27 May EU elections 2019. The fundamental discussion that never took place
Three years ago, there was a chance to change European politics for the better. It was not long after the Greek debacle. The Troika – the Commission, the IMF and the ECB – had forced Greece on its knees. As a consequence of their ‘reforms’, wages fell by up to 40%, savage cuts were implemented in social welfare, pensions, health care and education. The lucrative part of Greek infrastructure – including the harbour of Thessaloniki for example – was sold off. Still, Greek businesses continued to go out of business. Strange, because neoclassical theory says that lower wages lead to investment and productivity growth. It seems impossible for the mainstream to understand that, in fact, the reverse is true. Kleinknecht and other macroeconomists proved that lower wages decrease productivity growth. Kleinknecht et al. looked at 20 OECD countries over a time span of 44 years. Put colloquially, Kleinknecht’s argument is that when wages fall, there is less incentive for investment. Why invest in innovation and technology if wages fall anyway and when there is full globalization? This very simple theory explains most of the so-called productivity puzzle (though certainly not all of it).
Anyway, what was the chance? People everywhere were tired of austerity – cuts and more cuts while at the end of the day the budget deficit had grown. Much less in the popular eye is the issue of macroeconomic imbalances in the EU. The story goes back to 2003. The Germans started to implement wage moderation when Schroder came to power. This was in flagrant contradiction to an agreement (called the golden wage rule) which had been agreed upon by all countries before the launch of the Euro. The golden wage rule (the theory goes back to Joan Robinson) holds that wages need to rise in sync with productivity growth plus the rate of inflation (which was set at 1.9% at the time by the ECB). If the golden rule is being followed, economies will reach their optimal state. Unemployment, for example, will be frictional (that is Robinson’s theory anyway).
If wage growth evolves in all countries according to the golden rule, some countries will of course still be doing better than others. Substantial wage differentials will exist, but – and this the point – the most productive countries would not be able to accumulate enormous current account surpluses (the difference between imports and exports), while less productive ones would, correspondingly, not accumulate enormous deficits. Today, and for several years already, Germany has the biggest current account surplus in the world. The effects of German wage moderation have been disastrous for the manufacturing output in Europe. The competition on the basis of labour cost per unit of output was such that, by 2010, a product made in Germany was one fifth cheaper than an identical product made in France (which adhered to the golden wage rule). With Italy, the difference in price was nearly a third.
Could the problem be remedied? Wren-Lewis and Varoufakis and many others argued in favour of a Keynesian solution. In 1944, in Bretton Woods, Keynes had advocated the installment of one big international clearing bank to which all countries of the free world would be a party. The bank would check the evolution of current accounts, force countries with excessive current account surpluses to appreciate their currency and make interest free resources available to debtor countries so that they could catch up in development. Given this macroeconomic regulation, Keynes argued that capitalism would work much better than before. Among other things, it would prevent a crash such as in 1929. But Keynes lost the argument. Instead of his Clearing Unit we got the IMF.
The problem is that EU economic governance (Maastricht, the six pack, etc.) does exactly the contrary of what Keynes proposed. Adhering to neoclassical bogus orthodoxy, to the Commission, surpluses are never a problem (to them they are only the expression of hard work – sure, and for which wages?). Deficits, on the other hand, need to be adjusted. According to European governance, if the GDP/debt ratio of a member state exceeds a critical threshold, the country is obliged to implement ‘reforms’: the further flexibilization of labour markets, decreasing the level of social welfare benefits and protection (unemployment, pensions, care), the further privatization of public services in infrastructure, health, education, etc. The net result is deflation or what Keynesians call secular stagnation – low investment, low productivity growth, lack of aggregate demand, growing inequality and increasing poverty. It is, basically, un-development.
Is it possible to overhaul German wage moderation and EU economic governance? It obviously cannot be overhauled in Germany. It cannot even be addressed at EU level. There is no way to change economic governance in Europe without abandoning the neoclassical orthodoxy on which it is based. This is just not going to happen, not as long as power relations do not change anyway. So, there were few options left and this is the discussion that never took place.
Some, like Varoufakis for example, thought that we had time to prepare for the EU elections of 2019. The ‘plan’ (so to speak) was to organise the whole European left (social democracy, the left, some Greens) around the key demand of changing economic governance in Europe. Imagine that it would have worked. Today, the S&D fraction would be the biggest in the EU parliament (EP). Without a majority in the EP, the Commission cannot function. It is the parliament that is sovereign, not the Commission. The parliament embodies ‘the will of the people.’ Could it have worked? We will never know. Unfortunately, the plan generated no interest whatsoever. So far for political vision.
Others considered the EU beyond salvation and advocated a Lexit (a left exit). The exit idea lives within the right and the extreme right and within the left, such as Die Linke in Germany, the left in France, the extreme left in Italy and there is, of course, Corbyn in the UK. The ‘plan’ (if you like) is to break away from the Euro, return to the original currency, depreciate and compete with whoever else. This idea gained prominence and popularity in Italy for obvious reasons. When I asked one of its main proponents, an extremely vocal Italian professor of macroeconomics – a former proud Communist and today a loyal senator of Salvini’s extreme right Lega – by how much he thought the new Lira should depreciate, he couldn’t give me an answer (but he sent a paper, written by himself and some assistants, arguing against his own case. It seems that political fantasies do not do so very well in peer-reviewed literature). How much more additional unemployment was this going to create in Italy?, I asked. No idea. Of course, depreciation would create unemployment as it stifles domestic aggregate demand. No macro-econometric models exist for the simple reason that it is not possible to build a model that predicts the future if the starting condition is fundamentally different from anything that occurred before. There is simply no basis. Bagnai tried, but as said, the conclusion of his article is not what the professor tells his electorate.
Aside from all this, what would the Italians do if, for example, France would also decide to drop out of the Euro zone? This sounds fantastic now, but two years ago, extremely serious people, such as professor Sapir (macroeconomics again), were leading the charge. Sapir even had a complete plan ready: France was going to drop out on a Friday, after the stock markets in Europe had been closed. It had to be before a long weekend, with Monday off. The state would print the new Francs over the weekend. ‘Whatever comes next, we’ll deal with it somehow’ seemed to be the ‘thinking’ behind this James Bond-like operation. So, both the French and the Italians would depreciate their new currency. How many (tens of thousands of) unemployed people would they create, while, needless to say, in both countries, as in most, the foundations of the political system are at stake with every election, with the extreme right constantly gaining support. I will now not go into the MMT (modern monetary theory) revendications and their political consequences, but please see, for example, here.
This is the discussion that never took place.
The elections solved absolutely nothing.
In Germany, the SPD got its worst result ever. Die Linke ends up at a miserable 5%. The Greens, on the other hand, did great. The Greens got good results a bit everywhere, but I am certain that in Germany they have done exceptionally well because they have consistently and uncompromisingly attacked the blatant racism of the extreme right as well as the xenophobia of some who should know much better. There is no doubt that a lot of progressives refused to vote for Die Linke because they fundamentally disagree with Lafontaine’s diatribes about Fremdarbeiter and the like.
In the UK, Labour, which two years ago was the biggest political party in the whole of Europe in terms of membership, managed to get its worst result since the end of the Second World War. No one of the sect will ever blame Saint Jeremy himself, but I know a lot of people – left wing people, people from the political center, middle class people, not so politically interested people, intellectuals, socialists, immigrants, EU citizens and the younger generation who would gladly vote Labour if only Corbyn’s Brexit position would not be unacceptable to them.
In Sweden, the Social Democrats are hanging on. The Swedish Democrats and the Moderaterna are gaining support. What will happen when Sweden will be fully confronted with the global slowdown or a new recession? Democracy is a great good, but what’s the purpose if there is barely any information, discussion, debate or polarisation about issues that are really fundamental? During the campaign, once again, everybody tried to be so different so that once again everything stays the same. It is the unbearable lightness of politics in an age in which fundamental issues need to be addressed – and quick because we are running out of time.