From the “social dimension” to European social/democracy and beyond

11. lokakuuta 2013

This a condensed version of the talk I gave at the Conference on Restoring Socio-Economic Convergence in Europe in Brussels on 10 October 2013 (my powerpoint-presentation can be found here). The conference was organised by the European Commission, DG Employment. A summary of the conference will be available shortly, also in Finnish.

It is a good idea to introduce a social dimension to the EMU. What has to be taken into account, however, is that there can be conflicts between different means and aims. The characteristic consequences of austerity, which seems part and parcel of the current EMU, go against social concerns. These consequences include unemployment, rising inequalities, marginalisation and exclusion. Moreover, enhancing private property rights and competition in “free markets” create tendencies towards wealth and power concentration. This is because many processes are self-reinforcing through positive feedback loops. Subsequently, wealth and power concentration result in increasingly asymmetric power relations in society, thus making it more difficult to tackle social problems in the future.

Also aspects of competitiveness can go against social concerns. “Competitiveness” means of course many different things, as in the growth strategy of Europe 2020. The term can refer to energy sustainability or human capital and education etc. What it often means, however, is “modernisation” of welfare systems and labour markets, translating into lower wages for many and the weakening of labour rights. These are not only contradicting the aims of the “social dimension” in their own right but also, again, reinforcing and increasing disparities and asymmetric power relations in society. What is more, competitiveness often involves lower taxes for firms and for mobile private wealth and capital, thus further strengthening the same tendencies.

Moreover, it is fairly easy to see the contradictions evoked by austerity and competitiveness. To understand these we need only the concepts of fallacy of composition and effective overall demand. The compositional fallacy occurs when it is assumed that what is possible for a single given actor at a given time is possible for all of them simultaneously. For instance, if there are 30,000 jobs on offer in a country, and 300,000 unemployed, all of them could get jobs, but obviously only ten percent of them at most could do so at the same time. This is a simple illustration of the fallacy. Understanding more complex economic paradoxes requires understanding the concept of effective aggregate demand. Demand is based on the readiness of actors to pay for goods and services, and on their actually making good on this willingness. Whether the actors have money to do so, however, depends on a complex of conditions. Production capacity tends to grow, but if there is not enough efficient demand, the result is unemployment of resources, a recession or depression.

Policies revolving around austerity and competitiveness tend to be counterproductive. If the multiplier effects of austerity measures – welfare downsizing, lower wages, unemployment etc. – are large enough, the result is a classical ”paradox of thrift”. Attempts to save generate more debt, as has happened in Europe during the euro crisis. The current account imbalances can be analysed in a roughly similar manner. The absence of adequate common institutions can easily create the illusion that a surplus country is somehow independent of the conditions of the (importing) others.

The EU is only a relatively small part of the world economy. In the 2040s, the EU is probably, assuming current membership, about 5% of the world population and 10% of world GDP. The same contradictions re-occur on a much larger scale, in the global political economy as a whole. Thus the project of making the EU more “competitive” tend to come at the expense of others, reducing worldwide aggregate demand.

For these reasons, any attempts at adding a social dimension – or strengthening the one that allegedly exists – to the current EMU have to be assessed in the global political economy context. Imagine, however, a model of social/democratic federation of Europe (with a slash to stress the difference to the actual programmes of the contemporary European social democratic, labour and socialist parties). The ideal-typical model of social/democratic Europe provides a perspective from which we can better see the potentials and limitations of the social dimension.

In parallel with the significant EU budget – increasing the EU budget 7-8 fold – and European tax revenue, new forms of democratic participation and representation will be developed. In economic policy, the aims are full employment and social justice, with the main emphasis on fiscal instruments. Monetary policy is made subject to general economic policy goals, functional finance is enabled, and the European Central Bank is democratized. The EU has active regional policies, and at the same time the principle of subsidiarity is comprehensively applied. The Union guarantees a basic minimum income to all its citizens, it implements coordinated and otherwise harmonized income and wage policies, and endeavours to influence the rate, composition, and direction of economic growth through active public investment policies. This simple model – however static and unambitious it may appear to some – serves to underline the very limited aims of the current proposals by the Commission to add a social dimension.

From a wholistic perspective, of course, the formation of effective aggregate demand in a single country – including the EU – is dependent on what happens elsewhere.

Mere coordination of economic policies between states — including the EU — or the implementation of simple measures such as a financial tax, for example, are not enough to make interdependence sustainable. Moreover, we should also ask how can coordination of autonomous national economy policies succeed without common institutional arrangements that are binding on all? Because the EU is so deeply intertwined with worldwide political economic processes, global reforms would also contribute to the metamorphosis of the EU. These could reinforce each other.

In conclusion, I would like to stress that mere monitoring, development of new indicators and coordination, or ”exploitation fully the scope of the current EU budget”, are unlikely to make any significant difference to the current situation. The Commission admits that the full realisation of the ”social dimension” requires changes of the basic treaty of the union. Thus the Pandora’s box is opened. This is a good thing, because then we can consider revising the institutional arrangements of the Union in a much more thorough manner. This has to be done democratically, though. I agree with Jürgen Habermas proposal for a democratically elected assembly or convent to discuss and outline the future contours of the Union, to replace the current design.

At any rate, the basic thrust of the current EU policies is contradicting the declared social aims. Even the promising proposals for a European unemployment benefit scheme and the ”pooling of macroeconomic sovereignty” are rather modest proposals compared to the requirements of the social/democratic model (and what is more, representing the US as a model for the social dimension is deceptive and discouraging). But the problem does not concern only the EU; we are talking about contradictions of the world economy as a whole.

Thus I have been arguing for a possible future in which a cosmopolitan EU is able to develop better common institutions as part of a far broader global whole.