Economic policy is triggering disaffection among countries — the very thing the pioneers of unity hoped to erase
The dream of the unification of Europe goes back at least to the 15th century, but it is the nastiness of the world wars in the 20th century that established its urgent need in our time. The challenge was well described by W.H. Auden in early 1939: In the nightmare of the dark /All the dogs of Europe bark, /And the living nations wait, /Each sequestered in its hate.
It is important to appreciate that the movement for European unification began as a crusade for cross-border amity and political unity, combined with freer movement of people and goods. Giving priority to financial unification, with a common currency, came much later, and it has, to some extent, started to derail the original aspiration of European unity.
The so-called “rescue” packets for the troubled economies of Europe have involved insistence on draconian cuts in public services and living standards. The hardship and inequality of the process have frayed tempers in austerity-hit countries and generated resistance — and partial non-compliance — which in turn have irritated the leaders of countries offering the “rescue.” The very thing that the pioneers of European unity wanted to eliminate, namely disaffection among European nations, has been fomented by these deeply divisive policies (now reflected in such rhetoric as “lazy Greeks” or “domineering Germans“,” depending on where you live).
As a result, the costs of failed economic policies extend well beyond economic lives (important as they are). There is no danger of a return to 1939, but it does not help Europe to have dogs barking, sequestered in resentment and contempt — if not hate. On the economic side, too, the policies have been seriously counterproductive, with falling incomes, high unemployment and disappearing services, without the expected curative effect of deficit reduction.
So what has gone wrong? Two issues need to be separated out: one, the counterproductive nature of the policy of austerity imposed on (or, as in Britain, chosen voluntarily by) governments; and two, a reasoned suspicion about the lack of viability of the shared euro.
The moral appeal of austerity is deceptively high (“if it hurts, it must be doing some good”), but its economic ineffectiveness has been clear at least since Keynes’s debunking of “the remedy of austerity” in the Great Depression of the 1930s, with unemployment and idle capacity due to a lack of effective demand. It is also self-defeating in reducing public deficits, because austerity tends to depress economic growth, so reducing a government’s revenue. Much of the eurozone has been shrinking rather than expanding since the inception of these policies.
However, we have to go well beyond Keynes in understanding the harm done by the ill-chosen cult of austerity. We have to ask what public expenditure is for — other than just strengthening effective demand (on which Keynes concentrated, focusing on the expenditure itself, rather than on the services it supported). Savage cuts in important public services undermine what had emerged as a social commitment in Europe by the 1940s, and which led to the birth of the welfare state and the national health services, setting a great example of public responsibility from which the entire world would learn.
Turning to the second problem — the euro, with fixed exchange rates for all countries in the zone — economies that fall behind in the productivity race tend to develop lack of competitiveness in exports, as countries such as Greece, Spain or Portugal have been experiencing already. Competitiveness can, of course, at least partly be recovered through slashing wages and living standards, but this would lead to great suffering (much of it unnecessary), and generate understandable popular resistance. Sharp increases in inequality between regions can be remedied, to be sure, by large-scale migration within Europe (for example, from Greece to Germany). But it is hard to assume that persistent population inflow to the same countries would not generate political resistance there.
The inflexibility of fixed exchange rates of the euro is inherently problematic when the economic performance of countries continues to differ. A unified currency in a politically united federal country (such as in the U.S.) survives through adjustment mechanisms (including large internal migration and substantial transfers) that cannot yet be a norm in a politically disunited Europe.
If European economic policies have been economically unsound, socially disruptive and normatively contrary to the commitments that emerged in Europe after the Second World War, they have been politically naive as well. The policies have been chosen by financial leaders with little attempt to have serious public discussion on the subject.
Decision-making without public discussion — standard practice in the making of European financial policies — is not only undemocratic, but also inefficient in terms of generating reasoned practical solutions. For example, serious consideration of the kinds of institutional reforms badly needed in Europe — not just in Greece — has, in fact, been hampered, rather than aided, by the loss of clarity on the distinction between reform of bad administrative arrangements on the one hand (such as people evading taxes, government servants using favouritism, or unviably low retiring ages being preserved), and on the other, austerity in the form of ruthless cuts in public services and basic social security. The requirements for alleged financial discipline have tended to amalgamate the two in a compound package, even though any analysis of social justice would assess policies for necessary reform in an altogether different way from ruthless cuts in important public services.
The problems we are seeing in Europe today are mainly results of policy mistakes: punishments for bad sequencing (currency unity first, political unity later); for bad economic reasoning (including ignoring Keynesian economic lessons as well as neglecting the importance of public services to European people); for authoritarian decision-making; and for persistent intellectual confusion between reform and austerity. Nothing in Europe is as important today as a clear-headed recognition of what has gone so badly wrong in implementing the grand vision of a united Europe.
(Amartya Sen is a Nobel prize-winning economist.) — © Guardian Newspapers Limited, 2012
Keywords: Eurozone debt crisis