Nacho Álvarez and Jorge Uxó – The reform of the Eurozone: beyond cosmetics

This evening the European Council begins its meeitng. Tomorrow the Eurozone ministers will be discussing a number of measures that the German and French are introducing concerning the economic and financial future of the Eurozone nations.

Nacho Álvarez is associate professor at the Autonomous University of Madrid and responsible for Podemos’s economic team (@nachoalvarez)

Jorge Uxó is associate professor at the University of Castilla la Mancha and a member of the Podemos economic team

In the course of time there have been a number of proposals for reforming the governance of the euro, such as those made by the European Commission or launched by the French president Emmanuel Macron in 2017, although this latest proposal has been very substantially limited following the agreement with Germany’s leader Angela Merkel. Whether openly acknowledged or not, this underscores a deep dissatisfaction with the results achieved since the creation of monetary union, particularly following the great financial crisis and the policies implemented during this “lost decade”.

It has taken Spain ten years to reach the GDP level it had in 2007, the Greek economy has shrunk by 25% and Italy now has a lower GDP per capita than it had before joining the euro. Unemployment rates have reached stratospheric levels, the quality of new jobs created is very poor – the result of imposed labour reforms – and key public services have been eroded.

Millions of European citizens – particularly in peripheral countries, but not only there – have noted that fiscal austerity and wage restraint are economic policies deeply rooted in monetary union itself. Moreover, as the latest book by Yanis Varoufakis, Adults in the Room, illustrates, the main decisions have been taken – and imposed – without a genuinely democratic debate on the options available and often outside or against the national parliaments themselves, representatives of popular sovereignty.

The reform proposals to be discussed by this week’s European Council focus on “completing the institutional design” of monetary union. For example, with the development of a fiscal union with a common budget, and a banking union that minimises the risk that a new banking crises will result in a new sovereign debt crisis.

Both of these things are important, but they will not be enough if they continue to neglect the essential: questioning the direction of economic policy and addressing the serious democratic deficits of European institutions.

A central, almost exclusive, role continues to be devoted to “market-oriented structural reforms”, and in particular to labour market flexibility. These reforms have plunged the Eurozone nations in a downward wage competition with enormous social costs – by intitutionalising job insecurity and inequality – while their effectiveness in raising growth, reducing unemployment, or promoting real convergence is more than doubtful.

The Berlin-Paris axis also aims to keep intact the corset of the Stability and Growth Pact, which is designed to limit the role of national fiscal policies and which imposes a deeply dogmatic view of budgetary stability. Macroeconomic stabilization in the event of new crises and the possibility for the state to stimulate economic activity are dramatically limited. For example, the energy transition is an urgent public good across Europe, but the scope for states to invest and move forward here is very limited under current rules.

It is clear that Macron does not envisage a change in the economic orientation of the Eurozone. You will know them by their deeds:  he is promoting a labour reform in France inspired by the Spanish one – that has resulted in an intense wage deterioration – and a fiscal policy based on tax cuts for companies, reduction of public services, and privatisations.

A real change of course is needed to make monetary union no longer an obstacle but a fulcrum of support. First of all, we must “rescue” fiscal policy, ensuring a sufficiently well-endowed EU common budget – including European unemployment insurance and an ambitious plan for productive investment – but also a reform of the rules that increases fiscal autonomy at national level.

The ECB has demonstrated an obvious ability to act as a lender of last resort to national treasuries, however three years too late (how many fiscal cuts we would have saved if it had done so since 2009!). This role of lender of last resort of the member states must therefore be explicitly included among the ECB´s functions, and its objectives must extend beyond price stability to financial stability and employment.

A third idea is the need for a symmetrical mechanism for eliminating current account imbalances, so that the entire weight of adjustment does not fall – as it has until now – on the wages of deficit countries. The construction of this symmetrical mechanism involves ending the devaluation of wages, rebuilding collective bargaining, raising minimum wages to 60% of the median wage in each country, and advancing the industrial development of structurally weaker economies.

A genuine reform of the euro area must also encourage a radical extension of democracy in decision-making, by establishing a democratic conditionality’ clause: any change in the governance of the euro area, or the creation of any new institution, must ensure that national parliaments have control over the election and accountability processes.

There are those who see – even among social democrats – that the political arithmetic of the Eurozone makes a change in this direction very difficult, and that there are only two options: to support Macron’s proposal, or to succumb to the national retreat called for by the extreme right. We believe that it is possible to prevent the extreme right from capitalising on the discontent of citizens with the EU, its technocrats, and its institutions. But the solution lies in politics, not in cosmetics. Let us recognise that we need profound and structural changes.


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