ISES :: Institute for Social and European Studies Foundation

ISES XVI International Summer University

REINVENTING THE FUTURE

25 June – 9 July, 2011

By Juozas Kasputis (MA), Vytautas Magnus University

Austerity without Growth: the Unsustainable Policy of EU Governments

Lecture presented by Guido Montani (University of Pavia)

The European project is facing a crisis. The EU is felt as an irritating bureaucracy. The Maastricht Treaty was an unsatisfactory compromise: a Monetary Union without an Economic Union and Political Union. In the current situation the European Union is considered as a set of institutions useful for national governments, but not as a long-term project. Since the Lisbon Treaty did not solve the problem of the European government, France and Germany started to talk about the need for “European governance”. On the peak of financial crisis France and Germany took the leadership, imposing intergovernmental solutions, outside the traditional “institutional triangle”: the European Parliament, the Council of Ministers and the Commission. The problem was thus conceived: how much should the virtuous states of the Union pay in order to avoid the failure of the vicious states? In order to do that, the European Stability Mechanism (ESM) was established, thanks to a change in the Treaty, so that the finances put in the ESM will always be under the control of national governments. But the intergovernmental method and the will to establish a European directoire are the true causes of euroscepticism, the revival of nationalism and the rise of populist movements in Europe.

In spite of EU crisis, the European project is not dead. The European Parliament has become the only legitimate institution representing the will of European citizens. Since 1979, on the occasion of every change in the Treaty, the European Parliament was able to increase its power. Some recent events show that the European Parliament resists to the increasing lordliness of national government. It is exposed by recent initiative “Europe for Growth. For a Radical Change in Financing the EU”. Today we have one European currency for 17 member states, but 17 national financial policies. This asymmetry does not work. “Europe for Growth” proposes two ambitious goals. The first is to end the system of national contributions. The present budget of the EU can be totally financed by 1% of VAT, a carbon tax and, if necessary, by a financial transaction tax. The second goal is a public investment plan, financed entirely by Project Bonds issued by the EIB. The European Parliament is not considered as a crucial institution, national governments make main decisions. In order to maintain the growth the participation of society is decisive. The election is key element in democracy. A European growth policy is impossible without European democracy.

The Future of the European Social Model in the Light of Austerity Programmes

Lecture presented by Mario Nuti (University of Rome “La Sapienza”)

The European Social Model is not exactly defined. The European Social Model (ESM) is a controversial subject. The ESM has been praised for positive aspects of European economic performance. At the moment the model is claimed to be in a crisis. Author insists that the European Social Model is one, recognizable in spite of European diversity, it is alive.

The US economy conforms to the neoclassical theory of markets. The EU relies more on the non-market institutions. The welfare state requires higher taxes. Both the EU and the US models use the advantages of market economies. Critics have alleged the superiority of the US system in terms of growth, job creation and employment. The US outperformed the EU in the 1990s up to the mid-2000s. But some of the smaller EU social dialogue countries, like Ireland, Austria, the Netherlands and Denmark, had an exemplary performance in the same period, while the EU outperformed the US from the 1950s to the 1990s. Relative EU and US performance depends strictly on the periods selected. 

In the last 10 years ESM has suffered some dilution, due to several factors including: the rising pension burden of an ageing population, the rising cost of available health treatments, opportunistic behavior (moral hazard). Another major factor diluting the ESM has been EU enlargement to the post-socialist countries of central Eastern Europe. EU candidates adopted EU competition policy; restrictions on state aid; improvements in state governance. But the EU authorities did not require of the new members the convergence with those policies that add up to the social dialogue model that characterized the European model. The crux of the matter is that it is impossible to maintain current relative and often absolute standards of living in the more advanced countries while, at the same time, following policies of the free mobility of factors and free trade. Protectionism, and/or constraints on migrations and on capital mobility, would have to be introduced to support living standards and welfare states in the more advanced countries, at the expense of lower overall productivity and lower living standards and growth in the emerging countries. 

This is the dilemma facing advanced countries, including all those adopting a European Social Model. The stringencies of the Growth and Stability Pact had already forced a certain dilution of the ESM, but eventually the Model was wrecked by the cuts in government expenditure adopted as a response to the global economic crisis of 2008-2010. The ESM, though diluted, have allowed the older EU members to fare better, during the recent crisis – in terms of social costs - than the less welfare-minded New Member States of Central Eastern Europe. And the US model has also been transformed in the crisis, re-instating the state as a major actor, taking care of the welfare not just of workers but of shareholders, creditors and managers of bankrupt private financial institutions. 

In conclusion: the European Social Model is alive and well; it has a distinctive identity in spite of cross-country diversity; it is not a superior model but it partakes fully of the advantages of a market economy and has specific merits in social protection and the composition of conflicts; it has been diluted in the last ten years as a result of various factors.