At last, the inane Fiscal Rules are to be relaxed. It took the Covid19 crisis to force this action by the EU leadership. In a recent blog I set out why the rules were flawed and why they should be reformed. At last there is movement.
The next step must be their radical, progressive reform. They must work for European people and no longer just to appease the right-wing ideologs who framed them. These anti-Keynesian rules enshrined austerity and pro-cyclical fiscal policies on some member states, hurting so many with increased unemployment, wiping out businesses and stopping much needed investment in infrastructure, schools, hospitals, education and training.
Last Friday 13th March, the Commission said it “will use all the tools at its disposal to make sure the European economy weathers this storm, in close coordination with and between Member States and the ECB.” This is ironically good news on a Friday 13th.
Surprisingly, Germany also announced on Friday that it would use what the economy minister Peter Altmair called, “measures unprecedented in Germany’s post-war history.” Olaf Scholz, the finance minister, said it would use a “big bazooka” to subsidise business and steady markets. This is long overdue as Germany’s infrastructure is collapsing and needs €450bn to modernise over the next decade.
The German State Development Bank, KfW, will massively expand lending to firms and it will provide unlimited liquidity to German companies hit by the virus. Altmair, of the CDU, emphasised that it will be “unlimited” assistance to firms. And the finance minister, Scholz of the partner SDP, reiterated that here will be “no upper limit on the amount of loans KfW can issue.”
Scholz is acting like a Social Democrat in this response to the crisis, but will he also demand a quid pro quo from business for workers and taxpayers in better corporate governance, labour rules (though German firms do not do “shareholder value,” but are run in co-determination with workers reps at board level) but also on better ethical standards (think VW’s diesel scandal)?
Reforming the current framework for economic and fiscal surveillance
The Commission said, “the start of a new political cycle in the Union is an opportune and appropriate moment to assess the effectiveness of the current framework for economic and fiscal surveillance, especially the six-pack and two-pack reform.” It is seeking public submissions but it is the new Irish government that must seek radical reform. It must be more radical than simple relaxation of the rules on investment, but of the other rules too.
Ireland was put through the ringer of unnecessary and harsh austerity by the Troika (EU, ECB and IMF) and not supported as much as it should have been by them when taxpayers bailed out all the private banks.
The Commission half-heartedly admitted that the rules were not working. Its focus was on the Euro and not helping its member states.
For example, in its “Communication on EU Economic Governance” (5.2.20) the Commission defends the fiscal rules but reluctantly admits “the recovery since the financial crisis has been long by historical standards; there has also been a decline in trend growth and public debt levels remain high in some Member States, and some Member States’ economies remain vulnerable to an economic slowdown.” And it is self-interestedly worried about the “risks of spillovers that would affect the functioning of the euro area as a whole.” This from the Commission that did help Ireland much of its private banks failed.
In addition, the Commission will further help businesses in this Pandemic.
The Commission also said that it will relax its rule on subsidies to business and state aid by saying it “will ensure that state aid can flow to companies that need it,” though it did qualify this by stating it “will make full use of the flexibility which exists in the Stability and Growth Pact.” In addition, EU President von der Leyen said that she will set up a ““Corona Response Investment Initiative” directed at health care systems, SMEs, labour markets, and other vulnerable parts of EU economies. The investment will be sizable and reach €25 billion quickly.”
But State subsidies to business must get back a return
If business is to get support from EU member states’ taxpayers to the tune of an additional €37bn, it must begin behave more responsibly on its governance and it treatment of workers. Most companies are run on the “Shareholder value” governance rules (but not Germany as we saw). These must be jettisoned in favour of stakeholder capitalism. This is hardly radical because the 181 bosses of the leading US corporates have already adopted this change within their Roundtable of Business.
The Financial Times has also realised that the economic system of capitalism is not working and has called for what it terms a reset and others have also joined in, including Nobel economist Angus Deaton and even Bloomberg, the huge media group owned by the US Presidential dropout.
In conclusion, the EU and many of its states are reacting well to the crisis by reforming the Stability and Growth Pact rules by using fiscal stimuli, expanding bank credit, and by increasing the huge subsidies business already gets.
Trade unions and civil society must now demand major quid pro quo from business in return for this vast array of state support, such as ending “Shareholder Value” governance immediately and by recognising collective bargaining. It is not just a legitimate demand but can be the key driver in reducing growing market inequality in Europe. These changes and €37bn are welcome, but they are unlikely to be enough to keep Europe going during this pandemic.
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.