constitution provided for a snap election which was duly called for January 25, 2015.

SYRIZA campaigned strongly on an anti-austerity package and rejection of the bailout conditions, but not on departure from the Euro Zone. It won 36.34 per cent of the vote and 149 out of 300 seats, almost an absolute majority. New Democracy went backwards. PASOK suffered heavily from a swing of the left vote to SYRIZA, and was reduced to 4 per cent, compared to 49 per cent in 2009.

As its coalition partner SYRIZA chose a conservative party – Independent Greeks or ANEL, a party with strong Right-wing and nationalist attitudes. ANEL won 4.75 per cent by campaigning vigorously against austerity, agreements negotiated with the Troika, and insults it claimed had been offered to Greece, especially by the Germans, and the European north in general. Its platform includes a call for German war reparations, a very sensitive issue: about 250,000 Greeks died during the Nazi occupation, mainly due to starvation; some 60,000 deaths were the result of massacres. ANEL has close links with Russia because of the Orthodox faith held in common, an affirmation of geopolitical continuity – Greece and Russia have often been close.

 

The new government and its finance minister

The SYRIZA ministry, under Alex Tsipras, took charge in early February 2015 and was marked by a considerable number of Left-oriented academics with little or no professional political experience. One of these was the new Finance Minister, Yanis Varoufakis, to whom would fall the lead in the intricate negotiations with the European bodies and members on the bailout and austerity programs.

Born in Athens, Varoufakis did his doctorate at the University of Essex where he was influenced by the renowned Argentinian political theorist, Ernesto Laclau, who died last year and whose works have informed numerous struggles by the Left in Latin America and elsewhere. Aged 53 at the time of his appointment, the new Finance Minister taught doctoral studies at the University of Athens. Over the years he has been on the staff of other universities including the University of Sydney for twelve years in the 1980s and 1990s. He holds dual Greek-Australian nationality.

SYRIZA had campaigned on the rejection of (i) the bailout terms, (ii) the austerity packages, (iii) the writing down of the loans to some “sustainable” level (they now total about 170 per cent of GDP, the highest ratio in Europe) and (iv) the negotiation of new conditions for the loans. Conditions would include overhaul of the tax system and strong measures against the “oligarchs”, dominant players in many of Greece’s cartel-like economic sectors.

SYRIZA had announced its intention to stay in the Euro Zone, and asked for six months for the loan terms and conditions to be redrawn. Varoufakis over several years in his well-publicised blog and other writings had strongly opposed austerity: he argued that (i) most of the bailout money had gone to the banks, mainly in France and Germany and (ii) Europe needed a new phase of integration moving towards a fiscal union. Prime Minister Tsipras and others prominent in the party had compatible views.

So it was not surprising that the rest of Europe saw SYRIZA as a new force in their destinies and responded to it according to their relative interests and declared attitudes. One certainty confronted Europe – an administration and financial protagonist whose views were against austerity possessed with clear ambitions for change within Europe itself.

The first big ticket items were the bailout loans. It soon became clear that the Germans and most of the other members were adamant: no cancellation of the terms and no write-downs. There could be some renegotiation of conditions. At least in public, other nations were prepared to contemplate “Grexit” if Greece should so choose and that should be necessary. No one denied that the result would be mayhem, even if in the end it could be contained and that was by no means certain.

The stakes were huge. Many believe that if the Euro goes, so does Europe as an integrated entity.

In early to mid February, fractious meetings were held, harsh words spoken, tense standoffs played out between Varoufakis and Wolfgang Schauble, German Finance Minister, known as “the ayatollah of austerity” and the most formidable of opponents.

A strong demand for cash withdrawals from the Greek banks showed panic and fears that a full scale run could be triggered. If a run had occurred, the Euro Zone could have imploded. Very likely both sides saw a disaster that needed to be avoided.

Fears had abounded that SYRIZA would lead an exit. Did it matter that Tsipras and his government, backed by Varoufakis personally, had adopted strongly pro-European stances? The key Greek players meant to carry through root and branch reforms. Angela Merkel and Wolfgang Schauble were who mattered and they were impressed. Both are strongly integrationist.

By 24 February a temporary financial accommodation was agreed. Varoufakis sent a letter to the President of the Eurogroup setting out a first list of reforms which Greece proposed to carry out. The Troika also accepted a four month period for the renegotiation of loan conditions. The Greek government undertook to put in hand immediately some of the most pressing structural changes.

Varoufakis put forward wholesale reform of administration and infrastructure with a view to modernise the governance of Greece.

 

Why austerity?

In the early 2000s the European economies had been growing strongly, financed through budget deficits, a strategy that aroused unease and criticism in “sound money” circles. Concern reached a crescendo in the aftermath of the 2007-08 financial crises in the US.

When the PASOK government took over in late 2009 it found that the country’s financial position was far worse than had been thought. There was fear of sovereign default, that fear inspired international panic. In response, the ECB, the EC and the IMF organised a first bailout package. Conditions included a government discharge of commercial debts and strict limits on spending, salaries and pensions.

Writing in the New York Times, Paul Krugman, Nobel Prize winner in Economics, has pointed out that underlying the austerity programs were moral and self-serving considerations masked as policy. The international financial establishment has never been entirely comfortable with arguments for government intervention and budget deficits as demand management tools, in accordance with the theories of John Maynard Keynes in the 1930s. Think of that establishment as embracing the US Republican Party, German intellectual circles and the likes of the Liberal Party in Australia.

Rejecting government intervention became part of the new economic orthodoxy in conservative circles. Spending to prevent recession smacked of “loose money” to the financial and political Right. Readers will recall the frenzied anxiety from the Liberal Opposition which greeted the Rudd economic stimulus program, a classical Keynesian measure, which saved the Australian economy, almost alone in the world, from recession during the global crisis.

Partly because, just about that time, two papers had been published in high-status US economic journals which appeared to seal the arguments for budget surpluses. The world’s treasuries and departments of finance, being dominated by economists, have battalions of staff and in-house librarians expected to be “across the literature”. An academic economist who is published in a scholarly journal can count on his or her words and graphics being read, and likely absorbed by those who advise the practitioners of politics. No other discipline has such influence on real world practitioners.

The first paper was by the Harvard economists, Carmen Reinhart and Kenneth Rogoff: “Growth in a time of debt”, National Bureau of Economic Research Working Paper No.15639 (January 2010). The second was by Alberto Alesina and Silvia Ardagna, “Large changes in fiscal policy: taxes versus spending”, National Bureau of Economic Research Working Paper No.15438 (2009). These two papers, though published recently, have come to be regarded as two of the most influential articles in the history of economic thought.

Reinhart and Rogoff sought to demonstrate that debt to GDP ratios greater than 90 per cent were a sure sign that the economy would soon be on the rocks. Greece was around 160 per cent. Alesina and Ardagna argued that budget restraint would increase investor confidence and lead to growth.

The articles became the touchstone of “good” policy. Austerity was the go. By 2013 both papers would be completely discredited in academic and official circles because of data errors and incorrect analysis.

By that time it was too late. Several countries, not only Greece, were being kept to extreme programs that cut expenditures and welfare payments. Years later Europe is still suffering from those cuts. Growth in some regions, including Greece, has been returning, if at low levels. Europe remains the sick man in the world economy. Costs have been horrendous in terms of unemployment, services, infrastructure, prospects for a generation and the social fabric. It has also, as we shall see, had political ramifications. Meanwhile, Germany, in particular, has continued to run budget surpluses and maintained large trade surpluses. Germany could have used its strong position to generate growth elsewhere in Europe.

Whither Europe?

At time of writing, late April, there appears to be a stand-off between the European institutions and the Greek government which is facing a cash-crunch when it may not be able to pay salaries and pensions. Meanwhile, the situation on the implementation of the 24 February agreement within four months is confused as the ECB seems to be now insisting that the new Greek government honour the austerity conditions agreed to by the previous governments. The very rejection of these by SYRIZA and the Greek electorate brought the present government to power. Anxieties about Greek departure have returned.

Outside the European institutions there is widespread agreement that policies of austerity have failed to solve Europe’s economic problems over the past six years. Debt in Greece and elsewhere is now higher than in 2008. Growth has only recently begun to lift. Even the IMF has advised that growth policies should be adopted in Europe. Growth policies mean a roll-back of austerity.

The Troika seems to fear that if SYRIZA succeeds, Europe will see similar Left-wing parties emerge to challenge the conservative consensus. Spain, which has also suffered from austerity, is one of the strongest opponents of any alleviation of the Greek conditions because its government fears the rise of a new and increasingly popular Leftist movement. Influential elements in German politics, notably in Chancellor Merkel’s own ruling coalition, are hostile to providing any more relief to Greece and some are even somewhat sceptical of the Euro Zone itself.

These political forces have been brought into prominence by the drastic effects which the crisis since 2009 has had throughout Europe. Nationalist, far-Right and populist movements have emerged which chafe at the restraints imposed by the European ‘iron cage’. They are seen as challenges to the whole European idea.

The state of political evolution has not been adequate to deal with a full-scale crisis. The most central element is the lack of a fiscal union which would allow balancing transfers to be made from surplus to deficit regions, the sort of arrangement which we tend to take for granted in a federation like Australia. Here, adjustments are made in financial flows across the States as when the West Australian economy rises and then declines.

It is probably not surprising that Yanis Varoufakis has recently suggested a new move at a conference in Italy to address the problem of regional imbalances within the existing European treaties without taking further steps towards political integration. Varoufakis is advocating a partnership between the European Central Bank and the European Investment Bank which would allow the ECB to purchase EIB bonds which could be used to fund investment projects anywhere across Europe. Whether this finds any favour remains to be seen. The idea of further European integration and political evolution has been pretty much on hold while the polity works its way through the crises.

Angela Merkel, Chancellor of the most powerful nation in Europe and a known believer in the European idea, thinks long and hard about the economic and political impact of Grexit, as well as the geopolitical ones, in the face of a more assertive Russia.

GREECE, EUROPE AND AUSTERITY by Gavan McDonell


A new arrival

Greece accounts for about 2 per cent of the population of the 500 million who live inside the European Union – a 28-member political and economic union – and accounts for a similar proportion of its Gross Domestic Product. The EU produces about 20 per cent of global GDP; if regarded as a unit, it is the largest economic entity in the world.

In early February this year, Greece triggered convulsions throughout the EU and further afield when it elected a left-wing coalition, SYRIZA (the Greek acronym for “Radical Coalition of the Left”), as the majority party. SYRIZA became the first successful party in any European country forming government on a platform challenging the policies of “austerity”, that is, reducing spending and welfare payments.

Since the global financial crisis, austerity measures have been promoted by the major EU financial institutions. Uproar has followed through much of Europe. There have been fears of “Grexit” – the exit of Greece from the Euro Zone. Tense negotiations are now afoot among Greece, EU member states (notably Germany) and the Troika of the European Commission, European Central Bank and the International Monetary Fund.

How was it that such a small ant could nip the pants of such a large bull? To get some understanding we need to look back at the history of the “European idea”.

 

The European Idea

Beginning in the late 1940s and early 1950s, steps were taken to combat the intense nationalism which had spawned interstate rivalries and two World Wars, continent wide devastation and tens of millions of deaths and injuries. There was a strong sense of Europe’s place in the world, its influence over many centuries, the need to rebuild from weakness. The first concrete action was the setting up of the European Coal and Steel Community in 1952, signalled as the “first step in the federation of Europe”. Its six members were Belgium, France, Italy, Luxembourg, West Germany and the Netherlands. It had the aim of averting future wars by pooling the potentials of heavy industry.

In 1958, following the Treaty of Rome, the European Economic Community was established with a customs union. The Treaty also created the European Atomic Energy Community, with the same six members and the same strategic objectives. In 1967 a single set of institutions came into existence to govern the three communities of coal and steel, economic affairs and atomic energy. Denmark, Ireland and the United Kingdom joined.

In 1979 the first direct, democratic elections to the European Parliament were held. Greece joined in 1981, Spain and Portugal in 1986. The Single European Act of 1986 was passed that provided for a common market to be established in 1992 and the adoption of a common foreign and security policy. The twelve members became known as the European Communities.

With the break-up of the Soviet Union and the eastern bloc in 1990, East Germany became part of an enlarged Germany. Other new members were in prospect, notably from Eastern Europe. The Copenhagen Criteria, agreed in 1993, set out the conditions for new member states to join: a functioning democracy, respect for human rights, a developed market economy, among the most important.

Terms specifically included the aims of economic, monetary and political union. European citizenship was adopted. A single market set up a free trade area, freedom of movement for people, goods, services and capital, common policies on trade, agriculture, fisheries and regional development.

The Maastricht Treaty of 1993 established the European Union, the legal successor to the Communities and led to the creation of the single currency, the Euro. A crucial move towards economic integration was agreement on specific restraints on national economic performance requiring common criteria for inflation, government debt, annual deficits and the exchange rate. These were the stability criteria.

While these agreements fell well short of a fiscal union, they introduced a new level of interdependence.

By 2001 twelve countries had joined the Euro Zone (which is not the same as the European Union): the Zone contained those countries using the Euro as common currency. By 2009 there were four more and by 2015 there were another three.

The 19 countries had a population of over 330 million, two-thirds of the EU total. France, Germany, Italy and Spain account for over 250 million, Austria, Netherlands, Belgium, Greece and Portugal for another 60 million. The remaining eleven together total only 20 million.

Greece can be regarded as one of the middle powers in the Zone. Its economic weight is lower because its per capita income was less than half of that of richer powers. Greece has been declining since then. Greece is one of the fourteen countries most heavily involved with trans-European initiatives.

By 2015 there was a Parliament of Europe and regular elections throughout the Union. This political unit had a bureaucracy based in Brussels, the European Commission, free movement of people, free trade and a customs union. A common currency was circulating among the majority of members plus some other states outside the Union.

Economic institutions include the European Central Bank, a long term lender; the European Investment Bank, the world’s largest international public lending body; plus central legal institutions and a host of infrastructure embracing social, political, economic, scientific, technological and environmental matters.

Seventy years of patient negotiation and common action in pursuit of common goals had taken the European idea a long way. The idea had shown the benefits of coordination and scale. There are many problems which confront Europe but any consideration of the world’s geopolitical situation must start from the recognition of these achievements and this history of accommodation.

 

Recent political developments in Greece

In the general elections of October, 2009 PASOK (the acronym for the centre-left party) defeated the centre-right party, New Democracy. The two parties have competed for government since the fall of the colonels’ junta in 1974. The junta (1967-74) casts a long shadow over the Greek polity.

During its period in power in the early 2000s New Democracy had presided over considerable economic growth, fuelled by ever growing budget deficits well outside the budgetary limitations agreed with the European Union under the interdependent stability arrangements noted above.

PASOK was dismayed on taking office to find that the previous government had falsified statistics. The financial situation was much worse than had been thought. (Note: Greece, Italy and other European countries had used instruments devised by Goldman Sachs, JP Morgan and other financial intermediaries to hide their true financial positions).

International anxiety soon produced a sovereign debt crisis, a fear that the government would be unable to pay its debts, enter sovereign default and possibly leave the Euro Zone. The situation was made worse by the discovery that the country had been in recession for several years. Greek Government debt was downgraded to junk-bond status. Private capital was no longer available to Greek government borrowers. Greece had the highest budget deficits and debt to GDP ratios in Europe.

The Greek government owed very large sums to European institutions, member states and the private sector. A bailout package of €110 billion was quickly agreed by the Troika on condition that the Greek state would repay creditors who had taken commercial risks, in effect transferring risk and the pain of the bailout from the creditors to taxpayers and workers.

The urgency of the crisis resulted in a strictly technocratic arrangement by the regulatory bodies minus the democratic process as would normally have been the case. The bailout was provided by mid-2010 on condition that the Greek government adopt stringent austerity conditions (i.e. reduce spending), additional structural reforms, privatise government-owned assets, together with very sensitive cuts and freezes on public sector wages and on pensions. Failure to accept these conditions would have involved the aforesaid ‘Grexit’ . Riots, strikes and widespread opposition to these measures followed.

A year later, worsened economic conditions and the failure of the government to implement various of the conditions prompted the mobilisation, again by the Troika, of a second bailout loan of €130 billion. Terms of the second bailout were not agreed until February 2012 and envisaged the difficult task of repaying €240 billion by December 2014.

Austerity has been painful. GDP dropped by over 25 per cent, unemployment reached 28 per cent, youth unemployment was at 65 per cent. Wages and pensions had been cut. Many people were in great distress. Some spoke of a humanitarian crisis. Violent opposition broke out. Opinion polls showed that the left wing SYRIZA could win an election due for 2012. Alarm spread throughout Europe and beyond at the prospect.

SYRIZA’s rise has been rapid. Formed in 2004 as a coalition of left and radical-left parties, SYRIZA transformed itself into a single party containing what had previously been separate parties in 2012. Under a young, charismatic leader, Alex Tsipras, it won 27 per cent of the electorate to become the main opposition party to the governing coalition led by New Democracy and PASOK. In the 2014 European elections it had the highest vote. In late 2014 the political process failed to appoint, as then due, a new national President. The Constitution provided for a snap election which was duly called for January 25, 2015.

SYRIZA campaigned strongly on an anti-austerity package and rejection of the bailout conditions, but not on departure from the Euro Zone. It won 36.34 per cent of the vote and 149 out of 300 seats, almost an absolute majority. New Democracy went backwards. PASOK suffered heavily from a swing of the left vote to SYRIZA, and was reduced to 4 per cent, compared to 49 per cent in 2009.

As its coalition partner SYRIZA chose a conservative party – Independent Greeks or ANEL, a party with strong Right-wing and nationalist attitudes. ANEL won 4.75 per cent by campaigning vigorously against austerity, agreements negotiated with the Troika, and insults it claimed had been offered to Greece, especially by the Germans, and the European north in general. Its platform includes a call for German war reparations, a very sensitive issue: about 250,000 Greeks died during the Nazi occupation, mainly due to starvation; some 60,000 deaths were the result of massacres. ANEL has close links with Russia because of the Orthodox faith held in common, an affirmation of geopolitical continuity – Greece and Russia have often been close.

 

The new government and its finance minister

The SYRIZA ministry, under Alex Tsipras, took charge in early February 2015 and was marked by a considerable number of Left-oriented academics with little or no professional political experience. One of these was the new Finance Minister, Yanis Varoufakis, to whom would fall the lead in the intricate negotiations with the European bodies and members on the bailout and austerity programs.

Born in Athens, Varoufakis did his doctorate at the University of Essex where he was influenced by the renowned Argentinian political theorist, Ernesto Laclau, who died last year and whose works have informed numerous struggles by the Left in Latin America and elsewhere. Aged 53 at the time of his appointment, the new Finance Minister taught doctoral studies at the University of Athens. Over the years he has been on the staff of other universities including the University of Sydney for twelve years in the 1980s and 1990s. He holds dual Greek-Australian nationality.

SYRIZA had campaigned on the rejection of (i) the bailout terms, (ii) the austerity packages, (iii) the writing down of the loans to some “sustainable” level (they now total about 170 per cent of GDP, the highest ratio in Europe) and (iv) the negotiation of new conditions for the loans. Conditions would include overhaul of the tax system and strong measures against the “oligarchs”, dominant players in many of Greece’s cartel-like economic sectors.

SYRIZA had announced its intention to stay in the Euro Zone, and asked for six months for the loan terms and conditions to be redrawn. Varoufakis over several years in his well-publicised blog and other writings had strongly opposed austerity: he argued that (i) most of the bailout money had gone to the banks, mainly in France and Germany and (ii) Europe needed a new phase of integration moving towards a fiscal union. Prime Minister Tsipras and others prominent in the party had compatible views.

So it was not surprising that the rest of Europe saw SYRIZA as a new force in their destinies and responded to it according to their relative interests and declared attitudes. One certainty confronted Europe – an administration and financial protagonist whose views were against austerity possessed with clear ambitions for change within Europe itself.

The first big ticket items were the bailout loans. It soon became clear that the Germans and most of the other members were adamant: no cancellation of the terms and no write-downs. There could be some renegotiation of conditions. At least in public, other nations were prepared to contemplate “Grexit” if Greece should so choose and that should be necessary. No one denied that the result would be mayhem, even if in the end it could be contained and that was by no means certain.

The stakes were huge. Many believe that if the Euro goes, so does Europe as an integrated entity.

In early to mid February, fractious meetings were held, harsh words spoken, tense standoffs played out between Varoufakis and Wolfgang Schauble, German Finance Minister, known as “the ayatollah of austerity” and the most formidable of opponents.

A strong demand for cash withdrawals from the Greek banks showed panic and fears that a full scale run could be triggered. If a run had occurred, the Euro Zone could have imploded. Very likely both sides saw a disaster that needed to be avoided.

Fears had abounded that SYRIZA would lead an exit. Did it matter that Tsipras and his government, backed by Varoufakis personally, had adopted strongly pro-European stances? The key Greek players meant to carry through root and branch reforms. Angela Merkel and Wolfgang Schauble were who mattered and they were impressed. Both are strongly integrationist.

By 24 February a temporary financial accommodation was agreed. Varoufakis sent a letter to the President of the Eurogroup setting out a first list of reforms which Greece proposed to carry out. The Troika also accepted a four month period for the renegotiation of loan conditions. The Greek government undertook to put in hand immediately some of the most pressing structural changes.

Varoufakis put forward wholesale reform of administration and infrastructure with a view to modernise the governance of Greece.

 

Why austerity?

In the early 2000s the European economies had been growing strongly, financed through budget deficits, a strategy that aroused unease and criticism in “sound money” circles. Concern reached a crescendo in the aftermath of the 2007-08 financial crises in the US.

When the PASOK government took over in late 2009 it found that the country’s financial position was far worse than had been thought. There was fear of sovereign default, that fear inspired international panic. In response, the ECB, the EC and the IMF organised a first bailout package. Conditions included a government discharge of commercial debts and strict limits on spending, salaries and pensions.

Writing in the New York Times, Paul Krugman, Nobel Prize winner in Economics, has pointed out that underlying the austerity programs were moral and self-serving considerations masked as policy. The international financial establishment has never been entirely comfortable with arguments for government intervention and budget deficits as demand management tools, in accordance with the theories of John Maynard Keynes in the 1930s. Think of that establishment as embracing the US Republican Party, German intellectual circles and the likes of the Liberal Party in Australia.

Rejecting government intervention became part of the new economic orthodoxy in conservative circles. Spending to prevent recession smacked of “loose money” to the financial and political Right. Readers will recall the frenzied anxiety from the Liberal Opposition which greeted the Rudd economic stimulus program, a classical Keynesian measure, which saved the Australian economy, almost alone in the world, from recession during the global crisis.

Partly because, just about that time, two papers had been published in high-status US economic journals which appeared to seal the arguments for budget surpluses. The world’s treasuries and departments of finance, being dominated by economists, have battalions of staff and in-house librarians expected to be “across the literature”. An academic economist who is published in a scholarly journal can count on his or her words and graphics being read, and likely absorbed by those who advise the practitioners of politics. No other discipline has such influence on real world practitioners.

The first paper was by the Harvard economists, Carmen Reinhart and Kenneth Rogoff: “Growth in a time of debt”, National Bureau of Economic Research Working Paper No.15639 (January 2010). The second was by Alberto Alesina and Silvia Ardagna, “Large changes in fiscal policy: taxes versus spending”, National Bureau of Economic Research Working Paper No.15438 (2009). These two papers, though published recently, have come to be regarded as two of the most influential articles in the history of economic thought.

Reinhart and Rogoff sought to demonstrate that debt to GDP ratios greater than 90 per cent were a sure sign that the economy would soon be on the rocks. Greece was around 160 per cent. Alesina and Ardagna argued that budget restraint would increase investor confidence and lead to growth.

The articles became the touchstone of “good” policy. Austerity was the go. By 2013 both papers would be completely discredited in academic and official circles because of data errors and incorrect analysis.

By that time it was too late. Several countries, not only Greece, were being kept to extreme programs that cut expenditures and welfare payments. Years later Europe is still suffering from those cuts. Growth in some regions, including Greece, has been returning, if at low levels. Europe remains the sick man in the world economy. Costs have been horrendous in terms of unemployment, services, infrastructure, prospects for a generation and the social fabric. It has also, as we shall see, had political ramifications. Meanwhile, Germany, in particular, has continued to run budget surpluses and maintained large trade surpluses. Germany could have used its strong position to generate growth elsewhere in Europe.

Whither Europe?

At time of writing, late April, there appears to be a stand-off between the European institutions and the Greek government which is facing a cash-crunch when it may not be able to pay salaries and pensions. Meanwhile, the situation on the implementation of the 24 February agreement within four months is confused as the ECB seems to be now insisting that the new Greek government honour the austerity conditions agreed to by the previous governments. The very rejection of these by SYRIZA and the Greek electorate brought the present government to power. Anxieties about Greek departure have returned.

Outside the European institutions there is widespread agreement that policies of austerity have failed to solve Europe’s economic problems over the past six years. Debt in Greece and elsewhere is now higher than in 2008. Growth has only recently begun to lift. Even the IMF has advised that growth policies should be adopted in Europe. Growth policies mean a roll-back of austerity.

The Troika seems to fear that if SYRIZA succeeds, Europe will see similar Left-wing parties emerge to challenge the conservative consensus. Spain, which has also suffered from austerity, is one of the strongest opponents of any alleviation of the Greek conditions because its government fears the rise of a new and increasingly popular Leftist movement. Influential elements in German politics, notably in Chancellor Merkel’s own ruling coalition, are hostile to providing any more relief to Greece and some are even somewhat sceptical of the Euro Zone itself.

These political forces have been brought into prominence by the drastic effects which the crisis since 2009 has had throughout Europe. Nationalist, far-Right and populist movements have emerged which chafe at the restraints imposed by the European ‘iron cage’. They are seen as challenges to the whole European idea.

The state of political evolution has not been adequate to deal with a full-scale crisis. The most central element is the lack of a fiscal union which would allow balancing transfers to be made from surplus to deficit regions, the sort of arrangement which we tend to take for granted in a federation like Australia. Here, adjustments are made in financial flows across the States as when the West Australian economy rises and then declines.

It is probably not surprising that Yanis Varoufakis has recently suggested a new move at a conference in Italy to address the problem of regional imbalances within the existing European treaties without taking further steps towards political integration. Varoufakis is advocating a partnership between the European Central Bank and the European Investment Bank which would allow the ECB to purchase EIB bonds which could be used to fund investment projects anywhere across Europe. Whether this finds any favour remains to be seen. The idea of further European integration and political evolution has been pretty much on hold while the polity works its way through the crises.

Angela Merkel, Chancellor of the most powerful nation in Europe and a known believer in the European idea, thinks long and hard about the economic and political impact of Grexit, as well as the geopolitical ones, in the face of a more assertive Russia.

In the end, this correspondent thinks, if push comes to shove, Mrs Merkel and her conservative coalition will blink at any move which could lead to the German destruction of Europe for the third time and open it up to manoeuvres from the East.

In the end, this correspondent thinks, if push comes to shove, Mrs Merkel and her conservative coalition will blink at any move which could lead to the German destruction of Europe for the third time and open it up to manoeuvres from the East.

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