FEPS Fresh Thinking

Those who have seen the recent movie Contagion are aware how terrible this is when necessary precautions have not been taken in time. Let us be clear, the “crisis-beast”, or the financial markets have already been very successful in their contagion strategy. We have seen last week that two democratically elected Euro-zone governments, Greece and Italy, had to step down. Both situations are different and of course it is high time for the Berlusconi government to be replaced. Nevertheless, the situation gives us the picture that we crossed the threshold to post-democratic times. This is clearly expressed in a statement of EU Council President Herman Van Rompuy, when he said in Rome last week that “Italy needs reforms, not elections”. Read in this perspective the German philosopher Jürgen Habermas in his recent opinion piece in the Frankurter Allgemein Zeitung. He stated very clearly the danger of a post-democratic Europe and the neglect of legitimate concerns that there should be no poverty and that there would not be marginalised populations in European welfare states.

This should be the overall reference point of the analysis. Inequality is the inherent cause of the problem in Europe which we now call “sovereign debt crisis”. It is more than urgent to re-establish social justice. Re-establishing social justice means re-orienting our economic policies in the sense that these policies serve the people and not the opposite in which the people serve the economy. Such an approach is the general starting point of overcoming the crisis in Europe and elsewhere. Such a policy has to be more environmentalist, and more respectful towards the rights of all workforces and definitely more socially balanced and democratic.

The largely deregulated financial markets created products which were risky beyond imagination. Lower taxes heightened inequalities in many of the Euro Zone countries as incomes of middle and lower wage earners deteriorated significantly. These policies have decisively contributed to the “contagion” which the financial markets brought to Europe. Moreover, it is the core of the crisis.

The macroeconomic coordination mechanisms established in Europe since the beginning of the crisis in 2008 are in reality nothing more than simple austerity policies. Coordination therefore means alignment. Look at the reform of the European growth and stability pact, the introduction of the European semester, the European 2020 strategy and all the instruments for financial stability established recently.

There is a clear need for our economic policies to cure these macroeconomic imbalances! If politicians impose savings programmes all over Europe, they recognise that the mechanism of public borrowing is pushed to its limits, but they are not asking for the reasons behind it. Aggregate price stability is simply not sufficient at all. Austerity programmes all over Europe mean contagion and deep recession. The EU Commissioner Olli Rehn announced last Friday the prognosis of a recession in Europe from next year on – Here we are!
Hence the problem is quite simple: Either we cut our expenses and diminish our sovereign debt in the short and medium term while running a huge risk of raising in the long run or we increase income due to a sound fiscal policy which puts employment at the centre of our preoccupations. This creates further income, growth and welfare.

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  1. It is key that governments are responsive to the people who elected them and NOT to financial markets, which are totally unaccountable democratically.
    Financial markets are human constructs; they need to modified so they do not undermine democratic governance. They should be transformed from Poor masters to good servants of the real economy
    As Ernst Stetter writes, so clearly , the European macro agenda must move to a growth and equity strategy. Only restored growth will provide light at the end of the tunnel of this dark crisis

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