Whatever you wish to call it -euro-pact, Pact for the Euro, Euro Plus Pact- and from here on it will be known simply as the Euro Pact, public knowledge of its scope and function, in Ireland at least, has been extremely limited.
Whilst both the parties presently in government, and those that preceded them, campaigned resolutely for a Yes vote on Lisbon, and in so doing presented the European Union as a land of enlightenment, milk and honey, the subsequent experience of the EC-IMF-ECB bailout has served to temper public enthusiasm, to say the least, about the European project.
However, since day-to-day news coverage has been devoted to the potential permutations of corporation tax rates and bailout interest rates, the character of the forthcoming Euro Pact, in terms of its implications for the vast majority of the population, has been almost completely obscured.
This is hardly surprising: the neo-liberal ideology that underpins the Pact is propagated as common sense in Ireland, and the idea of Ireland at the heart of Europe, whilst assiduously promoted by astroturf civil society groups, never entailed the population of Ireland participating in politics in Europe.
Furthermore, many of the measures contained in the Pact coincide closely with the interests and objectives of Ireland’s ruling elites. Therefore it would be wrong to expect Ireland’s politicians or media outlets to break lifetime habits in order to submit the anti-social, anti-worker, anti-union provisions of the Pact to any scrutiny.
But as we shall see from this article by Juan Torres López and Alberto Garzón Espinosa, translated and republished with their permission below, the Euro Pact is an expansive expression of the same anti-democratic interests that forced Ireland into a bailout and saddled its population with the gambling debts of wealthy speculators.
And whereas the Irish population, when it comes to giving thought to these matters, has been largely bedazzled and disorientated by the implications of crippling debt and the myth of politicians who will pull an iron out of the fire on Ireland’s behalf, people in other countries, in particular, Spain and Greece, have opted to challenge the European Union’s anti-democratic character on the streets.
The time has long passed for polite discussion of the European Union’s ‘democratic deficit’: what we are now dealing with is a surplus of dictatorial power, concentrated in the hands of financial speculators, corporate elites and their political collaborators.
This Sunday 19th June sees a Europe-wide protest against the Euro Pact, flowing from the movement in Spain that started on the 15th May, whose central demand is ‘Real Democracy NOW!’.
There will be protests in Ireland too, in Dublin, Limerick, Cork, and Galway, to say No To The Euro Pact, a pact which, as Torres López and Garzón Espinosa outline below, as well as constituting a complete fraud and swindle, will be immensely harmful to the vast majority of people living throughout Europe. As their article shows, the demand for real democracy in the European Union has never been more urgent, but as the recent protests show, people in Europe have never been more alive to its possibilities.
19-J: Against the Euro Pact. Real Democracy in Europe NOW!
Juan Torres López and Alberto Garzón Espinosa
At the end of March the heads of state or government of the Eurozone, along with six other countries (Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania) signed an accord with which they said they were seeking to tackle the crisis and the debt problem that had been generated in Europe. Through this, they established a series of common obligations, and made the commitment that the various governments would apply the necessary economic measures in order to put the obligations into effect. The accord has become known as the Euro Pact and requires all the measures it entails to be subjected to the recommendations established by the European Commission. The latter, moreover, will act as principal supervisor and evaluator in the pact’s application and development.
The general objective of the Pact according to its signatories.
The Pact’s signatories declare that their general objective is to tackle debt by raising the competitiveness of the Eurozone, which is to say, facilitating the commercial performance of firms in those countries that use the euro in global markets.
To achieve this objective the pact has established four pillars which should frame the main lines of economic action on the part of national governments.
First pillar of the Pact: Fostering competitiveness
The first pillar for reaching this general objective is the fostering of competitiveness, and the signatories of the Pact believe that this can only be achieved by lowering prices, and that in turn, prices will only come down if wages are lowered. To this end, the need has been established to control so-called unit labour costs.
Since unit labour costs are the result of dividing nominal wages by productivity, in order to lower them once must either lower nominal wages (the numerator) or raise productivity (the denominator).
The pact proposes measures in both directions.
To lower nominal wages it recommends reforms such as the following (Those in inverted commas are quotations from the Pact which can be read here):
- ‘Review the wage setting agreements’, in order to restrain possible increases.
- ‘Review of the degree of centralization in the bargaining process’, in order to reduce the bargaining power of workers and thereby avoid them being able to exert upward pressure on wages to defend their purchasing power. As is well known, the more centralised a collective bargaining system, the greater the number of workers who participate in the bargaining, and, as such, the greater power they have. Conversely, the more decentralized the negotiation (as the neoliberal European leaders wish), the more difficult it is for workers to defend their rights or achieve higher salaries: if bargaining takes place at state level, for example, workers can have robust bargaining powers, but if bargaining is done at a personal level, they will have none. The signatories of the Pact propose this review so that the decentralization of bargaining can begin, because they know that in this way salaries will be lowered, which is what they want.
- ‘Ensure that wages settlements in the public sector support the competitiveness efforts in the private sector’. That is, the salaries of public sector workers must be reduced so that they do not serve as an upward reference point for workers in the private sector.
It is obvious that all these measures in the Pact are directed towards lowering wages, whether in an immediate manner (lowering them directly) or in an indirect manner (lowering the bargaining capacity of unions and lowering public sector wages that function as a standard for private sector wages).
As such, we can state that the Pact aims for a type of competitiveness that is doubly impoverishing. For one, because it is not based on improving the quality or the value of the products supplied by European firms, but rather, on lowering European wages to match the rest of the economies of the world, thereby lowering the income of the vast majority of the population and impoverishing European workers. The Euro Pact is a pact against European workers.
Also, because on top of that, it will depress the European economy, since the reduction of wages will also reduce spending conducted in Europe, which will translate into less sales for thousands of small and medium enterprises that live off the purchases carried out by European wage earners.
From this point of view, the only beneficiaries of the Pact are the large European global firms, those that are active in global markets, not just the European market, and whose profits, as a result, do not depend solely on spending conducted in Europe, as is usually the case with the immense majority of small and medium enterprises. For this reason we can state that the Euro Pact is also a pact against small and medium European enterprises.
And since SMEs create the majority of employment (an average of 70% throughout Europe) we can say that the Euro Pact is equally a pact against employment.
To raise productivity the Pact recommends ‘further opening of sheltered sectors’, ‘to improve education systems and promote R&D’ and ‘to improve the business environment’.
Significantly, not only does the Pact fail to mention, it even goes in the opposite direction of, certain factors which, since the time of the first economists, are known very well to be beneficial for raising productivity: good wages, good working conditions, job security, participation of workers in the life of the firm, appropriate and abundant social protection…this allows us to state that the Euro Pact does not, in reality, seek to raise productivity but merely to lower wages so as to raise the profits of the big European firms.
Moreover, it is known that of the three measures it proposes to raise productivity the most decisive by far is the second, and everyone knows that to improve education systems and promote R&D a lot of public money is needed.
However, the pact, as we shall see later, also proposes the reduction of public spending, and this means that one can be completely sure in venturing that instead of raising productivity, what the Euro Pact will do is lower it, through the deterioration in working conditions and in the endowment of social capital which is essential for raising productivity.
And furthermore, the Pact forgets something essential: even if with these measures productivity increases were achieved, it is not assured that, combined with parallel reductions in wages, they would give rise automatically to greater competitiveness, since this, as the signatories of the Pact themselves assume, depends on the price of the products on sale. And if it turns out that markets, as is the case in Europe -and the Pact proposes nothing to fix it-, are very imperfect, that is, are very concentrated and are dominated by a few firms with great market power, the most likely event is that these firms take advantage of the lower labour costs in order to raise their profits, and not to lower the price of their products. In fact, this is what we have seen happen constantly in European markets (and especially so in Spanish markets).
Therefore, we can say, that contrary to what it says, the Euro Pact is a pact against the competitiveness of the European economy.
Finally we have to make a general observation. Around three quarters of exports of European countries are ‘intra-European’, that is, with other European countries as importers. That means that if the capacity to consume of European economies is reduced (as a consequence of salary cuts and a fall in public spending) imports will inevitably fall..and as a result the lowering of the prices of European exports will have been for nothing, even if indeed they did manage to get lowered. This means that what the Euro Pact is going to produce is a fall in economic activity in the whole of Europe.
The second pillar of the Pact: fostering employment
The fostering of employment in Europe is sought by starting from the idea that unemployment is caused by a faulty functioning in the labour market which means that, in order to avoid it, reforms are needed that modify its regulation and its structure. Concretely, the Pact proposes measures such as ‘to promote flexicurity’, the ‘reduction of undeclared work’, the ‘increase in labour participation’, and ‘life long learning’, on top, of course, of the reduction in labour costs pointed out previously.
To achieve the last point the pact also recommends the ‘lowering of taxes on labour’, -that is, social contributions – a proposal that is doubly negative and harmful for the vast majority of the population. In one sphere, because it weakens the public pension system, the sustainability of which neoliberal leaders claim so often causes them worry. In another, because what it means in reality is a reduction in wage bills, and as such, the generation of more inequality, more impoverishment and less spending, with the problems that these bring, as we have already we have noted above. And, independently of this, it also involves raising the regressiveness of the fiscal system, since, at the same time as it is proposed that the overall tax take be maintained, it is also proposed that direct contribution (which depends on the capacity of each person) is substituted for indirect taxation, which is paid independent of the income of individuals. This is precisely what the European Commission has just proposed to Spain.
The idea that what needs to be done, in order to create work, is to cheapen labour and ease contractual conditions in labour markets by ‘flexibilising’ labour relations, which is the starting point of the Pact, was proven false more than seventy years ago. It is the idea that supposes employment is created only as a function of the price of labour, without considering that employment depends, in reality, on the level of effective demand in the market for goods and services since, however cheap labour might be, if business owners do not sell the products they manufacture they will not hire workers.
For this reason the Euro Pact is a fallacy and a fraud as an instrument for creating employment: it lowers wages, but because it simultaneously weakens the market for goods and services, it thereby obstructs or makes it impossible to create employment, due to the fact that the market for goods and services depends mostly on spending by workers, as we have already mentioned. In fact, empirical studies show that the most favourable conditions for the creation of employment in Europe in recent decades have not been those associated with flexibility in labour markets but with general macroeconomic conditions: wage levels, interest rates, economic activity, which is precisely what deteriorate as a result of the Euro Pact (Engelbert Stockhammer and Erik Klär, Capital accumulation, labour market institutions and unemployment in the medium run . Cambridge Journal of Economics, 2011, 35; pp. 437-457)
What the Euro Pact will achieve will be to make employment even more precarious in Europe, making it more insecure and temporary, as well as cheaper. And as such, it will become less productive because with the spreading of this type of work it will be progressively more difficult, in Europe, to foster economic activity that is of high added value and more competitive. What the Euro Pact will achieve will be to specialise Europe in the supply of cheap labour along with the supply of low quality personal services, as has already been happening with countries such as Spain, where these policies have been brought forward.
Instead of making Europe more competitive, the Euro Pact will turn Europe into a sort of large low-cost fairground, for sole exploitation, as we have said, by the big European firms that have captive markets inside and outside Europe and which, in reality, are those who have fostered this Pact and obliged governments to sign it.
Third pillar of the Pact: ‘Enhancing the sustainability of public finances’
The Pact stresses the need to guarantee the application of the Stability and Growth Pact that demands the reduction of budget deficits to below 3%. To this end it recommends reforming the pension system, the health system and social benefits, which is to say, expenditures that have the most direct impact on social welfare, but, of course, which point to very profitable provision of goods (private pensions, private health, private care) for private firms.
In particular, the Pact recommends ‘aligning the effective retirement age with life expectancy’, ‘limiting early retirement schemes’ and ‘using targeted incentives to employ older workers’, all of which amounts to weakening the public pension system and thereby foster its progressive privatisation, which is what is being sought in reality, as we have analyzed in more detail in other work.
Moreover, in additional recommendations the European Commission also proposes to press on with the process of privatising public services and firms, which is to say, to simply provide bumper businesses to private capital, since it is not true that privatisations mean net increases to public funds: the sales usually occur when prices are low, when they are not gifted, and there is no consideration given to the income that will no longer accrue from the moment that public services or firms are passed to the private sector.
To reassert these antisocial measures, the Pact calls for ‘translating EU fiscal rules as set out in the Stability and Growth Pact into national legislation’ with the objective of ensuring that the rules have ‘a sufficiently strong binding and durable nature’. In fact, it is proposed that framework laws, or even constitutional laws be introduced for this purpose.
This Pact recommendation is profoundly antidemocratic, and can be described as an authentic economic coup d’état, since it entails, on the one hand, setting forth the armour-plating of a particular type of political economy, legally prohibiting every other possible alternative, and, on the other, preventing those countries who lag behind the most in social investment and infrastructure from resorting in future to debt, which is usually the only means of achieving them. That is, it entails condemning them to backwardness and impoverishment.
This measure is, besides all that, deeply useless and to top it all will only cause there to be even more debt than what they wish to avoid.
The Euro Pact is not even going to achieve a reduction in the deficit and the debt with these impositions because it is false that in order to alleviate debt it is sufficient to limit spending, just as numerous empirical studies have shown, such as, for example, that of Mark Weisbrot and Juan Montecino, Alternatives to fiscal austerity in Spain. The most likely outcome is that these measures end up producing an equivalent or similar fall in earnings, because they reduce economic activity and, as a result, the generation of receipts for state funds, which ends up preventing budget imbalances from disappearing. They only serve to raise social malaise, social shortages and even a lack of public resources needed by private capital for the creation of activity and employment.
The fourth pillar of the Pact: reinforcing financial stability
Proposed in this point is a programme of ‘tax policy co-ordination’, but without specifying how it should work beforehand. In fact the states simply ‘commit to engage in structured discussions on tax policy issues’, which shows that the will to move forward, toward a necessary European treasury with powerful tax measures that promote a more productive and sustainable type of economy with a more just distribution of income, or toward the co-ordination of effective combat against fraud and tax evasion, is nil.
With regard to banking regulation, all that is stated is that ‘strict bank stress tests will be undertaken on a regular basis’, which is really taking the mickey out of European citizens, if it is borne in mind that the ones conducted have been a total fraud: it is enough to recall that they claimed Irish banks had been found in perfect condition, and only a few weeks later they had to be injected with €80,000 million euro to cover the holes in their balance sheets.
In the case of Spain the European Commission has also recommended moving forward with the process of privatising the savings bank, but allowing, before that, for public money to be spent on cleaning them up. With complete shamelessness, the authorities who subscribe to the Pact and who on so many occasions show their intense preoccupation for the misuse of public money, are recommending ‘the restructuring of vulnerable institutions, including private sector solutions’ and the ‘provision of government support in case of need’.
Finally the problem of public debt is left to the mercy of the European Stability Mechanism (ESM), the goal of which is to ‘safeguard financial stability in the Eurozone’ and whose function will be to provide financial assistance to those countries that require it. This assistance will be conducted by the European Commission and the International Monetary Fund in collaboration with the European Central Bank, and it is stated in the Pact this assistance will be carried out ‘subject to strict conditionality’ and must be geared towards ‘obtaining and maintaining the highest credit rating from the major credit rating agencies.’
Financial assistance will be conducted in the form of loans and under exceptional circumstances with the purchase of debt in primary markets, but always ‘on the basis of a macro-economic adjustment programme with strict conditionality’. That is, the Pact involves subjecting Europe to the conditionality that these organisations have always used for imposing neoliberal adjustment policies, the results of which have been disastrous in all the countries in which they have been applied.
The Euro Pact is a torpedo aimed at the waterline of Social Europe.
It is technically deficient because it is based on simplistic ideological conceptions, whose only force arises from the power of those who will end up benefitting from the proposed measures.
The starting point (that in order to confront the debt that grips Europe one must raise the competitiveness of national economies and that this can only be achieved by lowering labour costs) is doubly false.
It is false firstly because the debt that is causing very grave problems for many European governments and businesses and families did not arise from European economies being too uncompetitive or competitive. The public debt generated over the past two years is a consequence of governments having to deal with the financial crisis caused by international banking institutions and big hedge funds. And the private debt is the effect of the loss of incomes produced by the policies, such as those that are being proposed once again, of wage reduction that have been applied in recent years. This is demonstrated by the fact that the crisis and the debt have affected countries and economies with disparate competitiveness levels.
And it is also false because, as we have pointed out, it is not true that the cause of the debt is that salaries are too high or that greater productivity can be achieved by lowering them.
Therefore, the Euro Pact is a colossal swindle, conceived only to favour the profits of the banking sector and large firms because while saying it is trying to combat the debt what it will cause, with the type of measures it proposes, will be less employment, lower revenues for wage earners and for small and medium enterprises, and, as such, the debt will rise even further in future. This is exactly what interests the banking sector and what the banking sector intends! Because we should not forget that the business activity that brings it profits and power is precisely the generation of debt.
The struggle against debt on the part of European leaders is merely for show. It is fake. The real cause of the brutal increase in debt in Europe has been the drop in wage incomes in recent years, and the drop in tax receipts, caused by the policies they have been advocating. What the Euro Pact calls a struggle against debt is, in reality, a struggle against public spending destined toward the provision of social goods and services to the population on lower incomes, so as to justify its conversion into private business via the privatisations it proposes. Reliable evidence of this is the fact that the Euro Pact says nothing about public spending dedicated to subsidising big business groups, banks, or military industry when it comes to saving public money. If they really wanted to reduce unproductive spending, how come they don’t propose the reduction of military spending?
And the Euro Pact is not just a swindle on account of what it says, but also what it does not say, which is, because it does not address the real problems of the European economy and society: nothing is done to ensure that the banking system functions and goes back to providing finance to firms and consumers; nothing is proposed to rein in the speculators who are the real authors of the crisis and who are now gilding themselves thanks to the issue of debt; it remains silent over the spectacular increase in inequality, or the criminal use of tax havens within European territory itself, to name but a few.
The Euro Pact, in sum, is a fraud for hiding that the roots of the problem are in the very constitution of monetary union on bases which are technically wrong, anti-social, and only favourable for big business and banking capital.
Europe is ever more necessary but its monetary and political composition is moving closer toward the design of a dictatorship than that of a real democracy and for this reason decent women and men who aspire to live in a just world, respectful toward nature and in peace with human beings, must strenuously oppose this new attempt, from the Euro Pact, dedicated to submitting people to the sole logic of private profit.
The Europe of the neoliberal euro has given its all, and this has been nothing but an increase in inequalities, financial crises, job losses, the decay of working conditions and the closure of millions of small and medium enterprises. Only the profits of big capital derive a net benefit from the euro, therefore either there is a change in the conditions in which Europe, enslaved by this monetary union, finds itself, or there will be no other alternative than to struggle for an exit from the euro in order to apply other economic policies that deliver human welfare, sustainability and social harmony. We will address the content of these policies in a forthcoming article.
Juan Torres López (http://www.juantorreslopez.com) holds the chair in Applied Economics at the University of Seville and is member of the Scientific Board of ATTAC-Spain. Alberto Garzón Espinosa (http://www.agarzon.net) is a researcher at Pablo de Olavide University in Seville y member of the Scientific Council of ATTAC-Spain. Both are editors of www.altereconomia.org