Marica Frangakis Nicos Poulantzas Institute

1. Fighting austerity Reclaiming the European ProjectISSDevelopment Research Seminars2012-13Social Policy after the Financial Crisis11 December 2012 MaricaFrangakis NicosPoulantzas Institute

2. Outline • Definition of concepts; theoretical issues • Etymology – Ideology – Hegemony • Policy vehicles for the implementation of austerity in the EU • Fiscal consolidation – Liberalisation – Privatisation • Implications of austerity for the economy and for society • Deepening recession – Unemployment - Poverty • Reflections on outlook and alternatives

3. Etymology – Ideology – Hegemony: Where do the terms come from, how are they used & to what effect • “Austerity” (most looked up-word in 2010) : “non-indulgence, ascetism, self-denial, self-discipline, plainness, sobriety, puritanism, solemnity, strictness, etc.’ (Collins Thesaurus of the English Language, 2002) • Capture of terms linked to universal values: Implicitly, notion of public debt is rejected, as ‘inherently bad/wrong’ analogy with private debt • Rationale- If it is prudent for individuals to avoid getting into debt, would it not be wise for governments to do the same? If a government does become indebted, would it not be best for it to suppress expenditure &/or increase public receipts, so as to reduce, if not extinguish, the public debt?

4. Public debt fetichism – rationale and fallacies Robert Skidelsky: Does debt matter? • Fallacies– 1.Governments have “monetary sovereignty’; 2. Reducing the public deficit shrinks the economy; 3. Public debt = transfer of wealth from taxpayers to bond holders, not a net burden; 4. No connection between size of public debt and price government must pay to finance it; 5. Low borrowing costs for governments do not necessarily reduce interest rate the cost of capital for private sector • Ideological undertones - Attempt by financial industry to shift public discourse from the need for radical changes in the financial sector to the ‘living-beyond-one’s means’ accusation in order to secure more bail-outs for the banks and deflect pressures for financial policy reform

5. Austerity: economic necessity or political project? • Theoretical presumption - The effect of any government deficit is mitigated by compensatory changes in the representative agent’s spending decisions. Hence, reducing government deficit allows the private sector to consume more. Also, high public debt ratios reduce the rate of growth through a rise in savings and through the crowding out of private investment supply side considerations • Fallacy - As Keynes argued long ago, running a government deficit is a necessity, especially if it is held domestically, since it provides the private sector with new funds for saving and a means to save (interest-bearing government bonds), thereby increasing private sector wealth and reducing the need to save from current income, i.e. leading to increased demand and consumption. More so at a time of crisis and recession

6. Hegemony - The power of the narrative • “… our fundamental outlook about the economy, at the level of the average person, is closely bound up with stories of excess borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years” (Robert J. Shiller, The Great Debt Scare) • Eurobarometer Social Climate Index – evaluation of the current situation (range from -10 to +10) • EU27 - 2012, -0.8; 2011, -0.6; 2010, -0,7; 2009, -0.7 • Highest values (2.8) in Benelux, Nordic, Austria and Germany Lowest values in Southern and Eastern countries; Greece – the lowest ranked member state in 3 out of 4 years (-5.8) • Uncertainty about recovery+decline in income/confidence = holds back new investment & household consumption

7. EU austerity policy vehicles • Stability and Growth Pact - Upper limits on public deficit (3% GDP) & public debt (60% GDP) + ‘excessive deficit procedure’: adjust via fiscal austerity or face sanctions; • Austerity policy becoming stricter since beginning of crisis • ‘Fiscal compact’ - Changing national legislation, preferably via amendments to EZ member states’ constitutions, to include: (i)‘debt brake’ – max. allowed structural (cyclically adjusted) budget deficit 0.5% GDP; (ii) debt reduction roadmap - each year government debt to be reduced by 1/20th of difference between actual level and 60% GDP benchmark; (iii) sanctionson non-complying countries to be imposed by European Court of Justice: interest-bearing deposits/fines (Treaty on Stability, Coordination and Governance)

8. Austerity and conditionality • “Within the new framework of the European semester, the European Council endorsed the priorities for fiscal consolidation and structural reform. It underscored the need to give priority to restoring sound budgets and fiscal sustainability, reducing unemployment through labour market reforms and making new efforts to enhance growth” (E.C., 24/25 March 2011, Conclusions, p. 2) • ‘Austerity’, a multifaceted policy = fiscal consolidation + labour market reform + market liberalisation’ • EU/IMF Programmes for Greece, Ireland, Portugal, Hungary, Latvia and Romania • Conditionality for monetary support = ECB and Outright Monetary Transactions& for fiscal aid = EFSF & ESM

9. Economic implications of austerity • Fiscal consolidation – Cutting down goverment consumption impacts negatively on output/economy – The larger the multiplier, the greater the effect • IMF: “… the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2 … the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher in the range of 0.9 to 1.7 (WEO Oct 2012: 41-43) • Public & social expenditure cuts: more negative effects than raising taxes; ‘frontloading’ fiscal cuts: harsher/more protracted negative effects on output than gradual consolidation; long-run hysteresis effects • As GDP debt ratio explodes and financial pressures

10. GDP growth rates 2008-2012 (% pa; 2005 market prices)

11. Public debt/GDP ratio, 2008-2012 (%)

12. An extreme case (so far) – The Greek economy in collapse

13. Social implications of austerity - Channels • Labour market: unemployment; underemployment – inactivity – flexibility • The ‘lost’ generation - NEETs • Long-term unemployment • Wages: moderation and deflation; wage share on a long-term downward trend • Commodification of public services – esp. education and health – through liberalisation and privatisation • Financial distress - poverty/social exclusion

14. EU27 employment & unemployment

16. Share of ‘Neither in employment nor in education or training” (NEETs) among 15-24 year olds (%)

17. Long-term unemployment rate as % of active population 2008 & 2012

18. Flexibility - Underemployment & hidden unemployment (million persons)

19. Wage moderation/deflation (% pa)

20. Wage share as % GDP at current factor cost

21. Commodification of public services • Healthcare and education – ‘citizenship rights’ – commodification goes back to 1970s, picking up in 1990s and escalating in current crisis • Europe 2020 targets for education – Reducing early school leavers to less than 10% (14% 2011) & increasing tertiary education attainment to more than 40% (35% 2011) • Experience points to the fact that the use of market mechanisms or greater reliance upon the private sector does not lead to reduced costs, nor to greater efficiency. • Instead, it results in increased inequalities in terms of access and quality of services, especially for the poorer sections of the population, as well as in worsening conditions for those employed in these sectors

22. Financial distress of EU households by income quartile of household 2000-2012

23. Changes in proportion (%) of people at risk of poverty or social exclusion (AROPE) 2008-2010

24. Children in poverty – Social transfers make little difference

25. Political implications of austerity – Fragile legitimacy of European project under question

26. The case of Greece - The political system in flux: Electoral results 2009, 2012 (% share of votes)

27. The games financial markets play…

28. Overall … • Austerity – Based on theoretical fallacies with regard to the nature of the public debt and the implications of fiscal contraction for the economy and for society • More of a political project, aiming at increasing the flexibility of the labour market and the shrinking of the social provisioning role of the state; the ‘political economy of the crisis’ reading • The ‘fiscal profligacy’ narrative needs to be displaced • The experience of the EU and esp. of its peripheral states reveals the failure of the current regime to revive the economy and to address the social ills – instead, undermining cohesion • Right & Left are facing each other in the restructuring of the political system/project; danger of the rise of the populist and fascist right in the face of the fragmentation of the Left; actors

29. Reflections on alternatives • Short-term measures - (i) Change in the narrative – regain the hegemony; (ii) abandonment of austerity policy – fighting poverty and inequality; (iii) reinstatement of public services - incorporation of social welfare objectives in economic policy; (iv) reversal of the deterioration in worker rights and employment protection regime; (v) kick-starting the economy especially in the periphery • Long-run project – (i) Foster long-term policy of sustainable development designed to deal with divergences within EU; (ii) adapt EMU to serve long-run goals; (iii) strengthen worker rights and restructure institutional framework, so that antagonistic wage policies are avoided; (iv) regulate finance • Reclaiming the European project – To the extent that the current regime precludes socially progressive solutions, need to change the EU radically; reclaim the European project