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Fighting austerity
Reclaiming the European Project
ISS Development Research Seminars 2012-13
Social Policy after the Financial Crisis
11 December 2012
Marica Frangakis
Nicos Poulantzas Institute
Outline
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Definition of concepts; theoretical issues
Etymology – Ideology – Hegemony
Policy vehicles for the implementation of
austerity in the EU
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Fiscal consolidation – Liberalisation – Privatisation
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Implications of austerity for the economy and
for society
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Deepening recession – Unemployment - Poverty
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Reflections on outlook and alternatives
Etymology – Ideology – Hegemony: Where do the
terms come from, how are they used & to what effect
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“Austerity” (most looked up-word in 2010) : “nonindulgence, ascetism, self-denial, self-discipline,
plainness, sobriety, puritanism, solemnity, strictness,
etc.’ (Collins Thesaurus of the English Language, 2002)
Capture of terms linked to universal values: Implicitly,
notion of public debt is rejected, as ‘inherently
bad/wrong’
analogy with private debt
Rationale - If it is prudent for individuals to avoid getting
into debt, would it not be wise for governments to do the
same? If a government does become indebted, would it
not be best for it to suppress expenditure &/or increase
public receipts, so as to reduce, if not extinguish, the
public debt?
Public debt fetichism – rationale and fallacies
Robert Skidelsky: Does debt matter?
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Fallacies – 1. Governments have “monetary sovereignty’;
2. Reducing the public deficit shrinks the economy; 3.
Public debt = transfer of wealth from taxpayers to bond
holders, not a net burden; 4. No connection between size
of public debt and price government must pay to finance it;
5. Low borrowing costs for governments do not necessarily
reduce interest rate the cost of capital for private sector
Ideological undertones - Attempt by financial industry to
shift public discourse from the need for radical changes in
the financial sector to the ‘living-beyond-one’s means’
accusation in order to secure more bail-outs for the banks
and deflect pressures for financial policy reform
Austerity: economic necessity or political
project?
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Theoretical presumption - The effect of any government
deficit is mitigated by compensatory changes in the
representative agent’s spending decisions. Hence, reducing
government deficit allows the private sector to consume more.
Also, high public debt ratios reduce the rate of growth through
a rise in savings and through the crowding out of private
investment
supply side considerations
Fallacy - As Keynes argued long ago, running a government
deficit is a necessity, especially if it is held domestically, since
it provides the private sector with new funds for saving and a
means to save (interest-bearing government bonds), thereby
increasing private sector wealth and reducing the need to
save from current income, i.e. leading to increased demand
and consumption. More so at a time of crisis and recession
Hegemony - The power of the narrative
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“… our fundamental outlook about the economy, at the level
of the average person, is closely bound up with stories of
excess borrowing, loss of governmental and personal
responsibility, and a sense that matters are beyond control.
That kind of loss of confidence may well last for years”
(Robert J. Shiller, The Great Debt Scare)
Eurobarometer Social Climate Index – evaluation of the
current situation (range from -10 to +10)
EU27 - 2012, -0.8; 2011, -0.6; 2010, -0,7; 2009, -0.7
Highest values (2.8) in Benelux, Nordic, Austria and Germany
Lowest values in Southern and Eastern countries; Greece –
the lowest ranked member state in 3 out of 4 years (-5.8)
Uncertainty about recovery+decline in income/confidence
= holds back new investment & household consumption
EU austerity policy vehicles
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Stability and Growth Pact - Upper limits on public deficit
(3% GDP) & public debt (60% GDP) + ‘excessive deficit
procedure’: adjust via fiscal austerity or face sanctions;
Austerity policy becoming stricter since beginning of crisis
‘Fiscal compact’ - Changing national legislation,
preferably via amendments to EZ member states’
constitutions, to include: (i) ‘debt brake’ – max. allowed
structural (cyclically adjusted) budget deficit 0.5% GDP; (ii)
debt reduction roadmap - each year government debt to be
reduced by 1/20th of difference between actual level and
60% GDP benchmark; (iii) sanctions on non-complying
countries to be imposed by European Court of Justice:
interest-bearing deposits/fines (Treaty on Stability, Coordination
and Governance)
Austerity and conditionality
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“Within the new framework of the European semester, the
European Council endorsed the priorities for fiscal
consolidation and structural reform. It underscored the
need to give priority to restoring sound budgets and fiscal
sustainability, reducing unemployment through labour
market reforms and making new efforts to enhance growth”
(E.C., 24/25 March 2011, Conclusions, p. 2)
‘Austerity’, a multifaceted policy = fiscal consolidation +
labour market reform + market liberalisation’
EU/IMF Programmes for Greece, Ireland, Portugal,
Hungary, Latvia and Romania
Conditionality for monetary support = ECB and Outright
Monetary Transactions & for fiscal aid = EFSF & ESM
Economic implications of austerity
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Fiscal consolidation – Cutting down goverment consumption
impacts negatively on output/economy – The larger the
multiplier, the greater the effect
IMF: “… the multipliers used in generating growth forecasts
have been systematically too low since the start of the Great
Recession, by 0.4 to 1.2 … the multipliers implicitly used to
generate these forecasts are about 0.5. So actual multipliers
may be higher in the range of 0.9 to 1.7 (WEO Oct 2012: 41-43)
Public & social expenditure cuts: more negative effects than
raising taxes; ‘frontloading’ fiscal cuts: harsher/more
protracted negative effects on output than gradual
consolidation; long-run hysteresis effects
As GDP
debt ratio explodes and financial pressures
GDP growth rates 2008-2012
(% pa; 2005 market prices)
EU27
UK
Germany France
Italy
Ireland
Greece
Spain Portugal
2008
0,3
-1
1,1
-0,1
-1,2
-2,1
-0,2
0,9
0
2009
-4,3
-4
-5,1
-3,1
-5,5
-5,5
-3,1
-3,7
-2,9
2010
2,1
1,8
4,2
1,7
1,8
-0,8
-4,9
-0,3
1,4
2011
1,5
0,9
3
1,7
0,4
1,4
-7,1
0,4
-1,7
2012
-0,3
-0,3
0,8
0,2
-2,3
0,4
-6
-1,4
-3
Czech
Slovenia Slovakia Republic Poland Hungary Bulgaria Romania Estonia Latvia
Lithuania
2008
3,4
5,8
3,1
5,1
0,9
6,2
7,3
-4,2
-3,3
2,9
2009
-7,8
-4,9
-4,5
1,6
-6,8
-5,5
-6,6
-14,1
-17,7
-14,8
2010
1,2
4,4
2,5
3,9
1,3
0,4
-1,6
3,3
-0,9
1,5
2011
0,6
3,2
1,9
4,3
1,6
1,7
2,5
8,3
5,5
5,9
2012
-2,3
2,6
-1,3
2,4
-1,2
0,8
0,8
2,5
4,3
2,9
Public debt/GDP ratio, 2008-2012 (%)
EU27
UK
Germany France
Italy
Ireland
Greece
Spain Portugal
2008
62,2
52,3
66,8
68,2
106,1
44,5
112,9
40,2
71,7
2009
74,6
67,8
74,5
79,2
116,4
64,9
129,7
53,9
83,2
2010
80,2
79,4
82,5
82,3
119,2
92,2
148,3
61,5
93,5
2011
83
85
80,5
86
120,7
106,4
170,6
69,3
108,1
2012
86,8
88,7
2008
22
27,9
28,7
47,1
73
13,7
13,4
4,5
19,8
15,5
2009
35
35,6
34,2
50,9
79,8
14,6
23,6
7,2
36,7
29,3
2010
38,6
41
37,8
54,8
81,8
16,2
30,5
6,7
44,5
37,9
2011
46,9
43,3
40,8
56,4
81,4
16,3
33,4
6,1
42,2
38,5
2012
54
51,7
45,1
55,5
78,4
19,5
34,6
10,5
41,9
41,6
81,7
90
126,5
117,6
176,7
86,1
119,1
Czech
Slovenia Slovakia Republic Poland Hungary Bulgaria Romania Estonia Latvia
Lithuania
An extreme case (so far) – The Greek
economy in collapse
180
GDP
Gross capital formation
Final consumption expenditure
Domestic Demand
160
140
120
100
80
60
40
20
0
2007
2008
2009
2010
2011
2012
Social implications of austerity - Channels
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Labour market: unemployment;
underemployment – inactivity – flexibility
The ‘lost’ generation - NEETs
Long-term unemployment
Wages: moderation and deflation; wage
share on a long-term downward trend
Commodification of public services – esp.
education and health – through liberalisation
and privatisation
Financial distress - poverty/social exclusion
EU27 employment & unemployment
Unemployment rates (%) Oct 12 Youth (<25)
UK
SE
FI
SK
SI
RO
PT
PL
AT
NL
MT
HU
LU
LT
LV
CY
IT
FR
ES
EL
IE
EE
DE
DK
CZ
BG
BE
EU27
EU17
Unemployment rates (%) Oct 12 Total
20.6
7.8
7.7
7.7
23
18.8
30.1
14
17.5
8.6
23
6.9
39.1
17.3
4.3
5.5
6.6
27.8
10.4
8.5
9.8
16.8
29.9
10.8
18.6
5.1
24.3
12.4
14.2
12.9
11.1
10.7
31.9
29.3
36.5
25.5
55.9
57
26.2
25.4
29.9
14.7
5.4
19.1
9.6
8.1
7.7
7.3
13.7
20.7
30.3
12.6
18.8
7.5
23.4
23.9
10.7
11.7
0
10
20
30
40
50
60
Share of ‘Neither in employment nor in education
or training” (NEETs) among 15-24 year olds (%)
Long-term unemployment rate as % of active
population 2008 & 2012
Flexibility - Underemployment & hidden
unemployment (million persons)
Wage moderation/deflation (% pa)
EU27
UK
Germany France
Italy
Ireland
Greece
Portug
Spain
al
2008
0,8
-1,5
1,3
0,2
1,3
8,8
-1,1
4,4
1,4
2009
0,7
1,4
-1
1,3
-0,4
3,9
1,2
4,3
1,9
2010
1,1
0
1,4
1,5
1,9
-0,9
-3,7
-0,4
0,3
2011
0,7
-0,7
2,2
1,5
0
0
-4,4
-0,3
-1,4
2012
0,5
0.3
2008
2,9
4
2,2
5,6
1,9
7,3
14,5
4
2,4
4,3
2009
-1,7
3,7
-2,9
-0,2
-5
4,9
-5,9
-1,8
-11,6
-6,7
2010
5
4,5
5
3,3
-2,7
8,2
1,5
1,1
-5,6
-2,4
2011
0,6
-0,6
3,5
0,9
-0,1
2,2
-4
-3
11,7
-1,7
2012
-0,6
-1,5
1,7
1,2
0
4,1
0,2
1,8
0,7
1,2
1,3
0,3
-0,3
-0,9
-6,4
0,2
-3,2
Czech
Slovenia Slovakia Republic Poland Hungary Bulgaria Romania Estonia Latvia Lithuania
Wage share as % GDP at current factor
cost
68
67
66
65
64
63
62
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EU27
EU17
Linear (EU27)
Linear (EU17)
Commodification of public services
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Healthcare and education – ‘citizenship rights’ –
commodification goes back to 1970s, picking up in 1990s
and escalating in current crisis
Europe 2020 targets for education – Reducing early school
leavers to less than 10% (14% 2011) & increasing tertiary
education attainment to more than 40% (35% 2011)
Experience points to the fact that the use of market
mechanisms or greater reliance upon the private sector
does not lead to reduced costs, nor to greater efficiency.
Instead, it results in increased inequalities in terms of
access and quality of services, especially for the poorer
sections of the population, as well as in worsening
conditions for those employed in these sectors
Financial distress of EU households by
income quartile of household 2000-2012
Changes in proportion (%) of people at risk of
poverty or social exclusion (AROPE) 2008-2010
Children in poverty – Social transfers make
little difference
Political implications of austerity – Fragile
legitimacy of European project under question
The case of Greece - The political system in
flux: Electoral results 2009, 2012 (% share of votes)
2009
New Democracy
6 May 2012
17 June 2012
33.48
18.85
29.66
SYRIZA (Radical Left
Alliance)
4.60
16.78
26.89
PASOK (Panhellenic
socialist movement)
43.92
13.18
12.28
Independent Greeks (split
from ND)
--
10.6
7.51
Golden Dawn (fascists)
--
6.97
6.92
Democratic Left (split from
SYRIZA)
--
6.11
6.26
KKE (Communist Party)
7.54
8.54
4.50
LAOS (extreme right wing)
5.63
--
--
The games financial markets play…
Overall …
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Austerity – Based on theoretical fallacies with regard to the
nature of the public debt and the implications of fiscal
contraction for the economy and for society
More of a political project, aiming at increasing the flexibility
of the labour market and the shrinking of the social
provisioning role of the state; the ‘political economy of the
crisis’ reading
The ‘fiscal profligacy’ narrative needs to be displaced
The experience of the EU and esp. of its peripheral states
reveals the failure of the current regime to revive the economy
and to address the social ills – instead, undermining
cohesion
Right & Left are facing each other in the restructuring of the
political system/project; danger of the rise of the populist and
fascist right in the face of the fragmentation of the Left; actors
Reflections on alternatives
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Short-term measures - (i) Change in the narrative – regain
the hegemony; (ii) abandonment of austerity policy – fighting
poverty and inequality; (iii) reinstatement of public services incorporation of social welfare objectives in economic policy;
(iv) reversal of the deterioration in worker rights and
employment protection regime; (v) kick-starting the economy
especially in the periphery
Long-run project – (i) Foster long-term policy of sustainable
development designed to deal with divergences within EU; (ii)
adapt EMU to serve long-run goals; (iii) strengthen worker
rights and restructure institutional framework, so that
antagonistic wage policies are avoided; (iv) regulate finance
Reclaiming the European project – To the extent that the
current regime precludes socially progressive solutions, need
to change the EU radically; reclaim the European project