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.................................................................................................................................................................agenda. 14 France and Germany launched an initiative in early 2011 for aso-called ‘Competitiveness Pact’. This led to a more consensual effortwithin the European Council: renamed ‘Pact for the Euro’ it contained afirm commitment to an effective ESM, alongside a more detailed set ofmeasures to which Euro area member states were to committhemselves.Measures are to be taken in the following areas: competitiveness, jobcreation, fiscal consolidation and financial stability. There are noprovisions for compulsion or sanctions on member states: peer pressurewill be relied upon. Only those actually seeking the support of theEFSF/ESM will be forced to make policy changes. The Pact immediatelyprompts the question of why we need a (non-binding) intergovernmentalPact for the Euro when the European semester and the AnnualGrowth Survey constitute a very similar process of policy coordination,albeit with – ultimately – the possibility of imposing sanctions (Watt,2011). What is explicit in the Pact is the ‘grand bargain’ nature of thedeal: European solidarity in the form of the ESM for greater policyconstraints. This was only implicit in the AGS. The latest manifestationis the so-called Euro-Plus Pact agreed in March 2011, to which the Euroarea members and a number of non-members (Bulgaria, Denmark,Latvia, Lithuania, Poland and Romania) have signed up.The latest initiative (August 2011) is another Franco-German plan.Most notable here is the insistence that all countries institutionalisedebt brakes/balanced budget rules in their constitutions, along the linesof the German Schuldenbremse. Putting operational policy rules into ahard-to-amend constitution is bad politics. Such rules tend to becomplex simply because the world is complex and they are likely to haveto be modified as circumstances and our knowledge of the functioningof our economies changes. Depending on how it is implemented it isalso bad economics: the crisis has taught us that countries in amonetary union, with a single monetary policy, need to use fiscal policyactively to address their specific national situations and promote Euro-14. An overview of this intergovernmentalist track is to be found here and the linkscontained within it: http://www.social-europe.eu/2011/08/another-franco-germansummit-another-mix-of-bad-process-and-ambiguous-outcomes/A triumph of failed ideas – European models of capitalism in the crisis 261
Janine Leschke, Sotiria Theodoropoulou and Andrew Watt.................................................................................................................................................................area cohesion. Tying the hands of policymakers with cumbersome, hardto change and/or hard to interpret rules is not the way forward.Overall, Europe is developing an almost bewildering array ofoverlapping policy responses in the area of economic governance.Beyond this confusion, none of the measures proposed, singly or jointly,come close to resolving the key problems facing the Euro area.In the context of the present discussion, which focuses on the prospectsfor inclusive growth, it can be concluded that the economic governancereforms are based to a considerable extent on a misdiagnosis of theproblem (‘it’s mostly fiscal’ and more market-oriented structuralreforms are needed). This does not (yet) constitute an adequateresponse to the crisis and thus threatens, in the short run, to harm anyprospect of economic growth and to increase the risk of a reneweddownturn. Exacerbating the shift to Continent-wide austerity makesswift recovery of demand and output unlikely. It also promotes policies(expenditure-side forced consolidation, decentralisation of collectivebargaining and a ‘make work pay’ approach to labour market policy)that will tend to make any growth that does occur less ‘inclusive’ (seealso next section). Finally, it risks embedding retrogressive policies inthe longer term (such as a debt brake), thereby depressing publicinvestment.4. Fiscal austerity against inclusive growth?Having argued that the new economic governance and fiscal austerity inEurope as a response to the debt crisis pose a serious threat to any kindof output growth – and consequently to employment creation andrecovery – we shall now take a closer look at the planned nationalmeasures for achieving the poverty headline target of the Europe 2020Strategy. These measures were announced in the context of theEuropean Semester last spring. We ask the following questions: dofiscal consolidation policies overshadow policies aimed at reducingpoverty in its various guises? Are the policies planned in the context ofthe European Semester mutually supportive and likely to increasecohesion across member states? And which objective is the EU’spriority: consolidation of public finances or poverty reduction?262 A triumph of failed ideas – European models of capitalism in the crisis
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Table of contentsSteffen LehndorffI
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