Evropski ekonomisti za alternativno ekonomsko politiko Euro Memo Group

What future for the European Union – Stagnation and polarization or new foundations?

Gospodarska gibanja 475

Euromemorandum 2015

1. Macroeconomic policies and the alternatives to stagnation

The economic recovery in Europe forecast for 2014 failed to occur and Europe is faced with the
prospect of protracted slow growth, high unemployment and, at best, a minimal rise in real incomes.
Although output in most countries ceased to decline, it remains well below the level in 2008 in
Southern and many Eastern member states. Despite calls for greater budget flexibility by some
governments, the European authorities insist on adhering rigidly to deeply restrictive policies. In
place of the obsession with achieving balanced budgets, a coordinated fiscal expansion should focus
on boosting employment through the promotion of environmentally desirable investments and an
end to the attack on social spending.

The single currency must be complemented by an effective federal level fiscal policy which is able to
cushion downturns at the federal, national and regional level and to provide for effective transfers
between the richer and poorer regions. This should be based on a strongly progressive tax system
and complemented by the development of a European wide system of unemployment insurance. A
tax should be introduced on all financial transactions, and a uniform EU corporate tax rate should be
introduced so as to end the bidding down of rates as states compete to attract inward investment. At
the same time, off-shore financial centers must be strictly prohibited in order to avoid international
tax avoidance.

While current account deficits have declined, this is due to policies of deflation which have reduced
imports in deficit countries. In future, responsibility for eliminating imbalances must be shared
between surplus countries, which should expand their demand, and deficit countries, which should
invest in export industries. The regional and structural policies of the EU should be strengthened and
expanded, in particular through a major program of public and private investment, funded by the
European Investment Bank, focused in particular on deficit countries and, more generally, on lower
income states.

2. Finance and the euro crisis

According to the ECB Banking Structures Report, the assets of the euro area financial sector have
almost doubled over the past decade, to reach €57 trillion in 2013, nearly six times euro area GDP.
Furthermore, the expansion of shadow banking – a network of credit intermediaries involving
entities and activities outside the regular banking system, interacting across different jurisdictions –
has outpaced that of the rest of the sector. Despite a series of financial policy reforms since 2009 the
EU financial system has not been significantly transformed. It remains a system consisting of large,
too-big-to-fail units, based on universal banks which combine investment banking and commercial
banking activities under the same umbrella. Its banks and other financial units are highly leveraged,
while shadow banking, plays an ever increasing role in the intermediation process.

The banking sector should be radically transformed, creating units of smaller size which specialize in
a particular area of the financial services on the basis of clearly defined and generally applicable
rules. At the same time an effective policy framework is required to address the European shadow
banking system and its offshore dimension. So long as offshore centers are allowed to offer a safe
haven where financial institutions can circumvent regulation and taxes, a dual market environment
will persist. In order to overcome the vicious circle between bank losses and rising sovereign debt,
there is a need for a mechanism for resolving the debt issue at the level of the euro area. In order to
move towards a resolution of the euro area debt overhang, a conference of EU member states
should be convened. The combination of the ill-conceived single currency together with financial
deregulation and ineffective financial policy reform have contributed to the current entanglement,
the cost of which is paid by large sections of the population in the EU.

3. Industrial policy and the reshaping of the economy

Post-crisis Europe cannot return to the forms of production of the past, much of which has in any
case been lost during the prolonged years of stagnation. A new trajectory of ecologically sustainable
and socially inclusive development is required and public policies will be crucial in shaping it. The
new European industrial policy should focus on activities centered on the environment and energy;
knowledge and information and communication technologies (ICTs); and health and welfare. These
fields are characterized by labor intensive production processes and by a requirement for medium
and high skills which have the potential to provide good jobs. Such activities should be developed
with an expansion of activities in the public sector – including public research and development, and
environmental protection – and with new private activities driven by public demand within the
framework of regulation which supports the emergence of new dynamic markets. Policies should
focus on the sustainable development of local economies, including the emergence of new public,
non-profit and cooperative activities.

While EU structural funds and the European Investment Bank could play a role in financing such
efforts, the implementation of a European industrial policy will require a new European Public
Investment Bank or Agency, with similar organizations operating in each country. Such an
organization should be accountable to the European Parliament and have a substantial budget drawn
from Europe-wide resources. Funding should be of the order of 2% of EU GDP over a period of 10
years, or about €260 billion per year. This could be financed in various ways, including the emission
of Eurobonds; a new European Public Investment Bank which could borrow funds directly from the
European Central Bank; while the ECB could also directly provide funds for industrial policy to the
spending agencies concerned. These measures would make a major contribution to ending
stagnation in Europe while at the same time reorienting investment – both public and private –
towards a new model of sustainable development.

4. Social policy and combating inequality

The data produced by the European Commission itself provides incontrovertible evidence of the
social distress resulting from austerity policies. Millions more Europeans are in poverty while the
young people of the EU have been abandoned to mass unemployment. Because widening
inequalities are becoming a key political issue, the social policy chapter of this year's memorandum
focuses on inequality. Data from the Luxembourg Income Survey (LIS) show clearly a long-term rise in inequality across the EU. This can be traced to, firstly, a downward trend in the share of GDP going to labour and, secondly, increasing inequalities in wage incomes themselves. It is also necessary to
consider inequalities among member states, which have been drastically aggravated by austerity
policies and by a concentration of investment in Germany and a few of its neighbors.

Gender inequalities have also been worsened by austerity policies. Although, at the start of the
recession, male workers were most affected by rising unemployment, subsequent cuts to public
services have had a particularly heavy impact on female workers' employment and working
conditions. Also, the reduction or withdrawal of public services – including child care and facilities for
older people – has a disproportionate effect on women. Both the extremely adverse social
consequences of austerity policies and the strong trend towards wider inequalities necessitate a
major program of social investment. However, an effective program will require much greater
budgetary resources and will have to be situated within a sustainable development strategy
encompassing environmental, economic, social and cultural dimensions.

5. International trade and investment policy

– the Transatlantic Trade and Investment Partnership  (TTIP)

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 primarily intended to reduce the few remaining tariffs between the world
economy's two biggest trading blocs; its central objective is to dismantle and/or harmonize
regulations in areas such as agriculture, food safety, product and technical standards, financial
services, the protection of intellectual property rights, and government procurement. Investment
liberalization and the protection of investors' rights will also be central issues. Protagonists of
Atlanticism even herald TTIP as a new ‘economic NATO', by means of which the Western powers will be able to curtail the rise of emerging powers like China or Russia. 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 0.5% of EU
GDP, and will be phased in over a transition period of 10 years. Increased unemployment and
adjustment costs due to trade liberalization are downplayed or neglected altogether. The
deregulation involved in the trade deal will threaten public health, labor 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. At the moment, it is highly dubious whether the trade agreement will deliver any net
economic and social benefits to EU citizens. The prevailing approach to trade policy-making should
be abandoned, and a fundamental rethink of EU trade policy needs to be put on the agenda. This
includes as well other trade agreements such as CETA – the Canada-EU trade agreement, which in its
current form should not be ratified by the EU parliament.

6. EU neighbourhood policies

The EU neighborhood policies which are targeted at the post-Soviet space and the Mediterranean
have contributed in 2013 and 2014 to the conflict in Ukraine. The Eastern Partnership has focused on
the conclusion of Association Agreements with European successor states to the Soviet Union –
except for Russia. These Association Agreements have a free trade component and a geo-political
orientation. The partial transfer of the EU's acquis comanutaire to the post-Soviet countries serves
both ends. The Association Agreements are directed against the existing strong economic links
between Russia and its neighbors and compete with the Russian initiative of a Eurasian Economic
Union. In Ukraine, the population has been deeply divided on the issue of closer relations with the
EU or Russia. When the then Ukrainian government decided against signing the Association
Agreement with the EU due to both the dire economic situation and Russian pressure, a strong
protest wave in the Western and Central parts of the country emerged and led to the downfall of the
Ukrainian government. With Russian backing, there ensued a separation of Crimea and a military-
political separatist movement in the Donbass region with particularly strong economic and cultural
links with Russia.

Neither the Association Agreements with post-Soviet countries nor the free trade agreements with
Mediterranean countries take the development asymmetries between the two sides into account.
Trade liberalization is likely to lead to de-industrialization in the post-Soviet and Mediterranean
countries while the partial transfer of the acquis commautaire drastically reduces the policy space for
industrial policies. Asymmetries between the EU and neighboring regions are therefore likely to
increase. An alternative policy orientation is therefore necessary. First, the Deep and Comprehensive
Free Trade Agreements should be replaced by mutually advantageous cooperation agreements that
preserve policy spaces for the neighboring countries. Second, energy issues loom large in both the
Eastern Partnership and the Mediterranean policies; the EU should strive to reduce its dependence
on energy imports by reducing the energy intensity of production and promoting renewable
energies. Third, EU external policies are becoming militarized. The conflict in Ukraine has led to a
closer interaction between EU and NATO structures. These tendencies should be reversed and
capacities for peaceful conflict resolution should be strengthened.

Full article is available in Slovenian language.

Only a part of the articles in the publication Gospodarska gibanja (Economic Trends) is written in the English language. Please visit the Slovenian web page.


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