Troika for everyone, forever

02.11.2012

By Steffen Stierle (ATTAC-Germany) and Kenneth Haar (Corporate Europe Observatory)

Harsh loan conditions and a wave of EU-laws that prescribe neoliberal policies have triggered a major attack on welfare and democracy in Europe. Can it get any worse? A look at the proposals for a fiscal union and deeper economic integration shows quite clearly that it can. (Links to versions in German, Dutch and Spanish below.)

Ever since the eurocrisis broke in 2010, the European Commission and the Council have adopted a large number of new European Union (EU) laws, rules, agreements and even a Treaty, intended to respond to the crisis with a clear formula: austerity. A complicated system of enforcement has made key political decisions a matter for technocrats in the Commission, making it hard if not impossible for citizens to have any influence. In short, what we’ve seen is an attack on welfare and democracy.

This is most clearly demonstrated in the policies imposed on Ireland, Greece, Portugal and Spain as a condition for loans from the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). The debtor countries have been forced to implement severe austerity packages, including cuts in public spending for health, unemployment benefits, pensions, wages, public employment and public investment as well as increases in value added taxes (VAT) and sweeping privatization programmes, dictated by the so-called Memorandums of Understanding. The result has been a recession which exacerbates the economic crisis and is causing a social crisis.

But we should not believe that the citizens of these countries are the only victims. A complex system of rules is being drawn up to apply the same policies in all EU member states. A system so comprehensive that it’s fair to ask if any more could possibly be done. With the Council now discussing the proposals for a fiscal union and ‘integrated economic policies’, it’s clear that the drive to impose neoliberal policies is indeed being taken to new extremes.

New Economic Governance - An overview of the state of affairs

Following the eurocrisis, reforms have been adopted promoting similar policies in all EU member states, particularly in the Eurozone. The combined effect is that member states’ economic policies will be restricted in the future. In order to understand what's at play, a quick walkthrough the most important measures is necessary.

The European Semester

The European Semester was first tried out in 2011, now it’s part of the routine. Every year in April, all member states hand in their draft budgets to be discussed with the Commission. Then in June, the Council discusses the budgets of each and every member state, and issue recommendations. This all happens before national parliaments have had a say. The recommendations are based on the misguided assumption that the crisis was due to lax public spending, so most member states, for instance, have been recommended to reform their pensions systems.

The EuroPlus Pact

At the beginning of 2011 the EuroPlus Pact was introduced. The pact is a clear indication of the political winds in the Council. Formal mechanisms to enact peer pressure to implement it was part of the bargain from the beginning. There are two key points in the EuroPlus Pact.

First, on sustainable public finances, the pact states that in order to “secure the full implementation of the Stability and Growth Pact, the highest attention will be paid to: Sustainability of pensions, health care and social benefits.” In other words, if cuts are to be made, they must first and foremost fall on social expenditure.

Secondly, in order to “foster competitiveness” the EuroPlus Pact points to attacks on wages and the introduction of more ‘flexibility’ in the labour market as the most important tools.

The six-pack

The six-pack (six separate EU-laws that came into force in January 2012) put member states budgetary policies under close surveillance to ensure rules on maximum debt and deficit are strictly enforced. If a member state violates the rules, it can face fines if it doesn’t follow a strict path towards improvement. And, if a member state has high levels of debt, it can – for the first time – be fined.

The six-pack has also led to surveillance of ‘macroeconomic imbalances’. In general these imbalances are defined against the background of competitiveness. That means that convergence shall be reached by a downwards harmonization. For instance, if wages are not brought down to what is considered conducive to competitiveness, if social expenditure is not kept low, and if pension reforms are not carried out or at least in the pipeline, several mechanisms are triggered to enact peer pressure or impose sanctions. Initially, the system of sanctions only applied to member states in the eurozone, but following a separate decision on EU funds, member states outside the eurozone can now be fined as well.

The Fiscal Compact

The Fiscal Compact – a treaty covering all member states except the UK, Sweden, the Czech Republic and Hungary- also follows the logic that public debt is the core problem and that is has to be reduced by cost-cutting policies. It is on course to come into force on the 1^st of January 2013.

The Fiscal Compact is first and foremost about member state deficits. Under this new treaty, signatory states have to adopt legislation forcing the government (and all future governments) not to run a (structural) deficit higher than 0.5 per cent if their debt is more than 60% of GDP or 1% if it is lower. This is a much stricter rule than the one in force in the EU. This locks in the austerity policies in times of crisis, as well as in the future. The Fiscal Compact is established for eternity. It is not supposed to be an option for the signatory states to leave it without leaving the eurozone, or possibly the whole EU.

The Fiscal Compact also obliges member states to reduce their public debt rapidly to 60%, if it is higher. This is currently relevant for almost all eurozone-countries. As a result of tax dumping, the global financial crisis and the huge bank bailouts, the public debt in the eurozone is on average 87% of GDP. That means that countries have to implement austerity measures until the public debt is - according to the rules in the Fiscal Compact - at a suitable level. If they don't reduce the debt fast enough, they have to accept a relevant transfer of sovereignty to the European Commission, which will intensify the pressure and impose serious sanctions.

The countries which sign the Fiscal Compact are obliged to take the rules very seriously. They need to anchor them in their constitutions, if possible and otherwise in an alternative prominent place in their legislation.

All in all, the Fiscal Compact means a weakening of national parliaments and pressure on public expenditure, such as public investment, education and social security. In that way it follows the same logic as the EFSF/ESM-loans, which put pressure on social rights and democracy in countries that have been bailed out.

The Fiscal Compact also takes a step further towards a common economic policy, by obliging member states to consult with the Commission and the Council on major new economic policy reforms.

The two-pack

The two-pack has not yet been finally adopted, but that will happen soon. When comes into force, member states “experiencing severe difficulties” can be put under enhanced surveillance, which implies an intrusive regime of monitoring. Should a member state receive a loan from another member state, from the ESM or from the IMF, a ‘macroeconomic adjustment programme’ will be imposed/designed.

The two-pack also contains a procedure which member state governments must follow when they draw up the budget for the following year.

The “Big Four’s” Plan

All these measures add up to a pretty strict regime, where attacks on social rights, on welfare and on democracy are the order of the day. That brings up the question as to whether the building process of economic governance in the EU is finished. Apparently it is not. The next steps are already in the pipeline.

The future strategy can be studied in a proposal put forward by the President of the European Council Herman Van Rompuy, European Commission President José Manuel Barroso, European Central Bank President Mario Draghi and Eurozone finance ministers’ leader Jean-Claude Juncker (The Big Four) at the EU Summit in June 2012. A paper from Van Rompuy further clarified the detail. They have proposed a set of new steps for European integration (fiscal union, stronger integration of economic policy, banking union) along the same lines, only this time they want to take it a significant step further.

The fiscal union: pre-approved budgets

The proposal for a fiscal union has two main elements. The first is a common budget in the eurozone, the second a system of new disciplines to enforce austerity policies.

Many economists have suggested that a fiscal union is the logical response to the eurocrisis. It would allow a common approach to confront the economic shocks that hit some harder than others. It is seen as necessary because of the flaws in the Economic and Monetary Union, and in the euro. The inherent imbalances in the eurozone have raised the question how to prevent them in the future. Some have pinned hopes on a kind of “transfer union”.

But clearly that is not what is on its way. The proposals from the Big Four are timid when it comes to the question of “common debt issuance”, which would guarantee moderate interest rates for debtor member states. And while there is talk about a “fiscal capacity” – a eurozone budget to address economic downturns in member states – proper care is also taken to underline the idea that support should be “structured in a way that they (the funds/money) do not lead to permanent transfers across countries or undermine the incentive to address structural weaknesses.” Translated that means that those member states which implement the hardest neoliberal reforms, shall profit most. That means that the budget will be used as a tool to push through social cuts, wage moderation and liberalization across the eurozone.

The proposal for a eurozone budget is not very concrete yet, but two serious problems meet the eye: the lack of democratic control; and the pressure on wages and social security systems, imposed as conditions for financial support.

The problem of democratic control is really obvious since there is no modus of democratic control in the eurozone. In the EU there is at least the European Parliament, which even if weak, can debate and exercise some control over the EU budget. But the new budget will be explicitly created outside the EU fiscal capacity. That means public money will be taken out of democratic control.

The other aspect of the fiscal union might have even bigger consequences, for it’s not about how to prioritize and administer what will possibly be a relatively small eurozone budget. It’s about how member states do their entire budgets.

How that will work can be seen from a question in Van Rompuy´s paper – a paper which it has to be said is difficult to understand in the main. The question is this: “What further steps could be taken to improve the effectiveness and enforcement of the new economic governance architecture (6-pack, 2-pack and the Treaty on Stability, Coordination and Governance (TSCG, also known as the fiscal compact, ed.)? Could safeguard clauses (i.e. ex-ante correction mechanisms) for national budgets be established?”

From this question – and from other documents on the matter – it becomes clear what the basic idea with a fiscal union is to be. Generally, the laws and procedures explained above, are responses to budgetary policies that are deemed unhealthy, and which require member states adopt more austere policies. But the next step, is to ensure that member state budgets abide by all these rules in the first place. In other words, budgets will have to be pre-approved by the Commission and the Council on the basis of the yardsticks developed with the Fiscal Compact, the Six Pack and all the other elements of the new system of economic governance. This will include – according to the Big Four – detailed requests to prioritize “budgetary envelopes”, for instance demanding lower expenses in one area and increases in another.

Economic Policy: the contracts

To clarify the important point of a deeper economic integration, we can again turn to Van Rompuy who asks the Council: “Should the principles in the EuroPlus Pact that guide policies on competitiveness, employment, fiscal sustainability, financial stability and tax coordination be made more binding? How would such principles be enforced?”

In fact a solution is already on offer, which can be seen from Van Rompuy’s joint reports, written with the rest of the Big Four. Together they suggest a kind of contract or “arrangements of a contractual nature” between the individual eurozone countries and the Commission. Policies will be locked in by agreement, that is, they are not supposed to be changed. Economic policies are likely to focus on attacking social expenditure and pensions to ensure ‘fiscal sustainability’ and on attacking wages and labour laws to ‘foster competitiveness’.

The proposal for these contracts also seems to imply that the European Semester is to be more important. Recommendations adopted under the Semester shall be made binding with the contracts.

The obvious idea of these contracts is the Europeanization of the memorandum policy which is currently being implemented in Southern Europe and Ireland through EFSF and ESM. Clearly a huge attack on democracy. National parliaments will lose out significantly. Important decisions on pension systems, wages, unemployment benefits, economic regulation and other aspects of social policy will be made in Brussels, sidelining national parliaments.

Banking union: lax regulation

The Big Four’s third proposal is the implementation of a banking union. At the core of the banking union the proposal is that there would be a Single Supervisory Mechanism (SSM), centralising European banking supervision in the hands of the ECB. This sounds appealing, since a strong supervisory mechanism is necessary. But since the ECB is beyond democratic control, there is a strong need for accountability and democratic scrutiny and control. And the way the SSM is to be implemented shows that democratic control is not a priority. The procedures chosen do not foresee any involvement from national parliaments and only very weak rights to have a say for the European Parliament.

The banking union proposals also include rules for the banks, e.g. regarding equity capital as well as a harmonization of the deposit insurance and a common framework for the liquidation of banks which are insolvent.

The banking union is intended to monitor banks closely to avoid costly collapses in the future. But in fact, the rules the ECB are supposed to enforce, appear to be remarkably weak. There is almost no rule in the pipeline which was not already agreed in the G20. And it will be much more difficult in the future for member states to implement stronger rules unilaterally. For instance, member states are not allowed to impose capital requirements on banks any higher than those agreed on at international negotiations, unless they are approved by the Commission and the Council. For the first time in the history of EU banking regulation, a ceiling – a maximum percentage of “capital requirements” has been adopted.

In principle, more regulation of the banking sector is a good idea. But there would have to be strong rules, and the rules would need to be enforced under democratic control. And they should touch the core problem with the banking sector: there are some banks which are simply too big, as is clearly demonstrated when the state comes to the rescue of big banks, such as Dexia. These banks have the potential to blackmail the states. They are able to take high risks in order to generate enormous profit rates, knowing that they will be bailed out if the business models do not work. To solve the too-big-to-fail-problem it is necessary to dismantle the big banks. The banking union does not answer this problem.

Outlook – the Troika forever, for everyone?

Since the Summer of 2010, the EU has developed something resembling a library full of procedures, laws, agreements and treaties that all underpin the same response to the crisis: austerity and attacks on social rights across the board. Some are enforceable via sanctions, others are kept in place by peer-pressure. As a result, the EU institutions, not least the Commission, have expanded their competence on budgetary policy considerably. But if the first sketches of the fiscal union and an integrated economic policy make it through the Council, we will soon discover that even more authoritarian measures can be applied to consolidate this transformation in the European Union. Not only will the Commission and the Council wield immense powers over budgets, they will exert that power based on well defined principles. These principles state that a good budgetary policy is an austere one that limits social expenditure, and that a good economic policy is one which puts the interests of business above social rights.

What this entails is not far from the policies imposed by the Troika on Greece, Ireland Portugal and Spain. Rather, it resembles a kind of Troika regime for the eurozone, and not just as a temporary painful economic programme, but as a perpetual model. And with a risk of this model becoming a core mechanism in the whole European Union.

Shaking the foundations

The Big Four, the Commission and the Council, are all aware that they are on course for troubled waters. Consequently, the proposals come with a suggestion to work out how they can be made legitimate and ‘democratic’. But to date, no real ideas have been produced, and it seems likely that the only thing they will offer, will be that the European Parliament is brought in now and then to comment. This is not likely to make the full package democratic in any sense.

The political elites of the eurozone have organized a general consensus about the direction. The EU Summit in October 2012 made clear that the Big Four’s proposals are the direction in which Europe is going. They have full support from the economic elite, including the employers’ organisation Business Europe, which has uttered unconditional support for the plans.

But it is not too late to resist. The plan is to develop concrete steps during the Summit in December, followed by the Summit in March 2013. The next few months are very important for the future of Europe. The best time to start activities against the fiscal union and the deeper economic integration, as Van Rompuy and Co. propose, is now.