A triumph of failed ideas European models of capitalism in ... - Journal

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How do economic governance reforms and austerity measures affect inclusive growth.................................................................................................................................................................The policy prescriptions with regard to job creation are primarily supplyside,focusing on making work pay by strengthening incentives andconditionality, despite the overwhelmingly demand-side nature of currentunemployment problems. Social inclusion/fighting poverty is discussedbriefly only in Annex 1 (European Commission, 2011a). Here the focus isclearly on the role of labour market participation (including incentives) infighting poverty (compare European Commission, 2011a). The potentialmerits of this approach have already been cast into doubt, however: growthand employment during the Lisbon Strategy era failed to deliver in terms ofreducing poverty (Cantillon, 2011).For the present discussion the key feature of the European semester isthat it is serving to increase the pressure on member states to pursuefiscal austerity while at the same time seeking to reduce unemploymentby implementing orthodox market-oriented structural reform policies.In a context in which unemployment is high primarily for cyclical(demand-side) not structural (supply-side) reasons, such an approach islikely not only to be ineffectual in reducing unemployment, but also tohave negative distributional effects. Both are inimical to the goal ofstable and inclusive growth.Addressing current account imbalancesThe surveillance of Member States is also to be substantially broadenedin comparison to the previous emphasis on the fiscal stance. A new, socalledexcessive imbalance procedure (EIP) is to be introduced,modelled on the excessive deficit procedure in the SGP. Under the EIP thecompetitiveness and current account positions (see Box 1) of all memberstates are to be assessed against a ‘scoreboard’ of relevant indicators (theprecise details of which have yet to be decided). The Commission and theCouncil can make recommendations to member states if the imbalancesare held to be excessive and injurious. Like the SGP there is also acorrective arm under which member states (in the Euro area) can besanctioned for failing to comply with recommendations. A country can berequired to deposit up to 0.1 per cent of GDP with the EuropeanCommission which, in the case of repeated non-compliance, can beconverted into a fine. Decisions on sanctions are taken by the Council,but subject to a new ‘reverse majority’ procedure, whereby the memberstate threatened by sanctions will have to obtain a qualified majority tooverturn the recommendation (as opposed to a qualified majority beingnecessary in order to endorse the sanction recommendation).A triumph of failed ideas – European models of capitalism in the crisis 257
Janine Leschke, Sotiria Theodoropoulou and Andrew Watt.................................................................................................................................................................Box 1 Current account imbalances in the EurozoneOne widely drawn lesson of the economic crisis is that current account imbalances are aproblem, not only at the global level (for instance, the United States and China), but alsobetween countries that share a common currency. 13 Such imbalances arose because ofthe workings of EMU (See Theodoropoulou and Watt, 2011). On joining EMU, previouslyhigh-inflation European countries on the southern and western periphery that had hadhigh interest rates benefited from a sharp fall in borrowing costs, setting off a –seemingly – virtuous circle: these fast-growing, high-inflation economies enjoyedrelatively low real interest rates (the common ECB-rate minus their high inflation rates).This stoked up economic activity, also by driving up asset – especially house – prices,which in turn stimulated the economy through various wealth effects. Meanwhile, slowgrowing,low-inflation countries were mired in a mirror-image vicious circle, facing slowgrowth and low inflation with relatively high real interest rates.Figure 6 Nominal unit labour costs minus 2% p.a. (1999 = 100)20,0EL15,010,0LUITES5,00,0PTNLIE-5,0-10,0BEFRFI-15,0AT-20,0DE1999200020012002200320042005200620072008200920102011Source: AMECO database; authors’ calculations.13. For most purposes it is an acceptable simplification to equate current account(im)balances with trade imbalances. Deficits, then, arise when a country imports moregoods and services than it exports; conversely, surpluses are the result of a countryexporting more than it imports. Countries running persistent deficits incur netliabilities (foreign debts) vis-à-vis the rest of the world (or run down net asset positionsaccumulated in the past), while surplus countries build up net asset positions (or paydown past liabilities).258 A triumph of failed ideas – European models of capitalism in the crisis
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Table of contentsSteffen LehndorffI
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