The crisis and the trick of the European structural reforms

The commentators have generally agreed to comparing the current global crisis to the crisis of the thirties of the last century. Historians will say in the future if the comparison was right. Initially, it looked also worse. Big investment banks were headed to collapse in the US as well in Europe. The growth was in retreat. At the end of 2009, the GDP had lost more or less five point in the two main western countries, the US and Germany. The unemployment had doubled in the US, adding new eight millions unemployed to the old ones. The same trend was plaguing the European Union. A very dismal prospect. But now the governments had absorbed the 1929’s lesson.

Over the 2008-09 all governments, in the US as well as in Europe, decided a massive monetary and budgetary intervention to offset the crisis, starting with the bailout of the banks. The economic recovery and the fight to the unemployment should have followed. So, to fix the mess stemming from the financial markets, the role of the state re-emerged from the shadows in which it had been ideologically relegated for many decades.

One might have guess that, after repudiating the Hoover's disastrous policy, a second phase would have followed to a sort of Roosevelt's new New Deal. However, this second phase never came. It proved to be an illusion and, at the end, a disappointment, similar to the long and deceptive wait in the French famous piece  En Attendant Godot.

In fact, financial institutions, national and international, promptly discovered that the Governments had everywhere increased the budget deficit which needed to be reined in. The strong increase of unemployment in the US and in the European Union, the reduction of labor income and of the welfare became a secondary, if any, issue.

The EU irrational behavior toward Greece and Spain

It is in this framework that the European Union, proved its crucial ineptitude in handling the Greek and Spanish budgetary problems. When George Papandreou, the new elected socialist Prime Minister, denounced the budget manipulations of the past conservative Government, and declared his determination to find, in agreement with the European financial authorities, an acceptable way to solve the problem, Brussels adopted an irrational and ruinous timing for deficit consolidation. The measures adopted were not aimed at solving the difficulties, but rather at punishing in exemplarily way a member State, making it an easy prey for the financial wolves. The stupidity of this policy is demonstrated not only by the social pains imposed to the Greek masses by a ferocious deflation, but also by  the fact that, a successful outcome of the fiscal plan will increase the Greek sovereign debt from the current 120 to 150 percent of the GDP by 2016.

Yet, the most intriguing example of the arrogant and flawed European policy is the Spanish case. No financial manipulation could be blamed on Spanish government. In 2007 the Spanish debt was 36 per cent of GDP, the lowest among the big Eurozone countries, well below the Maastricht parameter of 60 per cent, and  the budget showed a surplus around two per cent. Spain was considered a champion of fiscal discipline. But, the situation had been dramatically reversed when the housing bubble burst. The following deep recession, accompanied by an almost doubling of the unemployment up to 20 per cent, caused a wide budget deficit around 11 percent. The Prime Minister Zapatero proposed a vast plan of deficit cutbacks, but, not satisfied, the European Commission asked for supplementary draconian cuts. The point of depart was absolutely different from Greece; but the outcome, for the Spain too, will be a long phase of recession and of huge mass unemployment.

The Greek and the Spanish examples are the most telling, from the point of view of the European deficit obsession, reflecting the same inspiration of the conservative forces in the US. But the parallel would be misplaced. Let's see why.

Not "Tea party" activists

The European leaders don’t have to pacify US Tea Party activists, clamoring for   fiscal conservatism. It would be a mistake to interpret the European policy only through the prism of the budget consolidation. This is just the more visible scenario, but behind it there is a structured policy, a comprehensive idea of the European future. In simple words, the crisis is considered an opportunity not to be missed to apply the long resisted structural reforms: that is the deregulation of the labor market, the retrenchment of the social
spending, and the privatization of the public services and so on. According to this economic position, the growth and the employment recovery can only be brought by the development of the neoliberal structural reforms. In this doctrinal context the budgetary retrenchment is the preliminary, but not the most significant, issue of a new economic asset of the EU. The aim is to complete the continental up to now unaccomplished neoliberal revolution.

At the beginning of July, when most economists are arguing about the risk of a double-dip recession, Jean-Claude Trichet, the ECB president, states that economic recovery is actually coming. The deficit cuts recommended to the member states would not choke growth but rather restore the confidence. Yet he is adamant in reminding us that "structural reforms are fundamental if we want to increase the economic growth potential of Europe". And Jurgen Stark, the powerful ECB's de facto chief economist is absolutely explicit in affirming the ECB perspective: “It is not only fiscal consolidation. It's also a commitment by Governments to embark on structural reforms". What kind reforms?
 
According to Jean Paul Fitoussi, the reforms include: "making the labor market more competitive, removing disincentives to work embedded in various public policies, enhancing wage bargaining flexibility, and further liberalizing services”. So, if we take into account the European comprehensive economic policy, we have to conclude that not Herbert Hoover, but rather Frederick Hayek is a more appropriate reference.

In fact, the European financial authorities do not stop at evaluating the quantitative cuts of the public spending; they are more interested in their long-run social outcomes. Take the Spanish case. Zapatero government was asked from the European Commission not only to manage a dramatic spending retrenchment, particularly hitting the public employees and the pensioners. The crucial request was for an abrupt and draconian labor market reform, aimed to an extensive liberalization of the firing, giving the companies the freedom of collective firing on the basis of economic, technological and organizational reasons: that is, an unlimited freedom of sacking, reducing at the same time, the severance costs.

Greece and Spain are not isolated examples of a mix between fiscal policy and structural reforms. The clear imprint to the deflationist European course was impressed by Germany, the supposed main engine of the euro-area. According to the Bundesbank's estimates, the 2010 German budget deficit will amount to 5 percent of the GDP, the lowest among the major OECD developed countries. Add that Germany carries a giant trade surplus favored by the current Euro's decline. Given these data, one could have expected a macroeconomic policy to create a strong domestic recovery after the 5 % decline of the GDP in the 2009. Instead Berlin has in fact announced on June spending cuts of 80 billion by 2014, "the largest savings program in the country's postwar history". According to Angela Merkel the package is mired to strengthen the budget discipline, providing an example to other EU members, and also to implement the obligation set by the constitutional amendment to limit the public budget deficit to a maximum of 0.35 per cent of gross domestic product by 2016. The budget retrenchment, even though not needed, has given  the opportunity to go ahead with the labor market reform, cutting the jobless benefits which are supposed to discouraging unemployed to look  for new jobs, even less qualified and less paid. It is worth to remind that, after the past labor reforms, some millions of workers are already employed in under-paid mini-jobs (H.Seifert - http://www.insightweb.it/ [1] [1].).

From David Cameron to Mr Marchionne

In the UK, David Cameron, the new conservative Prime Minister, announced the British austerity plan that will target pay and jobs of state employees and welfare spending. The Financial Times has cheered the plan as "the first concrete step in the government's welcome push to cut the cost of the civil service". In fact, while the plan drastically limits compulsory redundancy payments to a maximum of 12 months earnings, the Office for Budget Responsibilities foresees loss 500,000 public jobs because of the coming fiscal consolidation. Of course, these measures will bring up a trade unions revolt. So it is not a coincidence that the government is also planning abolishing national pay bargaining and so reducing the negotiation power of the public workforce. The new conservative government aims to press ahead with the structural reforms that Msr.Thatcher left unaccomplished. The crisis is welcome in providing this opportunity.

The last events in Italy are a clear case of an attack to the workers’ rights. When Mr Marchionne, Fiat and Chrysler chief executive, undertook the restructuration of the Pomigliano factory in southern Italy, close to Naples, to build a new model of the small Panda, he requested draconian work reorganization as condition to keep working the plant's 5,000 workers. That included the increase of the shifts up to 18 a week, the increase of the supplementary hours, the reduction of the pauses and the intensification of the working rhythm. These are the work conditions in the Poland plant where Fiat already produces 500,000 Italian city cars, the Cinquecento. According to the International Herald Tribune, these conditions”mark a sea change in Italy's labor system". It was a tough challenge for the labor movement but, under the threat to bring the production to Poland, the unions accepted (or were subjugated to) the work conditions imposed by Fiat. You might guess that the forced deal would have satisfied the Fiat management. But it wasn't the case.
 
Mr Marchionne went ahead requesting that the norms related to illness of the national contract be renounced and, finally, that the right to strike, a constitutionally protected right, be renounced. Face the rebuff of these two last clauses by the FIOM-CGIL, the main union in the sector (while other four unions had accepted), a referendum was hold among the plant workers. That referendum implied an absurd as well as one sided dilemma between the acceptance of the Fiat's conditions or the plant closure and 5000 jobless.  Most workers, interviewed before the poll, answered that, being blackmailed, they were constrained to vote Yes. But an unpredicted and stunning outcome showed that 40 per cent of the manual workers had voted against the deal, notwithstanding the blackmail of the joblessness in an area where it is literally impossible to find out an industrial job.

Of course the center-right government of Prime Minister Berlusconi supported the Fiat's position. And his Labor and welfare minister cheered the Fiat's stance, suggesting that it had to become a new paradigm for the Italian industrial relations, helping to breaking down the national contracts and the Statuto dei Lavoratori (Workers rights' Statute), the main defense of the workers and the unions inside the factories.

The state of the art may be different in other European countries, but the Pomilgliano dispute is a clear example of the general strategy aimed to exploit the crisis to push back the workers' achievements and to hit the unions' bargaining power. Yet, at the same time, it shows how difficult it is to overcome the workers and unions' resistance.

The EU ominous long-term exit strategy

The policies at large adopted by the different European governments, under the pressure of the Frankfurt- Brussels axis (the European format of the Washington consensus) must not be considered as separate and odd episodes linked to the crisis. In effect, they are part of a general economic vision. The austerity plans are only the first round of an overall policy, whose objective is the implementation of structural reforms: labor law, welfare provisions, and union’s bargaining power. Such radical changes are supposed to implement the overall productivity and the member countries' competitiveness.

The rationale of this strategy, according to the Frankfurt-Brussels axis, should be found in the nature of a single currency area. Given that the member countries cannot increase their competitiveness by devaluating the currency, they need flexibility of the labor costs through the freedom of dismissals and the wage deregulation at the plant levels. It also implies a wide power of the companies to change the work organization in order to increase the productivity The austerity plans without the implementation of these structural changes would not allow the necessary increase in competitiveness within a single market in which the monetary and currency policies are centralized and the fiscal policy is subject to restrictive common norms.
In this sense, as The Economist argues, " long-stuck dossiers are finally moving", and a positive answer can be given to the old question raised by Jean-Claude Junker, the president of the Europgroup: "We all know what to do, but we don't know how to get re-elected once we have done it. The current crisis helps the solution to the extent that the pains and the changes are presented as "inevitable" in a context of economic decline, state's financial difficulties, and fading empowerment of the workers under the pressure of the mass unemployment.

Yet, the monetarist/neo-liberal supposed solution it is a flawed one. It won’t reduce the gaps relative to the real economies of the different countries. Instead, it puts each country in a desperate run to gain competitiveness vis-à- vis the others. In other words, a different way to disintegrate the European Union through a systemic and widespread social dumping. There may also be a different vision of the European technocratic authorities. If the structural reforms are implemented in the entire EU, they will give it a comparative advantage on other economic area, such as the US and China. But those areas will not accept an implicit European protectionist policy based on a structural deflationist attitude. They will react to the European dumping through currencies' intervention. In this framework, a two sided outcome could be foreseen in the light of the EU long waited structural reforms: on one side, a generalized internal dumping among the EU member countries; on the other side, a dumping policy toward other global trade areas. That is a path to destroy the Union and set a systemic non-cooperation with the other main area of the world.

A reversed New Deal

The structural reforms mean a gradual, destruction of the "European social model", through the cancellation of labor statutes, the weakening of the trade unions, the reduction of social welfare. A big difference with the dealing of 1929’s crisis. Then the advent of Franklin Roosevelt opened the way to the greatest social reforms of the US history. It is worth to remember that also in Europe there was a widespread enhancement of the welfare and labor achievement, as in Sweden and in France, while the fundaments of the Beveridge liberal platform and the Marshall's doctrine of the social citizenship were laid out.

Summing up, we entered the current crisis with a manifest failure of the neo-liberal policy and a long phase of growing social inequality. The European exit strategy is going to reaffirm and strengthen the same negative policies. For a short season we seemed to watch the triumphant return of Keynes. But it was a trick. In effect, the monetary and fiscal policies were set up to rescue the banks. Now we are faced with an amazing metamorphosis: Hoover's heirs have landed in Europe to a cheerful welcome.  But, as we have seen, this is only a more structured attempt to provoke a deep economic and social overhaul. Yet, it may very well bring an inevitable and increasing social opposition. The neo-conservative policies exacerbate the social disease, the inequality and the uncertainty of the future for the working and middle class and the new generations. Given the stupidity and the self-defeating attitude of the current political and ideological attitude of the European technocracies, many things might happen within the new and uncharted territory of the crisis and its developments.  The game may still be open in Europe, as well as for different aspects in the US.