Europe in 2010 – new gaps, old solutions

Public Servant (UK)

A glorious dream is turning into a serious nightmare and the Euro area won’t survive the next decade if competitiveness gaps can’t be closed, writes Jürgen Klute, Member of European Parliament for German party Die Linke

Ten years ago, European Union leaders proclaimed their will to create the world’s most competitive region by 2010. Optimism resulted, mainly from a speculation-driven dot com boom but also from high expectations in the new European currency. Led principally by Germany, the Euro area installed a powerful central bank that wanted an inflation rate of two percent and asked its members to cut their public deficits. 

Now we have reached the end of the decade, what began as a glorious dream is turning into a serious nightmare. After years of fiscal discipline, governments are in debt massively in their attempts to rescue failed banks and several countries have experienced speculative attacks after doubts about public solvency were raised by financial markets players.

European leaders are now insisting that the currency area’s rules have not been respected, which is why the introduction of European economic governance and surveillance mechanisms is intended to make sure that the ’stability and growth‘ pact will effectively be enforced with wrongdoers having to fear punishment, such as cuts in cohesion fund payments. 

In their obsession on fiscal and monetary stability, however, EU leaders play with growth and employment factors and don’t even stick to their own rules. If ECB (European Central Bank) would take seriously its inflation target of two percent or slightly below, it should also recommend that Euro area countries aim for annual wage growth rates at the same level, since wage growth mainly determines inflation rate. 

If the biggest player in the field restores its competitiveness via wage dumping, German export industries might get some individual export points in the short term. But reduced consumption is about to affect internal demand all over the continent and inflation can never reach the rate that central bankers have proclaimed as helpful for European economy. 

If „wrongdoers“ like Greece would not have put their competitiveness and budgets at a risk with average wage growth rates of 2.8 per cent, Europe would today be experiencing deflation and persistent recession. And having once fallen into the deflation trap, states lose all weapons to fight recession and debt rates explode without any need to „waste“ money on public welfare or military „adventures“ in the Middle East. European Union leaders could learn from Japanese mistakes if they don’t want their societies to lose one or two more decades from now on. 

Unfortunately, our political elites do not seem to realise the dimension and depth of the European crisis. Even worse, they believe that everything that is good for European top 20 companies will benefit employees, small businesses, and state and society as a whole. In this sense, wage dumping has never been understood as a short-term, unfair and misleading strategy but rather as something that would help Europe survive in a worldwide economic battle against China and other poor but fast-growing countries. 

Political elites at European and national level seem to forget that our economic power lies in strong internal demand driven by fairly paid employees and social insurance systems that enable citizens to buy a car or a house at relatively low risk. 

But what lesson should be learned from economic reform? The Euro area, according to UNCTAD economist Heiner Flassbeck, will not survive the coming decade if competitiveness gaps cannot be closed. Therefore, Europe’s currently most competitive economy, Germany, should be forced to foster wage growth of at least five per cent per year. Likewise, minimum income needs to be introduced at a fair level. 

Euro area countries also need help to reduce their debt rates, which can be achieved via effective control of rating agencies and hedge funds that have been key drivers in speculative attacks against Greek, Portuguese and further bonds. Pointing fingers at countries and demanding disciplinary measures mainly helps speculators who benefit from decreasing credibility and hampered growth prospects. 

Gaining governance over the economy, though, can only work if financial markets will be governed, too, and if a strong effort is made to close competitiveness gaps and bring back solidarity in and between our societies.