Social Policy Will Be Critical To A Sustainable EMU

Also posted on Social Europe Journal

by Simon Deakin

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European policy-makers have some vitally important decisions to make in the coming weeks. The June meeting of the European Council is due to consider the role of social policy in the wider context of economic and monetary union ('EMU'). The background to this process consists, firstly, of the adoption in November 2012 of the Blueprint for a deep and genuine EMU which referred to the need for greater policy coordination in the 'field of employment'. Then in May 2013 the Commission Vice-President and Commissioner for Monetary Affairs informed the European Parliament that he was 'working on preparing proposals to strengthen the social dimension of EMU' and on 'finding ways to better integrate the social dimension in the current structures for economic governance', including 'strengthening the surveillance of employment and social developments within the European Semester framework'.

It is clear what this could mean: a renewed effort to impose deregulatory policies on the member states, of the kind put forward by the Troika in its dealings with Greece, Portugal and Ireland. The logic of this approach is that 'structural reforms' in labour markets, by cutting nominal wages and enhancing flexibility in hiring and firing, will restore competitiveness in the states and regions adversely affected by the crisis.

This approach is consistent with the new economic governance which has been developing since 2010 around measures including the 'six pack', the Euro Plus Pact and the Treaty on Stability, Coordination and Governance (TSCG). These measures are based on the premise that if a stricter regime of macroeconomic surveillance had been in place during the 2000s, the fiscal imbalances which threatened the stability of the single currency and the wider Eurozone after 2008 could have been avoided. This is a false premise. Prior to the onset of the crisis, all the Eurozone states with the exception of Greece were in compliance with the convergence criteria.

The problem was that their real economies were far from aligned. The future debtor states were mostly pursuing policies of financially-driven growth which were dependent on an expansion of private credit and on increasing asset prices in the markets for commercial and residential property. Thanks in part to loose arrangements for wage determination, wages in these states rose faster than productivity (Johnston and Hancké, 2009). The future creditor states, by contrast, were mostly following policies of 'endogenous' or industry-led growth which depended on targeted investment in capital goods, public support for training and labour force upgrading, and wage moderation supported by coordinated collective bargaining. They were better placed to deal with the shock induced by the financial crisis when it arrived in 2008, but it must be remembered that their competitive advantage was, in part, the result of policies in the 'core' which were, in effect, exporting wage and price inflation to the faster-growing 'periphery' (Armingeon and Baccaro, 2012).

The policy of enforced austerity, administered at first through the interventions of the Troika and subsequently through the 'new economic governance', does not address these fundamental imbalances. The TSCG, in its attempt to embed a pro-cyclical fiscal policy at the level of constitutional governance, is in danger of becoming a dead letter within months of its implementation. Wage cuts and casualisation of employment are inducing depression-type conditions in the indebted states, but in the absence of productivity improvements they cannot address the underlying causes of the competitiveness gap, as the IMF has recently acknowledged in its assessment of the response to the Greek crisis (IMF, 2013).

The question now facing the European institutions is whether they can demonstrate the flexibility needed to effect a change of course. The debate over the 'social dimension' of EMU is to be welcomed for at least putting the relationship between social policy and monetary policy on the agenda. A 'deep and sustainable EMU' can only be one which promotes sustainable growth and social cohesion. To get to this point, a deepening of efforts at economic and social policy coordination will be needed. But this cannot plausibly take the form of the socially divisive and economically counter-productive policies which have been pursued to this point.

What would a sustainable EMU look like? To begin with, it would acknowledge that the most successful countries and regions within the single currency area during the past decade have been those that combined investment in human capital with strong welfare states and coordinated wage bargaining. Egalitarian policies in labour and social security law, designed to narrow earnings inequalities while promoting labour market access, help to build a stable tax base. Active labour market policies, coupled with legally-mandated vocational training systems, enable economies to adapt to global competitive pressures and the 'creative destruction' associated with technological change. Solidaristic wage bargaining, based on the principle of maintaining a floor to wages and conditions at sectoral and national level, has helps to ensure effective demand for locally produced goods and services in the face of recessionary conditions.

The EU already has in place the institutional mechanisms needed to promote learning around 'what works' in economic and social policy. To this extent, the new economic governance marks a step forward. A shift of emphasis within EMU, towards a growth-orientated and egalitarian form of economic union, does not have to wait for Treaty revisions.

The European institutions have shown a high degree of adaptability in the face of the crisis. This is most clearly so in the case of the ECB, which has overcome supposed limitations on its mandate to become an effective line of defence against the destabilising effects of currency speculation, through its outright market transactions programme. The Court, in the Pringle judgment, also demonstrated flexibility in finding a solution to the constitutional issues surrounding the adoption of the European Stability Mechanism Treaty, at the same time validating the central bank's interventions in the market for sovereign debt.

It is now down to the other institutions to show similar flexibility. The June European Council provides the ideal moment.

References

Armingeon, K. and Baccaro, L. (2012) "Political economy of the sovereign debt crisis: the limits of internal devaluation". Industrial Law Journal, 41: 254-275.

IMF (2013) Greece. Ex-post Evaluation of Exceptional Access under the 2010 Stand-by Agreement (Washington, DC: IMF) available at: http://www.imf.org/external/pubs/ft/scr/2013/cr13153.pdf

Johnston, A. and Hancké, R. (2009) "Wage inflation and labour unions in EMU". Journal of European Public Policy, 16: 601-622.

This article is part of the EU Social Dimension expert sourcing project jointly organised by SEJ, the ETUC, IG Metall, the Hans Böckler Stiftung, the Friedrich-Ebert-Stiftung and Lasaire.

"March of the Makers" - rebalancing our economy needs more push from government

By Michael Kitson, Cambridge University Senior Lecturer in global macroeconomics, Assistant Director of the Centre for Business Research.

You can now read Michael Kitson on compassonline.org.uk

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If the Chancellor George Osborne is to turn his vision of reinvigorating our manufacturing sector, the so called "march of the makers", he and his government colleagues need to develop a coherent industrial policy.

The public policy debates which focus on austerity, withdrawing from Europe, and on limiting immigration misses the target. These are short term political agendas, that are not good for long term economic growth. We need Europe as a market for our goods and services, 50 per cent of our trade is with our European partners, and we need people coming into the country to boost our talent pool.

The need for an industrial strategy

There are too many piecemeal policies at the moment and there is too much focus on austerity, and reducing the size of public sector deficits and debt. But there is no coherent long term industrial strategy that will successfully rebalance our economy. The need to rebalance our economy is losing momentum when it should be at the centre of the agenda. We have to focus on stopping the "retreat of the makers" before we even get to thinking about the "march of the makers".

The economy is still stagnating. We are still really bouncing along the bottom, this is the worst recession and the worst recovery from recession for over one hundred years. In normal times, an economy recovering from recession should generate annual growth of three to four per cent. Sir Mervyn King, the outgoing Bank of England governor, refers to a "modest recovery" - but a modest recovery is a sign of failure.

When in March 2011 George Osborne called for a "march of the makers" he identified manufacturing as the key growth sector for the economy and announced a series of policy initiatives, such as: extending the export credit guarantee schemes; increased R&D tax credits; and the creation of new enterprise zones. But these policies have failed to generate growth because they do not deal with the fundamental problem which is the lack of demand in the economy.

The myth of the 'invisible hand'

The manufacturing sector has suffered benign neglect from governments of all persuasions from the 1960s and particularly from the 1980s onwards. The manufacturing sector has been allowed to decline based on the argument that markets know best and that the economy can be built on services. Manufacturing has been left to decline, whereas in the USA and Germany it has been supported. For some, the "invisible hand" of the market, will solve all economic problems - a phrase used only once by Adam Smith in "The Wealth of Nations". Markets rely on help from government to help them work more efficiently and become more effective - the role of the State is to support markets. If we just rely on 'market forces', the result is an unbalanced and weak economy.

The need to rebalance

In the UK, there are sectoral imbalances: we have seen a focus on the financial services and the relative decline of manufacturing. There are regional imbalances: London has done very well over the last thirty years while the North West and the North East have not. There are also trade imbalances: we have had a big balance of payments deficit and we are not paying our way; for the last thirty years we have been borrowing from the rest of the world to fund our consumption habit.

These three imbalances - in our sectors, our regions and our balance of payments - cannot continue and we are destined to see much lower growth for ourselves and our children in the future.

Rebalancing is important, geographically for the regions and also for the economy as a whole. It is not just about manufacturing but it is also about giving our high technology services, our creative industries, a much needed push too. We need long term investment in these sectors, and this needs to come from the public sector and the private sector working together.

Openness strengthens the economy

There is also the misplaced focus on reducing immigration. The UK economy has always been open to talent, and that talent has helped our economy grow. We need to be an open economy both to ideas and to people. Europe is one of our major markets if we withdraw from Europe it is going to harm economic growth.

The importance of investment

What we need is a coherent strategy to invest, and although the private sector will help, a lot of that investment will have to come from the public sector and that means increased government expenditure. We must relax the current focus on austerity, and cutting deficits, the main legacy we can leave our children is not the problem of deficits, it is the problem of low economic growth. If we want to get economic growth going we need investment and we need investment now and the public sector has got to be part of that.

"March of the Makers" - Why UK business need funds to grow and global talent to capture new markets

By Michael Kitson, Cambridge University Senior Lecturer in global macroeconomics, Assistant Director of the Centre for Business Research.

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How can we turn George Osborne’s much used phrase "march of the makers" into reality? We need to rebalance the UK economy: rebalance our industrial sectors; rebalance our regions; and rebalance our balance of payments.

But two years on from when he first promised to deliver that "march" there is still a problem as the financial sector remains seized up, with many small and medium size enterprises unable to access funds to borrow to invest.

The importance of innovation

We also need to look at how our economic system is failing, where are the structural holes and structural flaws in our system? We need to invest more in science and technology and we need to get those ideas into businesses, not just manufacturing but also into the service sector. We need to create the structures that ensure businesses of all sizes can be innovative and are enabled to develop new products and processes. At the moment there is no coherent strategy to do this, just a series of encouraging initiatives, and businesses are failing to innovative because they cannot access funds or ideas. A proper industrial strategy could solve these problems.

We cannot continue to borrow to spend

Crucially if we did allow business to innovate, this would be good for our Balance of Payments, which has been in deficit from the early 1980s. This means that the economy has been spending more than it earns, we are good at consuming and not very good at producing and we need to change that around. We have borrowed to spend and we can no longer rely on the rest of the world funding our consumption habits. We need to pay our way and to pay our way we need to get better at producing goods and services, we need to be innovative and produce more that is the way forward.

Focus on growth not austerity

The focus at the moment is too much on austerity and not enough on long-term growth. We need to rebalance our economy and rebalance the economic agenda, we need to focus more on how we are going to get long term growth rather than focus on austerity because austerity can destroy the long term foundations of economic growth.

The long term economic outlook for the UK depends on what happens in the rest of the world. We are not isolated from the problems in the Eurozone as this is one of our main markets. Growth in the newly industrialising countries, Brazil, Russia, India, and China, will help the world economy, and as they grow they will buy more of our goods and services helping us to grow too.

The current political focus on immigration will harm economic growth and will harm innovation. We need to be attracting talent from around the world to help drive innovation and growth. It is not surprising that we see the focus on immigration at the moment, we saw it in the 1930s, when we suffered the great slump, and we saw it in the 1970s with the rise of the National Front. Economic problems often result in a focus of "blaming" somebody else, blaming immigrants, and blaming other countries. We need to remain an open society and that means open to people coming in from abroad.

Investment is essential for long-term economic growth. We need investment in economic capacity - which could be driven by a National Investment Bank, charged with the role of developing long-term growth in key sectors. We also need investment in people - reversing the policy on immigration and being open to talented people coming in from abroad. The solutions are available: drop the dogma and grasp them!