The Progressive Post

The challenge of Europe: growth and social cohesion

We must act with the utmost urgency because the intensity of the crisis has generated an alarming extension of poverty.

09/11/2017

The Great Recession and the errors in European economic policy have led to a sharp increase in inequalities; a problem that, along with climate change, is the particular challenge for Europe in the next decades.

 

The inequalities that are emerging are morally unjust, undermining economic growth and dangerously undermining the social contract on which the legitimacy of democratic institutions is built.

In 1945, after the destruction of two world wars and a turbulent interwar period, not even the most optimistic of observers was able to imagine the extraordinary transformation of Europe in the following decades. Europe, with obvious exceptions, experienced a period of political stability and economic and social progress unprecedented in the history of the continent.

The factors that explain these decades of prosperity were the consolidation of democracy as a system of government in Europe, the financial aid provided by the United States, Keynesian policies that softened the frequency and intensity of the recessive phases of the economic cycle, the construction of modern welfare states and the process of European integration inaugurated in 1951 with the founding of the European Coal and Steel Community (ECSC). By the end of the twentieth century, in short, Europe had succeeded in becoming the place of the world with the most balanced combination of wealth generation, on the one hand, and social cohesion through public policies for the redistribution of resources, on the other.

Europe, with obvious exceptions, experienced a period of political stability and economic and social progress unprecedented in the history of the continent.

The economic effects of successive shocks from oil in the 1970s, and the inability to respond with economic policies, represented a paradigm shift whose most prominent features appear in the Reagan and Thatcher economic programmes. Their policies sowed the seeds of the recent Great Recession, which began in 2007 with the American Subprime mortgage crisis, from whose ravages we are still suffering.

It is evident that the oil crisis marked a turning point in the economic history of the Western World. Since the mid-1970s, the economic growth rates of the advanced countries have been lower and economic developments have been unpredictable, despite the scientific and technological advances that have taken place. However, in parallel, large emerging countries such as China, India or Brazil have experienced an astonishing economic progress.

The economic crisis, which has not yet been overcome, erupted when almost no one expected it and was the most profound and complex the world has known since the 1930s. In the first phase, governments used a very expansive fiscal policy to mitigate the collapse of economic activity. At the same time, central banks reduced interest rates to almost 0%, injected the necessary liquidity to avoid disruption of the international payments system, and later purchased huge volumes of public and private debt. Finally, public authorities rescued financial institutions with solvency problems, with huge amounts of taxpayer resources.

To minimise the likelihood of new financial crises, it is necessary, for example, for European banks to have higher capital levels and that new taxes are applied to cover any future public bailouts.

Nine years after the fall of Lehman Brothers, it is possible to analyse the successes and mistakes of European economic policy, as well as the fundamental trends that will shape the evolution of the economy in the medium and long term. First, in recent decades the economy has generated increasing and disproportionate levels of debt, which explains the hypertrophy of the financial system, the excessive risk taking by banks, the formation of huge bubbles in asset prices (property, shares, etc.), and the accumulation of unsustainable imbalances in the current account balance of countries such as the United Kingdom and Spain. In this regard, governments have made serious mistakes in financial supervision and, above all, in financial regulation. To minimise the likelihood of new financial crises, it is necessary, for example, for European banks to have higher capital levels and that new taxes are applied to cover any future public bailouts.

Secondly, in the macroeconomic field, Europe clearly erred in defining the pace and composition of the fiscal consolidation process initiated in 2010, which first deepened the economic gap and further thwarted the recovery of activity. As a general rule, the need to reduce public deficits in countries such as Greece, Portugal or Spain should have been more gradual and a great deal of suffering avoided. The current economic and social drama in Greece is one of the nefarious consequences of excessive fiscal austerity policies, a tragedy that could have been mitigated by a better European economic strategy.

These errors also reflect the shortcomings of the institutional architecture of the Economic and Monetary Union (EMU), which in the coming years must be endowed with three key elements in order to ensure the continuity of the single currency: the mutualisation of debt of the EMU Member States; the establishment of a real budget and a Eurozone Treasury that, as in the United States, can make fiscal transfers to coun-tries with lower relative per capita incomes or which are experiencing economic difficulties; and the gradu-al harmonisation of fiscal and social policies.

Thirdly, the Great Recession and the mistakes in European economic policy have led to a sharp increase in inequalities. This is a problem which, together with climate change, is the particular challenge for Europe in the next decades. The inequalities that are emerging are not only morally unjust, they also hinder economic growth and the social contract on which the legitimacy of democratic institutions is built.

We must act with the utmost urgency because the intensity of the crisis has generated an alarming extension of poverty, highlighting the shortcomings of our welfare state.

In the coming years, therefore, its reduction must be one of the priority objectives of the European Union. For this, action by government is necessary on three fronts. The first is economic growth: through policies for macroeconomic stability and policies for effective competitiveness and innovation, Europe must trigger productivity gains that generate new jobs in the heat of economic expansion and, at the same time, allow a rise in wages in real terms. The second front is fiscal reform that reduces fraud, brings the taxation of capi-tal income closer to that of employment income, taxes wealth more heavily, and eliminates tax benefits that favour the wealthy and large corporations without economic justification. The third is the strengthen-ing of the welfare state by increased public spending to provide a better quality of public education and health and, in general, produce more effective redistribution.

We must act with the utmost urgency because the intensity of the crisis has generated an alarming extension of poverty, highlighting the shortcomings of our welfare state. In Spain, almost 13 million people currently live at risk of poverty or exclusion, more than 700,000 households have no income at all and more than 2.5 million workers are poor despite having a wage.

Spain has become a deeply unequal country in the EU rankings, which should lead us to a new design for our welfare system, incorporating policies to avoid social exclusion because, in many cases, access em-ployment is not enough.

This is how we Spanish socialists are thinking we are therefore proposing a Basic Minimum Income focused on those families who are doing badly and require income support, without losing sight that the goal is a full recovery of the economic and employment rights of the beneficiaries.

Our economy can afford to dedicate new resources to hundreds of thousands of families who need sup-port. The welfare state needs not only to restore the state benefits reduced by the Right’s aggressive cuts, but also to promote new policies aimed at a society badly hit by the crises and the mistaken responses that have accompanied it.

In the coming years, the European economy must recover some of the features that today have been lost, those which gave this continent the best quality of life in the world, because of its balance between economic growth and social fairness. Social democratic policies are without doubt the only ones that can heal our wounds.

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