A Slow-Motion Economic Disaster

It is no secret to readers of this blog that Europe’s political leadership is entirely out of touch with the real life conditions that people live under in Europe. The reckless fiscal policies imposed on member states by the EU leadership over the past 4-5 years have damaged the living conditions and the future prospects of perhaps as many as 200 million people in Europe. In 19 EU member states, youth unemployment exceeds 20 percent, while in at least two it is between 19 and 20 percent. In 7 member states it exceeds 30 percent, with three countries – Croatia, Greece and Spain – seeing more than half of their young go unemployed.

This is nothing short of a social and economic disaster, unfolding in slow motion without much media attention. Sometimes, though, Europe’s political leaders get an attention spurt and decide that they want to do something about that disaster. The latest fad is some sort of “social protocol” that is supposed to monitor and (in theory) initiate policies against the worst exhibits of the unfolding disaster. Euractiv.com reports:

As the European Commission prepares to issue its first-ever social policy recommendations in the framework of the strengthened European Semester of economic policy coordination, there are lingering questions as to what the whole process will actually achieve, with critics branding it a “communications exercise”. As announced last October, the EU executive will publish its assessment by next month on five “key social indicators”, together with its usual macro-economic recommendations. Poverty, inequality, household income, employment rates and youth joblessness will all come under scrutiny as part of the social monitoring process.

So now, after five years of destructive austerity policies with higher taxes and spending cuts; policies that have driven unemployment to depression levels in many countries; after five years of trying to balance government budgets in the midst of sharply rising demand for poverty relief entitlements and tax base erosion; the EU now starts wondering how people are doing in Europe.

Back to Euractiv:

This “scoreboard for employment and social indicators” is one of the “new tools to build the social dimension of the Economic and Monetary Union (EMU)”, the Commission says. It was launched in an attempt to strengthen the social dimension of the EMU as governments across Europe were feeling the backlash of austerity policies decided in the midst of the sovereign debt crisis. “The  new scoreboard of key employment and social indicators shows that we have high income inequalities in some member states and the data also shows increase in the differences of income inequalities amongst the member states of the Eurozone, between the core and the periphery. Persisting and increasing socio-economic divergence is a problem for a monetary union,” said Laurence Weerts, who is responsible for the social dimension of the EMU in the office of László Andor, the EU Employment Commissioner.

There was a vast economics literature available back when they started planning the currency union, showing that the euro zone did not meet the criteria of an optimal currency union. It would have been easy for the Eurocrats to avoid the problems caused by putting together a sub-optimal currency union – all they would have had to do was to, well, keep the national currencies.

But more importantly, the depression-level social problems in countries like Greece, Spain and Portugal would never have come about if the EU had not forced those member states to accept the EU-ECB-IMF version of austerity. Greece, as we know, lost one quarter of its GDP to austerity. One quarter. In the past six years unemployment in the 15-64 age group has tripled in Greece (it was 27.7 percent in 4th quarter of 2013) and Spain (26.1) and doubled in Italy (12.9) and Portugal (16.1). Youth unemployment, i.e., the age group 15-24, tripled in Spain (from 18.1 percent in 4th quarter of 2007 to 55.1 percent in 4th quarter of 2013), almost tripled in Greece (from 22.6 percent of 57 percent), doubled in Portugal (16.8 to 35.7) and almost doubled in Italy (23.2 to 43.5).

It is almost impossible to imagine that the EU leadership understands how their policies actually created this economic disaster. Yet, so long as they maintain their current policy priorities, where a balanced government budget is more important than any other policy goal, there will be no improvement of the situation for the perhaps 100 million Europeans whose livelihood critically depends on the welfare state. If instead the EU decided to get the welfare state out of the way, if they did away with the taxes that feed the welfare state and discourage entrepreneurship, they would quickly (by macroeconomic standards) see an improvement in the living conditions of those who are now on the dole.

However, that is probably not going to happen. The EU leadership is so stuck in its view of what is good and bad policy that its only idea of how to get the European economy going again is to depress wages. This, of course, means more people will depend on government just to survive the month. Euractiv again:

Belgian Green MEP, Philippe Lamberts, a member of the committee on economic and monetary affairs, welcomed the announcement in principle but says he doubts the recommendations will be taken into account. “I hope there will be country specific recommendations aimed at reducing inequalities. The problem is that they would be in contradiction with the usual Commission recommendations which say that we need to make the labour market more flexible, to reduce the power of social interlocutors, which clearly means putting a downward pressure on wages. If the Commission is to introduce recommendations to reduce inequalities, it would contradict itself,” Lamberts said. To really deliver on the social dimension, the Commission would need to “change directions” which “it won’t”, Lamberts said.

Two forces depress wages in Europe: high unemployment and large immigration of low-or-no skilled labor. Both forces are currently at work, which effectively means that Europe’s welfare states are going to get more clients. This in turn means that there is even less of a chance that Europe will be able to avoid a future in the economic wasteland where stagnation rules, people live in industrial poverty and there is no hope for a better future.

Think that can’t happen? Wait until late August when my book Industrial Poverty is out (Gower Applied Research). You will never see Europe the same way again.