Can the Eurozone resolve its macroeconomic imbalances before the next crisis?
The Macroeconomic Imbalance Procedure attempts to prevent future economic crises within the Eurozone by remedying emerging imbalances. Precisely how to achieve this, however, has opened a struggle for the very direction of European governance
November kicked off the European Semester, the EU’s annual policy coordination cycle. With the EU economy gathering momentum, but with disparities in living standards among member states persisting, the EU faces the vital task of monitoring where the next signs of trouble may arise. Mandated with this task is the Macroeconomic Imbalance Procedure (MIP).
Adopted in the 2011 ‘Six-Pack’ of reforms, the MIP extended EU-level economic governance beyond fiscal policy to broader macroeconomic issues. The MIP consists of a scoreboard of indicators covering all EU members states monitoring external (e.g. current account balance, export market shares, unit labour costs) and internal imbalances (e.g. private credit flows, house prices, unemployment).
Should an indicator for a country cross particular statistical thresholds, an In-Depth Review (IDR) by the European Commission may be launched, leading to reform recommendations within the European Semester. If the Commission determines an imbalance is excessive, the (as yet unused) ‘Excessive Imbalance Procedure’ may be triggered – potentially leading to sanctions of up to 0.1% of GDP for uncooperative Eurozone member states.
The large current account imbalances experienced in the lead-up to the Eurozone crisis significantly inspired the MIP’s adoption. Whereas the perceived moral hazard of a shared currency meant Economic and Monetary Union (EMU) governance has centred on restricting national fiscal policies, the balance of payments crisis in Europe from 2010 laid bare the inadequacy of available governance tools to deal with macroeconomic imbalances. The MIP was thus intended to cover a perceived blind spot by complementing the Stability and Growth Pact (SGP) with a mechanism to remedy macroeconomic imbalances before they triggered a crisis.
The idea, however, that the governance of imbalances can be reduced to a technical process of surveillance is something of a fantasy. The MIP does nothing to resolve the structural deficiency that the EMU has made international capital highly mobile, but removed key adjustment tools for member states to deal with balance of payments issues (e.g. currency devaluation or sovereign default). Instead, the MIP places high expectations on European institutions to prevent future crises through the manipulation of macroeconomic indicators largely beyond government control via a regime of monitoring and sanction.
Nevertheless, as the only tool with any capacity to coordinate macroeconomic policies within Europe, the MIP has opened a new terrain of political contestation over the orientation of European economic governance. We identify three projects competing to shape the MIP, providing a lens on the major battles for the future of the Eurozone. Which project progressive forces choose to pursue is a crucial political question if the Eurozone has a chance to achieve its promise of European convergence and collective prosperity.
The first project pushes Europe’s deficit countries towards an export-led development model building on an interpretation of the Eurozone crisis as a problem of competitiveness. The EU’s general response to the Eurozone crisis has rested on fiscal consolidation, austerity and structural reforms, leading to stagnant growth rates, a delayed recovery and a sustained external trade surplus. This general crisis management strategy is reflected in the MIP’s close attention to current account deficits and unit labour costs.
For many leading EU policy-makers, the Eurozone crisis was driven by low real interest rates in southern Europe unsustainably driving up public and private debt, consumer prices, and labour costs. As such, large current account deficits in southern Europe were predominantly seen as a competitiveness crisis.
The solution to this crisis was to lower wages. Because devaluation within a currency union is impossible, restoring competitiveness must take place through internal devaluation, downward pressure on wages, and austerity. This narrative finds expression in the MIP’s detailed surveillance of unit labour costs and its asymmetric monitoring of current account surpluses vis-à-vis deficits (deficits larger than 4% of GDP trigger an IDR, compared to surpluses above 6%).
As a result, surplus countries, such as Germany, whose 2010 surplus of 5.6% conveniently fell under the threshold, are given considerably more leeway than deficit countries. This asymmetric focus on current account balances, combined with the emphasis on adjusting deficits through labour cost reductions, has had significant social consequences for southern Europe.
The second project takes a more systemic view of the Eurozone. If the objective of the MIP is to create real convergence between the core and periphery of the Eurozone, and to erase external imbalances between them, raising wages can be as effective as lowering them. If Germany and other core member states raise their wages, they also become less cost and price competitive, which causes lower trade surpluses (at least in the short run).
This would not necessarily be a big economic problem because it would raise the Euro area’s effective demand and could stimulate production. This line of reasoning may have helped the European Commission reach the conclusion earlier this year that German surpluses were damaging the stability of the Eurozone, urging the German government to increase investment and wages.
However, this project of eliminating macroeconomic imbalances by raising wages in core member states runs counter to the perceived national interest and deep-rooted beliefs in Germany on the virtues of competition and competitiveness. As Martin Schultz stated amidst his failed bid to become Chancellor, because German “exports are the result of good work”, Germany should not be “ashamed” by their large trade surplus. Despite pressure from some countries, in the absence of support from progressive forces in the core surplus countries, this project has had little transformative impact.
A third project has involved attempts to mainstream alternative conceptions of economic development into the MIP. While not eventually included, the legislative negotiations over the MIP saw the European Parliament propose indicators that went beyond conventional macroeconomics, such as inequality or environmental sustainability. In 2015, however, a range of social indicators (e.g. the activity rate, long-term unemployment, youth unemployment) were adopted, driven by the Juncker Commission’s push for strengthening a social component of EMU. The ECOFIN Council expressed concern at this inclusion ‘given the need to preserve the effectiveness of the scoreboard’. Some progressive forces, such as the independent Annual Growth Survey (iAGS), similarly questioned the association of social indicators with macroeconomic imbalances.
These tensions revealed the hegemony of macroeconomics in the governance of Europe, relegating ecological and social concerns to less prominent regulatory mechanisms. More significantly, however, it has exposed how the MIP is more than a technical exercise, but a political battleground signalling the strategic direction and orientation of European governance. While social indicators were eventually included in the MIP’s scoreboard, they are of peripheral interest in IDR analysis and reform recommendations to countries. The battle for progressive forces will be to mobilise social indicators to push for a transformative development project for Europe.
The MIP is not known for its democratic inclinations. It forms part of a longstanding trend to de-politicise conflicting economic priorities into a regime of surveillance that treats labour and social welfare systems as economic variables in need of constant adjustment. Just like the SGP, the MIP is not a tool for growth or real convergence capable of ameliorating the tendency of the EMU to produce economic divergence. Rather, it is another mechanism for disciplining member states in line with particular economic strategies. The Eurozone crisis is, therefore, likely to be repeated precisely because no real change in the fundamentals of European governance that spawned the last crisis has taken place.
The MIP and the SGP will need a radical reorientation if the European project is to work for all its member states by allowing for the expression of a collective democratic voice on Europe’s future economic strategy. While developing visions for a more democratic Europe, progressives should not, however, lose sight of more immediate remedies for rebalancing the MIP and the EMU more broadly. This includes strategies to raise wages and investment in core member states to solve the crisis of demand in the Eurozone, as well as pushing for governance instruments to recognise the social and environmental components of economic imbalances. While the MIP will not resolve the economic, political, and ecological imbalances of Europe, it will be a crucial site in the battle for the future of Europe.Print page
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