Germany’s Choice: Will the Euro Crisis destroy the European Social Model?


Germany’s Choice: Will the Euro Crisis destroy the European Social Model?

Germany must face its leading role in Europe's destiny. Foto: Európa Pont, Quelle: Flickr, Lizenz: CC BY 2.0

September 6, 2012
Craig Willy

Any assessment of Germany’s role in the euro crisis must appreciate first the importance of German policy, that of by far the most important actor in the crisis’s management, and second the sheer scale of the disaster that has befallen Europe. This includes a double-dip recession threatening the world economy’s recovery, rising unemployment now at 11.3% (50% youth unemployment in some countries), and sustained assault on democratic processes in the peripheral countries (especially Greece, Italy, and Ireland). However, the current German government and the European Central bank risk turning this immediate disaster into a truly historic tragedy by taking measures which will permanently increase inequality, poverty and income insecurity in Europe.

The Current Path: The End of the European Social Model

The course currently pursued by the German government and the ECB are really quite remarkable in its antidemocratic, antisocial and even anti-economic (that is to say ineffective) character.

These include the outlawing of Keynesianism at national level through the Fiskalpakt and the empowering of the independent (that is, not accountable to elected officials) ECB as supervisor of the eurozone financial sector. No matter that the Fiskalpakt would have done nothing to prevent the crises in Spain and Ireland, both of which had low debt, or that the ECB was blind to the financial bubbles emerging in Europe’s periphery. As then-ECB President Jean-Claude Trichet stated in 2007: “very often, I and my colleagues of the [ECB] Governing Council are mentioning the Irish economy as a role model in many respects for the euro area.”

But the most revealing Euro-German strategy has been the will to “export” the equivalent of Gerhard Schröder’s “Agenda 2010/Hartz” reforms to the rest of the eurozone. The various bailout deals and ECB demands (notably imposed on Italy) require not simply deficit reduction, an understandable requirement for a loan, but specific action on unrelated policies such as privatization, wage cuts and labor market liberalization.

These reforms, it is true, have made a number of people in Germany much richer and have improved the country’s position internationally. But these reforms were also followed by staggering increases of inequality within Germany and of poverty (which between 2001 and 2010 increased from 11% to over 15.5%). The latter includes a simply shameful increase in child poverty. To make these figures more concrete: “poverty” for a single-person household is defined as someone earning less than €925 a month, a pittance.

Worse still, the ECB, a supposedly “apolitical” institution, has shown remarkable ideological prejudice. In February 2012, its president, Mario Draghi, declared to the Wall Street Journal that a “‘good’ [fiscal] consolidation is one where taxes are lower”. It was apparently of no import that the countries of the periphery, where the ECB’s influence is strongest, tend to have large rich-poor divides and low taxation by European standards. (Incidentally, the more economically successful European countries tend to have high levels of taxation, such as the Netherlands, Germany, Austria, France, the Nordic countries…)

The European paradox: An unnecessary debt crisis

The paradox of the European debt crisis is that the eurozone has less debt than most of the developed world, in particular less than the United States, Japan and the United Kingdom, and the eurozone’s average deficit (around 4% of GDP) is also half or less than that of those countries. As The Economist has pointed out: “The euro zone’s problem is not the debt’s size, but its fragmented structure. Taken as a whole, the stock of euro-zone public debt is 87% of GDP, compared with over 100% in America.”

In addition, contrary to Angela Merkel’s claims that Europeans “live beyond their means,” between 1992 and 2008 the eurozone as a whole had a primary budget surplus (it earned more than it spent, if you exclude interest on the debt) and it had among the lowest levels of household debt in the world. This factor is important given that the eurozone pays very high interest rates to the financial sector compared to other countries. In 2009, over 4% of Italian and Greek GDP went to the government’s paying interest on existing debt. In addition, heavily indebted America, Japan and Britain paid less interest on their debt (1 to 1.7% of GDP) than even less-indebted and “virtuous” Germany (2.3%).

In short, the necessary fiscal consolidation to achieve balanced budgets is minimal, if Europeans were to pay lower interest rate costs and if financial stability were restored, allowing a return to growth.

The trouble is that reducing European countries’ refinancing costs would require great financial solidarity between Europeans: either spreading risk through common eurozone debt (Eurobonds) or having the ECB act as a lender-of-last-resort that buys national debt. The latter is a completely normal activity for a central bank to ensure financial stability in a crisis, practiced by the Bank of England, the U.S. Federal Reserve, the Bank of Japan, and even historically practiced by the Bundesbank.

All informed and reasonable people must come to the conclusion that the eurozone system, as conceived at Maastricht, must be reformed: either it must be given the necessary federal powers to be made coherent or it must be dismantled. All reasonable people would also agree that any increase in financial solidarity between Europeans – either ECB lending or Eurobonds – must be accompanied by some degree of EU-level control to ensure that trust is not abused. The question is what the nature of that control should be, and in particular, whether it will be democratic and compatible with the historic achievement that is the European social model.

Alternatives exist

This is the risk: that the German Right will entrench an even more powerful and unaccountable ECB, the outlawing of Keynesianism at national level, greater poverty and inequality, and laissez-faire capitalist ideology throughout Europe, before it concedes the necessary reforms to save the eurozone. News about Merkel’s suggestion of a new European treaty, while still vague, suggest she is fully determined to continue down this path.

But there are an almost limitless variety of alternatives to the course currently being pursued by the German government and the European authorities. The progressive French economist Thomas Pikkety has suggested a limited federalism whereby common eurozone debt would be tied to collective debt ceilings for national spending to be determined by a new “eurozone assembly” of democratically-elected national parliamentarians. At the other end of the political spectrum, The Economist has proposed a scheme for temporary debt-pooling which would end the immediate crisis while limiting to an absolute minimum the creation of new, possibly undemocratic, European federal structures. These alternatives must be debated democratically and serenely, so that Europeans choose one that both ends the immediate economic disaster and safeguards their democratic rights.

What must not be done is, in the heat of crisis, to constitutionalize the anti-Keynesian, antisocial and antidemocratic preferences of one particular government into European Basic Law. If this was done, the euro would literally mean no more than the end of the European social model and the replacement of Christian-Social Democracy with a monstrous, unaccountable and virtually irreformable European technocracy.

The French Left is not enough

In the struggle to create a more rational and democratic eurozone, it is clear that the efforts of the recently-elected French Left are not enough. In May, the leader of the European Greens Rebecca Harms said: “The democratic deficiency of the fiscal pact will also hopefully be addressed as a result of the change in power in France.” Disappointingly, President François Hollande’s promised “revision” of the Fiskalpakt entailed no more concession from Merkel than an embarrassingly empty “growth pact” composed of nothing more than a tiny pseudo-stimulus program worth 1% of GDP (most of it pre-existing funds). Der Spiegel accurately described it as little more than “window dressing.” The crude reality today is, quite simply, that the President of France is no match for the President of the Central Bank and the Chancellor of Germany.

Europe’s destiny today, as so often throughout history, lies with Germany. The continuation of the current path would be a great tragedy: “Europe,” the prospect of lasting peace in a troubled Continent, will have meant nothing but the undemocratic evisceration of the European social model. In the long run, the resulting poverty, inequality and social crises can only increase the probability of extremism, nationalism and, ultimately , war. Everyone in Germany, but in particular the German Left, has a historic responsibility to ensure that this nightmare scenario does not come about.

Craig Willy is a Euroblogger and EU affairs writer. Get in contact with him via Twitter (@CraigJWilly).


Europe’s common future. Ways out of the crisis

The EU not only finds itself in a debt crisis, it is also faces both a crisis of confidence and of democracy. Now is the time for a broadly based public debate on alternative proposals for the future of Europe. We would like to contribute to the debate with this dossier. 

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