The Euro Crisis, European Neoliberalism and the Need for a European Welfare State: The Current European Crisis Was Not Caused by Excess Public Spending and It Will Not Therefore Be Solved by Further Downward Pressure on Living Standards

By Stockhammer, Engelbert | Soundings, January 2012 | Go to article overview

The Euro Crisis, European Neoliberalism and the Need for a European Welfare State: The Current European Crisis Was Not Caused by Excess Public Spending and It Will Not Therefore Be Solved by Further Downward Pressure on Living Standards


Stockhammer, Engelbert, Soundings


Europe is in crisis. In the aftermath of a financial crisis that originated in the USA a severe recession has hit Europe. Not only is unemployment rising, but several European states are on the verge of bankruptcy as financial markets refuse to roll over their outstanding debt. European monetary integration has taken away economic instruments that might have been deployed under these circumstances: devaluation and central bank-financed credit to national governments. The policy response to the crisis has been an orthodox package of austerity and downward pressure on wages - essentially what conservative economists had recommended in the 1930s. The austerity packages have intensified social conflict in Europe, but they are not addressing the causes of the crisis. Rising public debt is the consequence rather than the cause of the crisis. The boom before was characterised by rapidly increasing private (rather than public) debt. Among those countries that are in trouble now, Greece is the only country that had substantial government budget deficits. Ireland and Spain had budget surpluses. The root of the crisis is a dysfunctional, neoliberal European economic policy regime rather than excessive government spending. But this policy regime has been reinforced by the present austerity packages. As a consequence Europe is experiencing a wave of class struggles over who pays for the crisis.

This article will trace the origins of the crisis to the neoliberal economic policy regime in the EU. It highlights the fact that neoliberalism has given rise to two different, complementary growth models: one of debt-led growth and one of export-led growth. Both build on wage suppression, and are ultimately unsustainable. While European integration has been dominated by neoliberalism, the left shouldn't give up on Europe. I argue that a European welfare state would be economically viable in that it would address or prevent many of the imbalances that led to the present crisis.

The EU policy regime

The European Union has an economic policy regime that is inspired by neoliberal principles. Its main goal has been to restrain inflation and public deficits. The economic policy mix of the Euro zone is enshrined in the Maastricht Treaty and the SGP (Stability and Growth Pact). It can be summarised in six points: First, fiscal policy is essentially national policy. The EU budget is restricted in size (to 2 per cent of EUGDP) and too small (and too inflexible) to serve a macroeconomic function such as providing an expansionary stimulus in the face of a crisis. Second, national fiscal policies are restricted in the short term, since budget deficits must not exceed 3 per cent of GDP (except in severe recessions) and they must aim at a balanced budget in the medium term. Third, monetary policy is centralised and is effectively inflation targeting, with the ECB (European Central Bank) independently having decided on an inflation target of close to or below 2 per cent. Fourth, financial markets are liberalised, internally as well as externally. Financial integration, i.e. increasing capital flows within the Euro area, has been the aim of a series of directives by the European Commission (the so-called Financial Services Action Plan). The EU foregoes any instruments for controlling credit growth or allocating credit. Fifth, there is no bailout clause in the Treaty, so that neither other national governments nor the ECB will support individual countries facing problems in financing themselves. Sixth, labour markets were supposed to be flexible, which in practice means labour market deregulation.

The stubborn emphasis of the European Commission and ECB on labour market flexibility, even prior to the crisis, not only reflects a certain class bias in their policy, but is also an essential part of the EU's policy package. The Euro area does not have any of the traditional economic policy instruments that could be used to deal with adverse macroeconomic shocks: exchange rate policy, (national) monetary policy and fiscal policy have been entirely given up or severely restricted. …

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