Europe is diverging: ignore it at your peril

by Lorenzo Marsili, European Alternatives Executive Director
Originally published on OpenDemocracy

In the optimist 1990s, the introduction of the Euro was to represent the kernel of the European integration process. The single currency was meant to act as the motor for “ever-closer” convergence of European economies, thereby promoting ever-closer integration of public spheres and national policies, leading eventually to a form of political union.

Such logic has by now been proven misleading and inadequate.  In the absence of a strong and common political direction, the EU is undergoing a process of structural divergence, highlighted by diverging employment, growth, productivity, competition, and fiscal trajectories. Far from producing cohesion, in the absence of common fiscal policies the euro is reinforcing such divergence-patters, undermining in the process the legitimacy and capacity for action of transnational institutions.

Monetary policy, the area where most integration in principle is already achieved, is just the most blatant example: failing transmission belts mean that interest rates set for the whole of the Eurozone by the ECB no longer translate into similar financial environments across member states.  The recent lowering of interest rates to a record-low of 0.25% has been much decried in Germany. But SMEs in Spain live in a totally different planet: the average refinancing rate for companies from the South of Europe is closer to 8% if not higher, more than double the borrowing costs for their Northern competitors. In the absence of exchange-rate fluctuations this translates into a tremendous drag on the competitiveness of Southern enterprises, thereby increasing the productivity gap within the eurozone. Similar considerations could be made about the refinancing rates of public debt.

Without the possibility of monetary devaluation to keep imbalances in check, and without courageous common fiscal policies, austerity calls for internal devaluation, hitting notably on labour, on social welfare and on investment for growth. A 2013 report by the Red Cross highlights that Europe is the only continent in the planet to be increasing rather than decreasing the number of poor people. This should come as a tremendous shock to all of us.

Ungoverned, the process of economic divergence risks locking Europe into long-term stagnation, rising inequalities and chronic unemployment. This is not the prophecy of Cassandra, but the bulletins of the ECB and the IMF read honestly. An average Eurozone growth rate of 0.5 to 1% in the next years is going, at best, to stabiles the job market at current unacceptable levels, while wealth continues to be polarized and half of Europe’s youth remains out of work in the South, producing a lost and grieving generation on the way.

This is not a recovery, but a joyless and jobless stagnation. Existing and planned EU mechanisms are at best merely palliative (such as the Youth Guarantee), if not downright recessive and pro-cyclical, such as the Fiscal Compact and ECB orthodox monetary policy. There is no European investment plan in sight, no “Abenomics for Europe”, no serious policy to cut the cost of debt refinancing. It isn’t a rosy picture.

Economic divergence turns the euro into an enemy: a single currency fit for some countries but profoundly over-valued for others, with a central bank unwilling to act courageously for fear of mutualising liabilities across member states. Economic patterns, left to their own, are pushing Europe apart. And one does not need to be a Marxist to believe in the terrific power of economic trends to influence social, cultural, and political evolution.

The public debate on Europe is speaking increasingly different and often antagonistic tongues in “core” and “peripheral” countries. We see new animosities building up, national stereotypes and distrust returning. With investment in education and research cut back in some member states as part of austerity packages, the skill-set of European youth is becoming increasingly differentiated. Even the principle of labour mobility, and especially the mobility of young people, is suffering. In theory the great transfer of youth we are witnessing across the EU could be an immensely positive factor for integration. But this mobility is coming to resemble more the migration flows of the past century, and less the circular movement of the vibrant Erasmus generation. It is young people from the South moving to the North, a uni-directional migration that deprives only certain countries of human capital and increasingly appears a coercive effect of power imbalances across the EU.

Bringing Europe back together and making it work for its citizens is possible. The good news is that there is no shortage of detailed proposals for what should be done. Over the last three years European Alternatives has been running over 70 citizen panels and 13 international forums in 16 countries, engaging thousands of citizens to build a detailed policy manifesto containing over 80 pages of policy proposals for a democratic and fairer Europe. Now we are taking the manifesto to 1 Europena countries with our Transeuropa Caravans.

There are concrete ideas to rein in the financial industry and return banks to their original role of protecting savings and lending to business; changing the status of the ECB to make it employment-focussed; building common minimum social standards that protect European citizens from falling into poverty. And again, introducing minimum salaries and a minimum income; industrial conversion; mutualisation of debt and investment for growth.

Many of these policies require structural Europe-wide legitimate and democratic governance mechanisms, touching on labour market, wealth redistribution, education systems, welfare systems, and industrial policy. But much can be done already with the current institutional set-up, provided there be sufficient political will. Countries such as France, Italy, Spain, and others on the receiving end of self-defeating austerity policies need to take a much tougher negotiating stance and push for the ECB – where they have a majority in the Executive Board – to engage in non-standard reflationary policy to avert the risk of deflation and restart credit to SMEs. Investment needs to flow to the periphery through the unlocking of commonly guaranteed project bonds. A Europe-wide plan backed with tangible resources needs to rein in youth unemployment.

We cannot afford to accept the results of the European policy debate so far, a depressing spectacle marked by a timid and ineffective banking union, an obsession with a 3% deficit limit set over 20 years ago in Maastricht, and a stark refusal of mutualisation of debt and non-standard monetary policy. Such policies and the Treaties that enshrine them need to be radically challenged, and “mainstream” parties, notably social-democratic parties, need to be at the forefront of such challenge during the next European elections. Or watch citizens move towards the extremes and away from the European project.

Economic divergence is causing social despair. And social despair represents a greater existential risk to Europe than the 2011 speculative attack on sovereign debt.  Ignore it at your peril.