Working the night-shift in the German austerity sweatshop – Part III: Back to the future with the Werner Plan

Analysis originally published in the EUobserver 13.12.10.

So how do we get out of this mess?

It’s relatively simple, really. All that has to happen is a rebalancing of competitiveness between the core and the periphery.

“Of course much of the responsibility lies with Germany, doesn’t it?” continues Lord Skidelsky. “The euro was constructed in a way that benefited an export-led economy like Germany, but not everyone else. They have repressed wages to create room for exports, which then chokes off growth paths for other eurozone countries, who can’t readily increase their exports to Germany.”

The short version is that Germany must be forced to sharply boost its wages and inject stimulus: “Domestic demand in Germany should be expanded,” he concludes.

But the detail in such a plan however would require that Berlin also re-regulate its labour market, and the stimulus must be on a massive, Chinese scale. Europe would also have to institute substantial, low to zero-cost fiscal transfers from the core to the periphery. This of course would have to be accompanied by the creation of a European Treasury.

“If the euro is to survive, it has to develop a central treasury with a budget of five to 10 percent of GDP capable of dealing with asymmetric shocks, such as they have in federal systems like the USA,” he explains.

“Logically, you will have to start all over again with a better design.”

Overcoming the imbalances would also require the imposition of common eurozone labour law, welfare and move towards tax harmonisation.

Basically nothing less than a United States of Europe.

A piece of cake, or even zucherkuchen, no?

You’d be surprised.

It’s not just Keynesians and other heterodox economists who recognise that profoundly deeper European integration may be unavoidable. The precocious original attempted architects of a single European currency could not imagine anything less.

As early as 1970, the Werner Plan, Europe’s first proposed architecture for a single currency and drafted by Luxemburg’s then prime minister, Pierre Werner, recognised that economic union had to accompany monetary union and called for a bold advance towards federalism, with the transfer of all fiscal powers – taxation, public spending and borrowing – from national parliaments to the European Commission.

Much more recently, Christine Lagarde, France’s finance minister, has said repeatedly in the last few weeks that further integration is inevitable. Jean-Claude Trichet, head of the European Central Bank on 30 November at a meeting of the European Parliament’s economic and monetary affairs committee called on European states to fuse together their budgetary processes in order to save the euro: “We have got a monetary federation. We need quasi-budget federation as well.”

While back in May, European Council President Herman Van Rompuy acknowledged that the underlying contradictions within the eurozone had been there from the start and it was time to resolve them: “We are clearly confronted with a tension within the system, the infamous dilemma of being a monetary union and not a full-fledged economic and political union. This tension has been there since the single currency was created. However, the general public was not really made aware of it.”

In 2007, at the start of the crisis, eurogroup chairman and Luxembourgish Prime Minister Jean-Claude Juncker put the public relations dilemma more laconically: “We all know what to do; We just don’t know how to get re-elected once we have done it.”

And two weeks ago, Lagarde’s compatriot and chief of the International Monetary Fund, Dominique Strauss-Kahn gave a remarkable, landmark speech putting flesh on the bones of what will have to be done.

“The only answer is more co-operation, and greater integration,” he told a conference of the European Banking Congress in Frankfurt. “It’s time to finish the job, to finally realise the common destiny of Europe.”

This will, according to the IMF boss, full “economic union”, with “Single Labor Market” initiative at the European level, the “sequel to the Single Market [Act] that harmonised goods markets,” that was completed in 1992. This would involve, he said, common European labour taxation, common welfare systems, and common unemployment insurance. National secondary education and research budgets should also be transferred to the EU, and Europe’s budget as a whole substantially increased, currently strictly limited by the EU Treaties, via European-level taxation, whether coming from VAT or carbon taxes, he concluded.

What Strauss-Kahn crucially left out was that naturally this couldn’t be done on the back of the current EU political set-up with its infamous democratic deficit. Even if we imagined that there existed amongst voters a substantial constituency for such a wrenching abandonment of the fiscal powers that are, apart from foreign policy, the defining features of any sovereign state, there would have to be much more democratic accountability for all this economic union, so it would have to be accompanied by political union too.

But as Costas Lapavitsas, the University of London economist and critic of the austerity strategy we met earlier, points out, this is not the sort of integration the likes of Strauss-Kahn, Van Rompuy, Lagarde, and Juncker have in mind.

“I’m sceptical that they have the democratic impulse for what this sort of integration implies. We are talking about the same sort of people who could not accept the popular rejection of the [European] Constitution[al Treaty in France and the Netherlands in 2005], who could not accept the rejection of the Lisbon Treaty by the Irish [in 2008].”

While the ECB may be talking about deeper integration, it is quite clear from a revealing RTE interview with the Irish justice minister, Dermot Ahern on 30 November, the famously independent central bank, itself quite used to being aloof from political influence, exhibits few scruples when it comes to the democratic process.

Ahern told the Irish public broadcaster that “quite incredible pressure” had been applied to the country to apply for a eurozone bail-out.

“There were people from outside this country who were trying to bounce us in, as a sovereign state, into making an application – throwing in the towel – before we had even considered it as a government,” he said.

“If you notice they are doing the same with Portugal.” Asked who these people “from outside this country” were, he bluntly responded that they were “quite obviously” the men from the ECB.

This distaste for democratic oversight is implicit in Strauss-Kahn’s thinking. If we read the whole of his speech, going beyond the head-line-grabbing calls for common EU labour policy, education policy and taxation, we discover more of thinking and behaviour along these lines.

The kind of federalism the IMF chief imagines – although he doesn’t call it federalism, preferring the term “a ‘Centre-Driven Agenda’,” would extinguish all direct democratic control over government spending.

“The most ambitious solution,” he says, “would be to create a centralised fiscal authority, with political independence comparable to that of the ECB. The authority would set each member’s fiscal stance and allocate resources from the central budget.”

In less fancy language, he is saying that a central, unelected body – just like the European Central Bank, although Strauss-Kahn says this Star-Chamber role could be played by the commission or “a separate, independent institution” – would decide exactly how much a country could spend on what and then hand out an allowance to a country, like the spending money a parent gives to a child, presumably so long as it behaves, eats all its vegetables and cleans up its room.

But even if there were the political will and popular support for a quantum leap forward in terms of any form of European federal integration, à la the IMF or a more democratic version, Lord Skidelsky fears “that the markets will call the shots long before this happens.”

Markets are running faster than history. “Events are outpacing politicians.”

This is the third of a four-part in-depth look at the eurozone crisis. To read the other articles in the series, please visit the following links:

Part I: Dr Merkel’s fiscal enema

Part II: The China of Europe

Part IV: End of the eurozone

Or, if you prefer to print off and read this multi-page feature offline instead, please download a PDF version of the full article.

The series is also available as an ebook for your iPhone, iPad or Kindle.

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