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Europe Global Environment & Development The New South From G8 to G20 The Development Agenda UN Reform Global Finance Doha Final The Euro-zone in Crisis Eastern Europe

Alternatives to deepening divisions in Europe

The EuroMemorandum 2014

The European Union (EU) is set to exit from recession, but parts of Europe are beset with depression-like conditions; unemployment is exceptionally high in the peripheral euro area countries and not expected to decline appreciably in the near future. The European Economists for an Alternative Economic Policy in Europe (EuroMemo Group) warns of a Europe of deepening divisions. WDEV documents the summary of this year’s EuroMemorandum.


Harsh austerity policies have led to a widening social polarisation in Europe and to a process of industrial restructuring in which the position of Germany and other Northern countries has been strengthened while productive capacity in Southern Europe is being weakened. The crisis has also led to a significant shift in the distribution of income. In most countries outside the euro area core real wages have declined, and strongly so in the euro area periphery and much of Eastern Europe. At the same time the hierarchy between member states has been attenuation with the position of Germany and other Northern states being strengthened, while the position of Southern states has been weakened and wide areas of economic policy effectively dictated by Brussels.

The activities of the European Commission continue to be characterised by a serious democratic deficit and a lack of transparency. Key decisions are made in closed meetings which are not accountable either to national parliaments or the European parliament, but where powerful business lobbies exercise substantial influence. In a number of countries right-wing – and in some countries neo-fascist – parties have been able to capitalise on widespread disaffection with the European Union and the policies that Brussels is imposing on member states.

1. Fiscal and monetary policy

The economic downturn in the EU is set to end but output is still below 2008 levels and the situation is highly polarised with high unemployment and reduced real wages in many countries. The acute financial crisis has been stemmed but the financial system remains highly fragile, and banks actually reduced their lending in 2013. The highly restrictive fiscal policies imposed on many member states made it even more difficult to meet strict deficit targets. While the ECB stabilised the banks with around €1 trillion in unconditional three-year loans, lending to governments continues to be prohibited.

Given the EU’s rigid adherence to neoclassical principles, it is wages that are expected to bear the full weight of adjustment. While real wages have begun to decline in some countries, this is fuelling deflationary forces which are sweeping much of Europe. In place of austerity, government policy should focus on promoting employment in socially and environmentally desirable jobs. The regressive impact of cuts in public expenditure should be ended and public education and health services should be strengthened. Higher levels of spending should be financed by reversing the repeated cuts in taxation in the last 20 years. Budgetary policy at a European level should be increased towards 5% of EU GDP in order to have a meaningful impact on output and employment.

The financing of government deficits should be mutualised through the issue of joint euro bonds so that speculators cannot pick off weaker countries. The existing public debt in a number of member states in unsustainable; it cannot be fully repaid and should be subject to a debt audit to determine which debts are legitimate and which should be cancelled. The relentless downward pressure on wages should be replaced by encouraging a spread of collective bargaining. An orderly rise in wages can contribute to overcoming the weakness of domestic demand in Europe, as well as promoting greater social justice.

In order to combat unemployment and establish conditions in which people’s lives are not dominated by waged work, the normal working week should be reduced towards 30 hours with no loss of pay.

2. Financial and banking policy

Five years after the bankruptcy of Lehman Brothers, the financial and banking crisis is unresolved in the EU. In most EU countries, the banking system is still fragile in spite of the huge amount of liquidity provided by the ECB. The situation of the banking sector is very critical in some countries like Spain. In mid-2012, the Banking Union (BU) was proposed by the Commission as a new European project to solve the crisis.

In spite of its ambitious organisation, the BU does not change the dominant paradigm of banking in the EU. Reforms proposed by the Liikanen report on banking structure are reinforcing the role of universal banks in the EU instead of pushing for a strict separation between retail banking and investment banking. The reforms also raise questions about democracy and governance in the EU as they increase the role of the ECB, which is in charge of the single supervisory mechanism of banks. Yet the ECB is partly responsible for the depth of the sovereign debt crisis in the euro area, as it refuses to lend directly to governments on the primary bond market.

The slow pace and weakness of financial reforms has been exacerbated by the strong influence of the financial lobby which has succeeded in keeping effective regulation at bay. The European institutions should adopt the clear objective to reduce the weight of finance in the economy. Speculative activities should be prohibited. Retail banks must be isolated from financial markets and should focus on their core business: lending to the non financial sector. The Financial Transactions Tax directive proposed by the Commission must be implemented quickly. The ECB should be subjected to effective democratic control and give priority to social and ecological goals.

3. Governance in the EU

The coming into force of the Treaty on Stabilisation, Coordination, and Governance and the ‘Two Pack’ Directives mean that economic policy in euro-zone countries is now subject to comprehensive central control. Although the powers of member state parliaments over economic policy have been radically reduced, there is no corresponding increase in the powers of the European parliament. The multiplication of crude arithmetic limits on government spending and borrowing is likely to be as dysfunctional in the future as such exercises have nearly always been in the past. These simplistic rules display a distrust of democracy and an overestimation of the capacity of market processes to stabilise economic life.

The rhetoric of competitiveness used by EU leaders to justify both a generally restrictive approach to economic policy and immense pressure on weaker member states also works to limit democratic control over the economy. The legal restrictions on economic policy are now so severe that effective alternative policies will require either the abrogation of the new governance measures or their explicit subordination to other priorities - for employment, ecological sustainability and social justice.

4. Taxation

The economic and political relevance of taxation has become increasingly apparent as Europe’s crisis has gripped more deeply into the finances of most of the EU’s member states and the lives of their citizens. Global and regional advocacy groups, concerned with issues of justice in taxation and in fiscal affairs, have gained an increasing audience within European civil societies, reinforced by the revelation of widespread tax avoidance by global corporations and wealthy individuals. In response both to the growing outrage of European citizens over industrial-scale avoidance of tax liabilities and to the haemorrhage of tax revenue as a result of recession and stagnation, European governments have given much greater emphasis to the prevention of tax avoidance and ‘unfair tax competition’.

The European Commission, with the strong encouragement of the European Parliament, has approved a set of taxation reforms aimed at increasing the transparency of cross-border tax affairs. These reforms include information exchange in relation to The European Savings Tax Directive, the establishment of a Common Consolidated Corporate Tax Base and, within the euro area, a Financial Transactions Tax. While such initiatives are welcome in the confused landscape of European taxation systems, they will be insufficient to put an end to the beggar-thy-neighbour taxation policies which have continued during the current crisis; they will also not contribute to a reversal of the growing income inequalities and poverty in Europe. Only a radical harmonisation of direct taxation on the basis of progressivity in all EU member states, the removal of flat tax regimes in central and eastern Europe and the convergence of tax ratios Europe-wide will ensure the survival of a culture of social solidarity in the region.

5. Employment and social policy

The financial and economic crisis has had a deeply regressive social impact for many people in Europe, with high unemployment, poverty and even a lost future for many young people. According to the latest EU figures one in four of the EU population is in poverty and one in eight of its work force is unemployed. Levels of youth unemployment are especially disturbing: for the EU as a whole the figure is one in four, and in Southern crisis-hit countries like Greece, Spain and Italy it rises to one in two or one in three.

High unemployment and poverty have weakened the bargaining position of the work force vis-a-vis employers and this has been reflected in more precarious working conditions: one in five contracts in the EU are not permanent positions and short-time work and involuntary part-time work have increased since the onset of the crisis. The EU response has failed to provide resources to alleviate the impact of poverty and youth unemployment. Its own institutions, such as the DG for Employment, Social Affairs and Inclusion, have also failed to monitor and offer support to member states which are in economic and increasingly social crisis.

As an immediate measure, EU institutions should assess the social impact brought about by impact of the spending cuts it has imposed on member states. It should then provide support in key areas, in particular health care, and ensure the provision of support for the children and young people who are bearing the brunt of unemployment and poverty. To protect the working population from the rising tide of precarious working conditions, the benefits of social insurance programmes should be urgently extended to all workers, irrespective of their type of contract. The EU should also initiate legislative programmes to bring
European labour laws in line with a fast changing labour market.

6. Industrial policy

The urgency of an industrial policy in Europe is beginning to be acknowledged by the European Commission. But its proposals remain confined to the narrow framework of competition policy geared exclusively to the aims of short-term market performance. An alternative is required which links the objective of long-term industrial performance with concerns for a socio-ecological transformation.

This should involve six major dimensions: (1) a Europe-wide public investment plan for socio-ecological reconstruction to boost European demand; (2) a reversal of the major loss of industrial capacity in Europe; (3) an urgent drive to developed new environmentally sustainable, knowledge intensive, high skill and high wage economic activities; (4) a reversal of the massive privatisations of recent decades and substantial public-sector support for new activities at the EU, national, regional and local level; (5) the setting of a new trend towards a different kind of 'security' connected with disarmament, greater cohesion and reduced imbalances within the EU and individual countries; and (6) the creation of a major new policy tool for an ecological transformation of Europe.

Specific activities that could be targeted by the new type of industrial policy include: (a) the protection of the environment and renewable energy; (b) the production and dissemination of knowledge, applications of ICTs and web-based activities; (c) the provision of health, welfare and caring activities; (d) support for initiatives for socially and ecologically sustainable solutions of food, mobility, construction, energy, water and waste problems.

7. The EU-US transatlantic trade and investment partnership

The EU has in recent years negotiated numerous bilateral trade agreements. This has been topped by the announcement in early 2013 that the EU and the US had agreed to enter into negotiations on a bilateral trade agreement, the so-called Transatlantic Trade and Investment Partnership (TTIP). The proposed agreement is not only intended to reduce tariffs between the world economy’s two biggest trading blocs; its primary aim is to dismantle and/or harmonise regulations in areas such as agriculture, food safety, product and technical standards, financial services, the protection of intellectual property rights, and government procurement. Investment liberalisation and protection also will be central issues.

The European Commission, based upon commissioned studies, claims that the deal will boost growth and jobs in the EU. The economic case for the TTIP is, however, unimpressive. Income gains are estimated at less than 1% of EU GDP, and will be phased in over a transition period of 10 years. Increased unemployment and adjustment costs due to trade liberalisation are downplayed or neglected altogether. The deregulation involved in the trade deal will threaten public health, labour rights and consumer protection. The proposed investor-to-state-dispute settlement will privilege investor rights over public policy autonomy.

The TTIP is no less than a frontal attack on democratic decision-making in the EU. Major revisions to the proposed negotiating agenda are urgently needed. At the moment, it is highly dubious whether the trade agreement will deliver any net economic and social benefits to EU citizens. A comprehensive impact assessment with detailed studies on the many critical issues involved and a radical break with the prevailing lack of transparency are necessary first steps for a much-needed democratic debate on the TTIP.

The EuroMemo Group publishes every year a critical memorandum on actual economic policy issues of the European Union. This year’s memorandum can accessed in full at www.euromemo.eu.

Published: 19 Dec 2013

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