The Eurozone and the need for a paradigm shift

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This paper written by FEPS Economic Advisor Giovanni Cozzi, argues that a new deal for Europe should be based a better understanding of the causes and the historical neoliberal origins of the crisis. Neoliberal policies, which are fully embraced in the European Single Market rules and in the European Treaties, have significantly restrained the possibility to use fiscal policies for ensuring high-levels of aggregate demand. Ultimately, this has led to a significant pressure of economic adjustment on the labour market.  The paper calls for an economic paradigm shift and for institutional transformation in order to achieve real solidarity in Europe, in terms of job creation, growth and equity.

The Eurozone and the need for a paradigm shift

10 fundamental challenges

1. A new Deal for Europe should be based on a better understanding of the origins and the historical “neoliberal” roots of the crisis.

2. Make a clear assessment of the European Single Market and its restrictive

notion of solidarity.

3. Re-evaluate the limitations that the European Treaties have imposed on fiscal policies and the subsequent pressure of economic adjustments on the labour market.

4. Fiscal austerity will not succeed in promoting growth and creating jobs.

5. Fiscal policy should be seen as having the function of ensuring high-levels of aggregate demand, and the EU budget should be increased to act as a counter-cyclical mechanism.

6. A common labour policy and a shift away from wage repression are indispensable for Europe.

7. Focusing only on financial regulation misses out how finance is related to the rest of the economy.

8. Debt relief and consolidation should be discussed as part of a progressive policy package.

9. Supranational fiscal and labour authorities are required for increasing coordination across Europe.

10. The Stability and Growth Pact and the Six Pack have to be reformed so that fiscal policies are not reduced to a tool for simply balancing the budget.

Introduction

The crises (economic, financial, ecological, institutional and political) affecting the Eurozone have sparkled the debate on the need for a new deal on European economic and social policies. Words such as “responsibility”, “solidarity”, and “coordination” have entered the policy debate at European and national level among progressive political circles.To this end, it has been argued that the way out from the crises should  combine budget consolidation and debt control with stronger growth, employment and social cohesion. In other words, fiscal responsibility should be combined with economic effectiveness and social fairness (Rasmussen and Schulz, 2010).

However, whilst highlighting the need to shift away from an exclusive focus on public deficit and debt reduction, it is questionable that the current progressive policy proposals are setting the foundations for a different model of development, let alone representing a real paradox shift from the current austerity policies.

This paper argues that in order to provide a concrete and real economic alternative for Europe it is important to gain a better understanding of the causes of the crises and their historical roots which can be traced back to the beginning of the neoliberal counter-revolution of the 1970s. Indeed, too often economic and financial crises have only been seen temporary displacement which requires emergency measures rather thanbeing embedded in the structural development of the economic system.

The disregard of the systemic dimension of the crisis has limited the scope of alternative policy recommendations predominantly to “preventive” and “reactive” measures and has led to a neglect of those policies essential for building the institutional and economic foundations that would put Europe onto a different and more equitable developmental trajectory where solidarity (at least in terms of job creation and equitable growth) takes centre stage. Indeed, so far the ongoing crises has often been seen as a ‘crass exception that makes extraordinary measures necessary, only to return to normal once the crisis seems to have evaporated’ (Arestis and Sawyer, 2010 :331). In other words, most of the political decisions and discussions have amounted to the perpetuation of business as usual (Harvey, 2010), which translated into support of the current institutional and capitalist settings.

This paper begins by presenting a critical review of the causes and origins of the economic crisis and recession with a particular angle on Europe. This will be followed by a discussion of alternative economic and institutional policy proposals which could put Europe on a more sustainable economic trajectory.