Download Contradictions - EESC European Economic and Social Committee

Contradictions
of the EMU
Heikki Patomäki
Department of Political
and Economic Studies
University of Helsinki
Contradictions
•
•
Contradictions can arise from:
i.
incorrect beliefs about how things work (e.g. if one mistakes
poisonous substance for medicine)
ii.
or from a lack of generalizability (e.g. if everyone wants
simultaneously to avoid losing money by withdrawing all
their savings from a failing bank).
Often a contradiction stems from a fallacy of
composition, which can lead to a self-fulfilling prophecy
•
•
for instance, by making a bank more likely to fail
Contradictions can also occur at a societal level, if there
are organizing principles that work against each other
•
e.g. a Keynesian welfare state may be contradictory in
an open and liberal world economy, if corporations can
move their tax base elsewhere
Conflicts between aims /
organising principles of the EMU
 Competitiveness


”competitiveness”  lower wages for many
labour market flexibility  weakening of labour rights
 Structural

vs. social welfare
reforms vs. social welfare
structural reforms  stressing incentives, private
property & free markets  wealth and power tend to
concentrate
Internal and external competitiveness:
fallacies of composition

Firm-level competitiveness  less purchasing power for workers.

Joan Robinson: the central paradox of capitalism is that ‘each
employer individually gains from a low real wage in terms of his
product, but all suffer from the limited market for commodities
which a low real-wage rate entails’.

Euro-countries against each other: in the absence of a
mechanism of coordination or adjustment, euro-countries can
try to be more competitive than other euro-countries 
suppression of eurozone aggregate efficient demand.

A typical euro-country: external trade 40-50% of GDP, of which
55-85% with other EU member states.

Roughly 15% of the EU-trade is with the rest of the world.
Amplifying the contradiction
•
Contradictions are amplified by the fiscal multiplier effect
•
Standard neo-Keynesian estimates of the multiplier are
very low ( < 1)
•
Systematic historical evidence: an inverse relationship
between fiscal expansion and public debt/GDP ratio

•
in the eurozone, from 80% in 2009, to 95% in late 2014
IMF has been revising its estimates: under current
circumstances in Europe the fiscal multiplier is between 2
and 3 (the same as for Keynes in the 1930s)

the multiplier is high in recession or depression, and
especially so for investments  austerity is self-defeating

Lawrence Summers: ”Public investments are, under
current circumstances, a free lunch”.
Trade imbalances in Europe

The total sum of all trade deficits and surpluses is zero.

From the point of view of the whole of the European
political economy: deficits can help to maintain
adequate levels of overall demand; whereas trade
surpluses suppress it.

An application of Keynes’ proposal: trade balanced
via redistribution mechanisms within the EU; balancing
could be carried out through the ECB.

An alternative mechanism: common fiscal policy.

States in a federal system do not trade with each
other (only firms do).
From contradictions to
antagonisms

Causation is often cumulative and self-reinforcing,
which can explain also uneven growth and
widening technology gaps.

Trade imbalances and austerity policies have
speeded up and aggravated deindustrialisation in
much of Europe, and led to the concentration of
industrial activities in and around Germany


deindustrialisation  high unemployment
In the absence of (i) mechanisms of countering
cumulative causation and (ii) institutions of
solidarity and redistribution, this results in the
strengthening of group-egoism  antagonisms.
Financialization

Financialization is a process in which financial
markets, institutions and elites gain an increasing
hold over economic processes and policy decisions.

Financialization is associated with:
i.
ii.
iii.

rising social inequalities
shortening timescales in corporate decision-making
(reduction of values to financial instruments and their
derivatives)
and with economic policies focused primarily on lowering
inflation and promoting business confidence and external
competitiveness (= EU policies)
Bubbles are self-defeating: unless financialization is
tamed, a new financial crisis will lie ahead.
Political economic institutions Basis of legitimation
European taxes and noteworthy fiscal policy:
EU budget larger than that of any member
state (at least 7-8 times 2011 EU budget)
Parliamentary democratic principles at EU
level: commission or government directly
responsible to the parliament, parliament
decides on budgets and on laws
Focus on fiscal policy aimed at full
employment as well as economically and
ecologically sustainable growth
Full employment and social justice
Monetary policy aims at supporting fiscal
Democratic control extends to European
policy (promoting investments and growth); if Central Bank also, e.g. ECB answerable to
over-capacity and lack of sufficient demand
democratically elected council
develops, demand increased with central
bank funding
Regional policy aimed at reversing selfreinforcing processes of uneven
developments and guaranteeing maximally
even regional developments throughout EU
• large-scale public investments
The subsidiary principle, i.e. decisions made
as close as possible to where they will apply:
e.g. member states and municipalities levy
their own taxes and establish their own
norms, rules, and procedures
Common income, wage, and industrial
policies, including partial socialization of
investments
Social rights and a sufficient level of
guaranteed basic income for all EU citizens
Conclusions, part 1

The basic thrust of the current EU policies is contradicting the
declared social and democratic aims.

Economic policies focussing primarily on lowering inflation and
promoting business confidence and external competitiveness :
o
o

Ever tighter fiscal surveillance and coordination can be
contradictory too; austerity is frequently self-defeating,
especially under current circumstances
o

can be read as a symptom of financialization
involve contradictions at multiple levels
taxing trade intra-EU trade surpluses would be a much better way
US-style unemployment benefit system might involve some risksharing, redistribution and solidarity, but it does not go very far
in addressing the contradictions of the EMU.
Conclusions, part 2

What is needed is common fiscal policy: taxes, central bank
funding, public investments.

Central aim: even regional developments and full employment.

The process of financialization has to be tackled or reversed.

Strengthening public control over money creation  functional
finance (central bank funding - eurobonds)
o

Strengthening common institutions  new democratic
mechanisms and principles are required
o

in conjunction with the new powers of the ECB, the EIB could expand
operations and begin lending to finance public investment
constraints on transformations include the structural power of transnational
investors; the influence of the lobbyists in Brussels; and the way media and
education are being re-arranged across Europe and the world
The basic EU-treaties have to be revised (the rule of law).