Changing Europe

Economic and Financial perspectives on the shifting European landscape

The Prevalence of Neoliberalism in European Crisis Resolution

Whereas on a global scale neoliberalism has been perceived as being oversold – so by the IMF since 2010 – in Europe this concept was still the dominant guideline for measures to combat the financial crisis. 

The basic norm underlying the neoliberal concept was that increased competition in various spheres of economic activity would foster economic growth and so cure the wounds of the crisis. Two areas in particular provide evidence for the prevalence and uncritical application of neoliberal recipes, exchange rate policy and consolidation of public budgets. Exchange rate policy was re-discovered as a wonder-weapon. Even critical economists like Joseph Stiglitz proposed to introduce exchange rate flexibility into the European Monetary Union in order to combat the increased imbalances. These proposals ignored the main ‘raison d’être’ of a monetary union, which is that national governments should tie their hands. They were fixed on the idea to achieve real convergence by changing relative prices in trade. And they overlooked the established economic knowledge that exchange rate changes between diversified economies may combat monetary shocks but not real ones.

In contrast to exchange rate policy, which has not been applied so far, consolidation of public budgets was the main thrust of crisis resolution. In this area, the dominance of neoliberal thinking caused great damages. Following the European rule of fiscal discipline, austerity programmes were conceived and enacted, which unavoidably led to long lasting recessions and increasing income inequality. It should have been clear that those programmes cannot cure a financial crisis when the private sector of the economy – banks, corporations, consumers – is also bound to deleverage, that is to reduce its net-debtor position. So, the European Central Bank had to step in and to provide counter measures. The ‘Unconventional Monetary Policy’ since 2012 was not only necessary to assist ailing banks but also to counteract the obsession with fiscal consolidation.

Neoliberal polity concepts are not without contradictions. A narrow focus on fiscal discipline, as for example proposed by Jens Weidmann, President of Deutsche Bundesbank, includes demanding national budget sovereignty, so to revitalize the Treaty’s ‘no-bail-out clause’, and at the same time requires strengthening EU-control of fiscal discipline, that is compliant with the Stability and Growth Pact. But both cannot go together. It is not recognized that prosecution of the violation of SGP-discipline undermines the credibility of the ‘no-bail-out clause’.

Another aspect of the dominance of neoliberalism in European politics is the issue of debt release. When the financial crisis hit European banks and (already) over-indebted governments in 2008, the European Council had to respond quickly. At that time, bail-in solutions were taboo. Consequently, due to ubiquitous bailouts government debt increased substantially in Europe, making budget consolidation the prior objective. Nonetheless, inter-government indebtedness increased due to so-called rescue programmes. These programmes turned out to be a long-term burden to European politics, not only because the warranted budget consolidation failed in the first place but also due to the high social costs connected to them. The philosophy behind rescue policies is that governments shall comply with the rule. So, a debt release has been excluded with the consequence of a continued roll-over of the debt burden into the future, in particular in the case of Greece. Considering a debt release, we have to clarify the principle of liability, which is one of the constituent principles of a social market economy. It seems to be a narrow interpretation of ‘liability’ that debtors are liable but creditors are not – which means that like the Merchant of Venice they may claim fulfilment of their contracts in any case or have to be bailed out. Thus, neoliberalism would practise a lopsided application of capitalist principles, making governments liable in case of an unforeseen crisis, and so the general public. It is the insolvency law that provides a balance in such cases. But what of inter-government indebtedness? There is no insolvency law for states and the verdict, a debt release would be against the rules, is nonsense. Rather, conflicting claims in the political sphere require political decisions. Here, the prevailing neoliberal concept has missed opportunities for a better and transparent crisis resolution.

In a recent study, Markus Brunnermeier, Harold James and Jean-Pierre Landau described the European strategy of crisis resolution as ‘a battle of ideas’. They detect a dichotomy in European polity, a division between north and south, which they interpret as Kant versus Machiavelli or, in an economic reading, rules versus discretion. But in practice, the rule-based policy prevailed, parting with the opportunity of designing policies, which are adjusted to ’the specific circumstances of time and space’ (von Hayek). It was only in 2015 when the European Commission formulated the critique that rule-based cooperation alone is not sufficient. In its ‘Five-Presidents-Report’ the Commission identifies institutional deficiencies and calls for ‘a system of further sovereignty sharing within common institutions’ and for ‘increasingly joint decision-making’.

In his book Monetary Integration in Europe: The European Monetary Union after the Financial Crisis, the author attempts to make those inconsistencies of European politics comprehensible and to provide arguments for sharpening the reader’s own judgment. Though not being technical, the book is based on economic reasoning and – looking at the different actors of economic policy – makes the case for policy coordination on the European level.

Monetary Integration in Europe