SHOULD THE MUSICIANS CONTINUE TO PLAY?

Look around, and Europe is in crisis. At the time of writing, Greece, Ireland and Portugal are on the verge of an economic and social abyss, severe doubts about the very future of the European Monetary Union are growing, and austerity packages are being implemented across the European continent. Centrifugal political forces are on the rise, just as are xenophobia, racism and social exclusion. The promised lands of the most competitive and dynamic knowledge-based economy in the world, an economy capable of sustainable economic growth with more and better jobs and greater social cohesion – as envisaged by the European heads of governments in March 2000 at their European Council meeting in Lisbon, Portugal – seem to be further away than ever before. It would be difficult to find believers in this noble vision of a sustainably growing and socially coherent Europe nowadays in any country of the EU, let alone in countries like Greece, Ireland, Italy, Spain and Portugal. Even in the richer, developed European countries of the old economic centres, pessimism is on the rise. However, for the quantitative social scientist, profound economic crises (the Great Depression of the 1930s, the 'oil crisis' of the 1970s, the current world recession) always seem to be appropriate times for reconsidering basic principles of economics and the social sciences.

Always, such times were also propitious to discover or rediscover the fact that unequal relationships profoundly characterize the world economy and that the effects of dependency and the role a nation plays in the world system profoundly affect the economic and social trajectory of a country. On 27 February 2007, we read – among the already visible, terrible icebergs of the looming current economic crisis – the following truly 'Titanic scenario' about the mindset of European central bankers in the International Herald Tribune (IHT): they, according to the IHT, think that the European Central Bank may be forced to raise interest rates if higher wage demands fan inflation (International Herald Tribune, 27 February 2007).

Should the musicians then continue to play? Like on the Titanic on 15 April 1912? This book starts from the assumption that the world can learn a lot from the empirical and theoretical debates and research results of dependency and world-systems research. The European 'political class' seems to not react at all to the implications of the global economic crisis. In a strategic document of the European Union, or if you wish in Brussels newspeak, an 'EU presidency country non-paper' (what jargon!) produced in 2009 by the Swedish government, then holding the rotating EU presidency, we even read that trade and economic integration, combined with new technology, brings new markets, competitors and trade partners closer. They help to decrease poverty, promote democratic values and increase international stability.

If there is continuity in Brussels' thinking ever since the mid-1990s, it is this credo about openness as the main precondition of global ascent. What about the role of, say, internal consumption and investment? The promised lands of free and open markets, always hidden somewhere in the foggy mists of the today's, are at the real centre of European policymaking. Already in March 2000, the EU aimed at its Lisbon 'European Council' to make the EU 'the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion'. The very same neoliberal agenda, already then the strategy to achieve this ambitious goal within a decade, is now being applied again. The European Commission at Brussels itself now freely acknowledges that this 'Lisbon agenda' or 'Lisbon Strategy' largely failed, but it does not provide any real more far-reaching explanations for this failure. Instead, it applies the same old medicine again to the ailing patient.

The European Commission itself conceded in one of its main documents on the subject recently that even before the crisis of 2008–9, there were many areas in which Europe was not progressing fast enough relative to the rest of the world. The strategy, proposed by the European Commission in this document on a 'strategy for smart, sustainable and inclusive growth' is relatively simple. The policy package offered by the European Commission has only three pillars. Guess what pillar number one is? Open economies! We go on to read that Europe will continue to benefit from being one of the most open economies in the world but competition from developed and emerging economies is intensifying.

In this book, we will systematically confront this type of thinking with macro- quantitative evidence on a global scale to show that a strategy, based on unlimited openness is not the solution, but very often part and parcel of the very problem of the European decline vis-à-vis its major global competitors. We will try to find out by macro-quantitative comparisons how the neoliberal agenda will most probably affect policy outcomes during the next decade, judging by the knowledge of cross-national research on how the main drivers and bottlenecks under scrutiny here have already affected these processes over the last decade or two.

Analysing the policy failure of the 'Lisbon Strategy' 2000–10 and the prospective policy failure of the 'EU-2020 strategy' has important implications not only for Europe, but for other major regions of the world economy as well, such as East and South Asia, advanced countries in the Middle East and North Africa and in Latin America, still confronted with the a semi-peripheral status in the world economy. Is the opening of markets the only viable strategy to catch -up with richer countries?

So, we will start the debate by comparing the trajectory of the EU-15 with the USA and some other highly developed Western democracies in terms of their globalization, their economic growth performance, their unemployment performance, and their inequality. New, universally recognized and reliable time series data, now available in the comparative social sciences, make such comparisons possible. The use of time series data and methodology about globalization and social performance opens up depths of analytical insights, hitherto unknown in the debate.

Graph 1, accordingly, highlights the development history of the old core of the European Union by comparison with the USA as the centre of the world economy and some other developed Western democracies. Globalization refers to the time series data, provided by the ETH Zurich KOF Globalization Index Project. Data for economic growth were taken from the IMF in Washington. Our inequality data are Theil indices of inequality, based on payment inequality in 21 industrial sectors, calculated from UNIDO data sources by the University of Texas Inequality Project, while unemployment refers to unemployment as a per cent of the civilian labour force, documented by the OECD in Paris.

As a first approximation to the subject, our graph uses simple unweighted averages for each of the three groups of countries (the EU-15, the USA and some of the other major developed Western democracies). As stated, the four compared dimensions are economic growth, globalization flows, inequality and unemployment.

Our first analysis yields already clear results, which might provide a possible new input for the entire 'Lisbon Strategy' debate. The USA throughout much of the 1980s, the 1990s and the first decade of our century had a lower unemployment and a higher economic growth than the European centre, i.e. the 15 countries making up the European Union before the last extensions (in the EU jargon, the EU-15). This fact is well known in the political debate about the subject, and really belongs to the canon of contemporary analysis on the subject. Also however – and this is indeed a startling fact – globalization inflows are smaller than in the EU-15, and – most importantly – the tendency towards sectoral inequality as a proxy for overall inequality is less pronounced than in the EU-15. The average, unweighted performance of the other Western democracies rather resembles the European performance of rising globalization, and rising inequality:

Policy pointer

From the viewpoint of this analysis, the main difference between the USA and Western Europe is not only the USA's lower unemployment and higher economic growth throughout much of the 1980s, the 1990s and the first decade of our century, but also its less intensive and less passive globalization.

These phenomena led two neo-Keynesian European economists (Marterbauer and Walterskirchen 2006, i.e. already before the onset of the current crisis) with good reason to diagnose correctly the European political economic predicament as follows:

The economy of the euro area has been in a poor situation since 2000, with the lowest growth rate of the industrialized world. In contrast to the USA, economic policy in the euro area was not able to initiate a self-sustaining economic upswing. Given unchanged policy guidelines, no lasting improvement can be expected. Mainstream economists explain the weak economic performance of the EU by 'structural problems'. The growth rates of potential output are low due to a lack of reforms on the supply side of the economy. Labour markets are not flexible enough, deregulation and privatisation are lagging behind and the cut in state expenditures especially concerning the welfare state is taking on too slowly. However, potential output commonly is measured as the trend output of the recent past. This completely overlooks cyclical and demand factors, in particular the effect of supply-side policies on demand. It is always the study of cyclical problems that sheds light on the importance of effective demand. Cycle and trend cannot be separated mechanically by time-series analyses, they are interacting. Following Kalecki, the long run is just a series of cycles. 'In fact, the long run trend is but a slowly changing component of a chain of short-period situations: it has no independent entity.' (Marterbauer and Walterskirchen 2006, citing Kalecki 1968b)

The rest of this study is organized as follows. In Chapter 2, the main critical theories are outlined, and it looks back on earlier major studies on the subject, while Chapter 3 presents the data and the research design. The main results are presented in Chapter 4, while Chapter 5 debates the final results, based on our non-parametric index of development and its multivariate determinants. Chapter 6 probes into time series relationships. Chapter 7 finally summarizes the study, while the appendices document our results and represent an invitation to the research community to further use and test our explanations.

Policy pointer

As critics of the current European political economy correctly remark, the euro area has the lowest growth rate of the industrialized world (Marterbauer and Walterskirchen 2006). Given current austerity policies, no lasting improvement can be expected. In accordance with Marterbauer and Walterskirchen, cyclical and demand factors have to be reconsidered as well.

BACKGROUND

As pointed out in Chapter 1, for the European Commission the world is relatively simple, and according to its current vision of the world, an answer to the question why Europe is currently more severely affected by the current economic downturn than other regions of the world economy is relatively quickly given: significant fiscal deficits, rising debt ratios, inability of regulators to regulate the financial market and greedy and speculative banking sector are to blame for the current crisis. These, together with the costs of ageing populations and unemployment, pose a significant challenge for fiscal sustainability. A stable and well-functioning financial sector is necessary. Large current account imbalances rooted in a persistent lack of competitiveness or due to other reasons must be addressed by acting on fiscal policy, on wage developments, on structural reforms relating to product and financial services markets (including the flow of productivity enhancing capital), and on labour markets. Member states should encourage the right framework conditions for wage bargaining systems and labour cost developments consistent with price stability.

Policy pointer

For the European Commission, the world is relatively simple: significant fiscal deficits and rising debt ratios are the main problem together with the costs of ageing populations and unemployment, which pose a significant challenge for fiscal sustainability. A stable and well-functioning financial sector is necessary. However, as followers of the countervailing Kalecki–Steindl paradigm correctly emphasize, full employment as the main political concern, demand as a growth driver, higher effective demand to raise employment, technology and educational policy, lower household savings, a stable or rising wage share, an anti-cyclical policy (cycle and trend have the same determinants), a rise of the public sector (which promotes growth through effective demand), tax coordination and international cooperation should be the basis of EU economic policymaking.

According to the European Commission, states with large current account surpluses should pursue measures aimed at implementing structural reforms conducive to strengthening potential growth and underpinning domestic demand. Member states, which do not tap their full employment and productivity growth potential because of sectors with low competition, a weak business environment and obstacles to employment and labour reallocation, must act coordinately to achieve the desired. Appropriate labour market reforms are needed in a number of countries so as to increase wage flexibility, reduce segmentation and improve incentives to work for all; and member states face challenges regarding increasing productivity and facilitating transition towards higher value added production and exports, and in several cases a diversification of the industrial base. An efficient regulatory business environment, administrative efficiency as well as promoting a higher degree of competition must be provided. Member states face important challenges regarding the human capital endowment and upgrading of their economies.

The five targets for the EU in 2020 are:

1. Employment 75 per cent of the 20–64 year-olds to be employed.

2. R&D / innovation Of the EU's GDP, 3 per cent (public and private combined) is to be invested in R&D and/or innovation.

3. Climate change / energy Greenhouse gas emissions are to be 20 per cent (or even 30 per cent, if the conditions are right) lower than 1990; 20 per cent of energy should come from renewables; there should be a 20 per cent increase in energy efficiency.

4. Education School drop-out rates should be reduced to below 10 per cent; at least 40 per cent of 30 to 34-year-olds should be completing third level education.

5. Poverty / social exclusion There should be at least 20 million fewer people in or at risk of poverty and social exclusion by 2020.

The European Commission maintains that Europe has identified new engines to boost growth and jobs. These areas are addressed by seven flagship initiatives. Within each initiative, both the EU and national authorities have to coordinate their efforts so they are mutually reinforcing. Most of these initiatives have been presented by the European Commission in 2010.

• Smart growth

• Digital agenda for Europe

• Innovation Union

• Youth on the move

• Sustainable growth

• Resource-efficient Europe

• An industrial policy for the globalization era

• Inclusive growth

• An agenda for new skills and jobs

• European platform against poverty

The European Union also set out its strategy until the year 2020 (the so-called 'Europe 2020 strategy') in the form of ten guidelines, on which progress must be achieved by the member countries. Unlike the now deceased and safely buried Lisbon Strategy or 'Lisbon agenda', spelt out in 2000 and relevant for the decade 2000 to 2010, the aim is now far more low-key. No more talk about becoming the most competitive and dynamic knowledge-based economy in the world within the next decade. The aim is now simply to set out a vision of 'Europe's social market economy' for the twenty- first century. It pretends to show how the EU can 'come out stronger from the crisis and how it can be turned into a smart, sustainable and inclusive economy delivering high levels of employment, productivity and social cohesion. To deliver rapid and lasting results, stronger economic governance will be required.' The strategy now has ten main guidelines:

Guideline 1: Ensuring the quality and the sustainability of public finances

Guideline 2: Addressing macroeconomic imbalances

Guideline 3: Reducing imbalances in the euro area

Guideline 4: Optimizing support for R&D and innovation, strengthening the knowledge triangle and unleashing the potential of the digital economy

Guideline 5: Improving resource efficiency and reducing greenhouse gas emissions

Guideline 6: Improving the business and consumer environment and modernizing the industrial base

Guideline 7: Increasing labour market participation and reducing structural unemployment

Guideline 8: Developing a skilled workforce responding to labour market needs, promoting job quality and lifelong learning

Guideline 9: Improving the performance of education and training systems at all levels and increasing participation in tertiary education

Guideline 10: Promoting social inclusion and combating poverty