Alternative Europe

Everyone says that the EU needs to be reformed. This blog will argue that the reform Europe most urgently needs is a change in political direction.

The argument is in three parts:

• European policy is too often a policy about Europe rather than a policy by Europe. European policy needs to turn outwards to address the questions which impact on the lives of Europeans.
• The most urgent issue facing Europeans is how to restore the economic momentum lost in the triple crisis - financial, economic and fiscal - which hit Europe in 2007-2010.  We need to understand where the crises have left us.
• Finally, an alternative to the false narrative and mistaken prescriptions of Europe's centre right which have led Europe into a prolonged slump is both possible and necessary.

Looking Out

European policy is too concerned with the construction of the EU. This leads to an inward looking polity where questions of institutional frameworks, policy procedures, legitimacy and the aspiration for unification take precedence over using the the frameworks that exist to advance a broader political agenda. No doubt there are important issues in how the EU works, not least the need for democratic forms to give legitimacy to EU actions. It is understandable that within the "Schumann village" policy makers give time, attention and serious intellectual effort to these questions. However Europe needs a bigger purpose than its own internal workings.

One major drawback of this inward looking mindset is the loss of a political perspective. Policy analysis in Europe frequently examines national positions, inter-institutional contest and the more-versus-less-Europe dimension. These cleavages - between states or groups of states, between parliament, council and commission, or between federalist and sceptics - leave little space for the traditional political cleavage between left and right. The centre-right has been in the ascendant in Europe for at least the last 5 years. Their policies are seen as Europe's rather than deriving from a particular political agenda. The values and aspirations of the centre-left would lead to very different policy prescriptions.

The Triple Crisis

We are several years into the triple crisis of economic wellbeing. It began in 2007 as a financial crisis. Doubts about the quality of banks assets led to a collapse in lending. As the financial crisis intensified in 2008 demand plummeted and economic recession hit Europe. Emergency measures were taken to stem the financial panic and to sustain demand. In 2010 however policy was reversed when sovereign debt became the focus of attention. It is important to recognise the existence of three separate crises, firstly because the centre-right narrative implies that sovereign debt was the sole cause of economic problems and secondly because an alternative policy must address all three in order to succeed.

The alternative which this blog will explore begins by noting that the Eurozone as a whole did not have a debt crisis, only individual countries. The Eurozone's strength could be used to resolve the problem in the interest of its citizens.secondly the deficiency in demand can be rectified by boosting investment and by reversing the deflationary bias in the "European semester". Finally, the banking sector needs more than repair and renewed regulation. It needs a transformation to create a financial sector which serves the needs of the productive economy and of society.

An Alternative Narrative

Europe's centre-right leadership has been successful not just in imposing its policy solutions on Europe but also in selling to Europeans a story of why their policies are necessary and inevitable. The centre-right narrative locates the origin of the crisis in government debt. Governments, they claim, borrowed to finance an overly generous welfare state.when government debt gets too high markets lose confidence that debt will be repaid and so demand a higher return to hold debt or,indeed, refuse to lend to indebted governments.Thus governments must cut spending and shrink their welfare states to regain the confidence of the market. At the same time the centre-right asserts that countries must compete in a global economy. To be "competitive" countries must cut costs, particularly labour costs. To attract investment, the returns investors can earn needs to rise. Thus the centre-right advocates "reform" to labour and other markets which repress wages while increasing returns to capital.

Every element of this narrative is false and this blog will take the time to expose the fallacies. Public debt did not cause the crisis in the Eurozone, still less the financial and economic crises which preceded it. Pursuing national competitiveness will not make countries better off, rather it will depress growth and flirt with deflation. Shifting the share of national wealth towards capital and away from wages increases inequality and reduces incentives for productivity enhancing innovation.

An alternative economic strategy needs to be accompanied by a robust and coherent alternative narrative. The key elements of which are:

• public debt did not cause the crisis, but private sector debt is part of the problem;
• private sector debt was fuelled by banks whose incentives push the volume rather than the quality of lending;
• the Eurozone's level of total government debt is manageable, particularly if the ECB stands as a backstop;
• creating a more productive economy is more important than competitiveness;
• public investment can boost both demand and productivity;
• private investment is incentivised by rising demand;
• repressing wages reduces demand and workers should share in the fruits of rising productivity.