speri.comment: the political economy blog

Saving ‘Social Europe’

Reinterpreting the rules ‘by stealth’ is all that is presently possible in governing the Eurozone economy

Vivien Schmidt, Chair of SPERI’s International Advisory Board and Jean Monnet Professor of European Integration at Boston University

Vivien SchmidtDuring the euro’s sovereign debt crisis, European leaders have been obsessed with rules, numbers and pacts.  These include the ‘Six-Pack’, the ‘Two-Pack’ and the ‘Fiscal Compact’, each more stringent on the nature of the rules, more restrictive with regard to the numbers and more punitive for member-states failing to meet the requirements.  In the absence of any deeper political or economic integration, the EU has ended up ‘governing by the rules’ and ‘ruling by the numbers’ in the Eurozone.  As a consequence, austerity policies focused on rapid deficit reduction, along with pressures for structural reform which has often been shorthand for reducing labour rights and protections, have wreaked havoc on ‘Social Europe,’ particularly in the periphery.

Slowly but surely, however, under pressure from deteriorating economies and increasing political volatility, EU leaders have been changing the rules by which they govern the economy.  But they have not done this formally.  Instead, they have informally and incrementally reinterpreted the rules without admitting it in their discourse to the public. This has helped to slow the economic crisis, but not to end it.

Such reinterpretation of the rules ‘by stealth’ has done little to reduce public disaffection.  Nor has it done anything for ‘Social  Europe’ – as poverty, misery and inequalities rise, as unemployment stays unsustainably high in southern Europe in particular, and as both skills and hopes are lost for an entire generation of unemployed (or underemployed) youth.  It has also helped fuel the rise of the extremes, in particular on the right. That said, reinterpretation of the rules has enabled EU actors to bring about incremental changes that have kept the European economy alive, if not well, as deflation threatens and growth remains elusive.

The European Central Bank (ECB) has moved from ‘one size fits none’ rules for monetary policy, which exacerbated (rather than reduced) member-states’ economic divergences, to ‘whatever it takes’ (in the famous phrase of its President, Mario Draghi, in July 2012).  The pledge to buy member-state debt (if necessary) and the recent move to quantitative easing have brought the ECB close to a ‘lender of last resort’ in all but the discourse.  Yet, although widely seen as the ‘hero’ of the crisis, the ECB’s push for strict conditionality through austerity and structural reform as a quid pro quo for its intervention to stop market attacks has still contributed to the Eurozone’s economic slowdown and social misery.

In the meantime, the Council has largely continued to govern by the ‘one size fits one’ rules of intergovernmental negotiation that have given the most powerful member-state (Germany) outsized influence to impose its preference for ever-stricter rules.  But, even though Germany has kept up a discourse focused on austerity and structural reform, it has intermittently agreed to instruments of deeper integration and has added growth to its stability discourse, as well as, most recently, flexibility, which it claims is already embedded in the rules.  France and Italy have lately pushed for even more flexibility, politicising the budgetary oversight process of the ‘European Semester’ without, however, actually contesting the stability rules and numerical targets.  Such politicisation is part of a game to increase legitimacy with key national constituencies by ensuring ever more flexible reinterpretation of rules while using the EU’s outside pressure to keep up the internal push for reform.  The trouble is that this turns to EU into the scapegoat, and grist for the populists’ mill.

In all of this, the EU Commission has taken on the role of enforcer.  In its discourse it has consistently emphasised its strict and uniform enforcement of the ‘one size fits all’ rules of budgetary oversight.  In its actions, however, the Commission has allowed for increasing flexibility in applying the rules and calculating the numbers.  While such rules-reinterpretation by stealth has been beneficial, it has had the perverse effect of ensuring that southern Europeans continue to feel oppressed, even when accommodated, while Northern Europeans continue to feel deceived, regardless.  Moreover, it makes the Commission – and by extension the EU – the bad guy, responsible for impairing the functioning of national democracy by giving national governments no option but to follow rules and apply numbers that don’t work.

Finally, even though the European Parliament (EP) continues to have almost ‘no size at all’ in terms of setting policy, its critiques of Council and Commission action, along with its successful push to have the appointment of the Commission President linked to the winning party in the EP elections, have ensured it an increasing presence, if not yet influence over policy.

So, where does the EU go from here?  Incremental changes to rules are not the bold kinds of actions required to move Europe beyond the crisis once and for all.  But, for the moment, they are all that is possible.  In this spirit therefore I make a few recommendations for further reinterpreting the rules and adjusting the roles of EU actors.

To begin with, Eurozone governance needs to become more like other areas of EU legislation and use the ‘Community method’ for legislation.  This means bringing the EP into all Eurozone decision-making, while reducing the dominance of the Council.  The Council itself should become a more open and transparent arena for political debate about the rules.  In turn, the ECB should limit its focus to Euro-related issues of monetary governance, leaving economic policy to other institutional actors, but doing all the necessary as ‘quasi-lender of last resort’ and bank supervisor.

As for the Commission, the very fact that it now has a clear double accountability – to the EP (through the appointment of the leader of the winning party as Commission President) and the Council – is a potential game-changer.  The new Commission has greater legitimacy to go beyond the role it has played throughout much of the crisis.

It has thus far been the ‘enforcer’ of the European Semester in a centralised exercise imposing hard-and-fast, sanction-triggering numbers (however flexibly interpreted).  It should now become the ‘enabler’ or ‘advisor’ within a more decentralised system of supervision and support by opening up the process to national actors – not only experts but also MPs, NGOs, labour representatives and other stakeholders.  By empowering local actors, the European Semester could help generate more workable kinds of ‘structural’ reforms, fine-tuned for each member-state’s political economy.  Moreover, within this context, why not make accomplishment of Europe 2020 goals focused on investment in education, training and R&D, as well as on reducing youth unemployment and poverty, count for delaying deficit reduction?  Were the rules themselves to become more flexible in a positive way within such a decentralised process, the European Semester itself could become a boon for ‘Social Europe’.

Saving ‘Social Europe’ by these means can be done, but it will require a lot of imaginative reinterpretation of Eurozone roles and rules.  Let’s hope that EU actors are up to it.

An earlier version of this post appeared in the Social Europe Journal on 4 December 2014.

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Categories: Economics, Europe and the EU, Finance, Inequality, SPERI Comment | Tags: , , , , | Leave a comment

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