Thursday, March 30, 2023
logo economy journal
< view full issue: Readjustment or economic crisis for this 2019
Luis Moreno

Tighten our belts or become indebted facing the next crisis

Ph.D in Social Sciences from the University of Edinburgh

It has been asserted that Europe, and particularly the Eurozone, is not grown to cope with a new economic crisis. Social researchers, media thinkers, and different propagators of hoaxes and fake news talk about its inevitability. All of them aim to once again prove the old adage about self-fulfilling prophecies. This is to say, that insistent predictions come to pass thanks to the causal relation between believing something and the behaving that doing it implies. We act as if the crisis were inevitable, and in the end we provoke its occurrence.


In recent months, analysts from different political economic leanings are heatedly arguing about which measures should be applied, not only to neutralize the pernicious effects of the impending recession, but also to improve the economy in the Old Continent, avoiding its known negative effects in the form of inequality, exclusion and the absence of social cohesion.

The results of the upcoming European elections to be held in the EU countries between 23rd and 26th May will surely condition the interpretations that investors and large capital funds will make of the political health of the Old Continent. Will Europe still be an attractive place to invest to ensure the best possible returns? This has been the case up to now, particularly since the Euro became an alternative -or at least a complementary- currency to the monopoly of the dollar in international financial and commercial transactions. Nevertheless, its future will not be free from the attacks of Anglo-American financial capitalism, perhaps renewed after Brexit if it is consummated (but hopefully not).

Throughout the process of Europeanization, two major political views of the economy have often confronted each other. Those that advocate a priority control of inflation and the growth of prices, and those that sponsor stimulus measures and increase in demand. Both aim to improve performance, competitiveness and prosperity. Both are apprehensive of a new recession for which, they argue, the Eurozone should react in advance. The macroeconomic framework is jammed. Politically, the greatest obstacle to uniting both approaches and perspectives concerns political uncertainty and particularly, the impact that an electoral rise of nationalist populisms can cause in the Member States of the European Union.

There are fears of authoritarian, fundamentalist, xenophobic or supremacist ideas, which were thought superseded after the Second World War.

How to reform and relaunch the European economy to avoid the predictions of a new recession? For Yanis Varoufakis, former Greek minister in the 2015 Syriza Greek government and co-founder of the pan-European group DiEM25 (Movement Democracy in Europe 2025), with the proposal of a Green New Deal, 500,000 million Euros would be provided annually through the use of debt, and without increasing the tax level with new taxes. It would be a plan to avoid the pernicious effects of climate change and whose great functionality would be to anticipate the financial crisis. The DiEM25 is inspired by the Franklin D. Roosevelt New Deal, thanks to which the American economy overcame the severe crisis of 1929 and the subsequent Great Depression. Now, after the Great Recession unleashed in 2007-08, the injection of public money through the use of the 'money printing machine' would, according to Varoufakis, create a virtuous circle of investment, employment and profitability, all while respecting environmental sustainability.

The New Green Pact would work as follows: the European Investment Bank (EIB) would issue bonds in the secondary markets with the support of the European Central Bank as much as is necessary. According to Varoufakis, the EIB bonds would be sold like "hot cakes" in markets desperate to access safe assets. Consequently, the excess liquidity would allow financing the Green New Deal, ensuring the basic objectives of DiEM25 so that all European the general public would have the right of access in their countries of residence to basic goods, such as food, infrastructure, transportation or energy. In parallel, the right to salaried work would be preserved, and it would contribute to maintaining a decent output of housing, education, and quality health in a sustainable setting that respects the environment.

Alternatively, last February a group of academics led by Piketty, reputed economist of the Paris School of Higher Studies in Social Sciences and author of the celebrated book, "Capital in the 21st Century", complemented their proposals for continental democratization formulated in October of last year. They succinctly proposed that a Europe with fiscal capacity was preferable to quantitative easing as an economic stimulus programme. Their proposals did not affect the redistribution of resources and money between European countries. Although the authors supported such an aspiration, they considered that it was not politically viable in current times, given the persistence of the nationalist statist visions reflected in the Merkel or Macron initiatives, which barely conceal the particular preferences of both Eurozone central countries.

To obtain new funds and financial resources, Piketty's expert group suggested the implementation of clearly progressive taxes for companies and one percent of "super-rich" of everyone, as well as the introduction of new environmental taxes to complement the institutional reforms to be carried out in the EU. In their 'Manifesto for the democratization of Europe', Piketty and company think that it is better to do so through greater and better fiscal schooling and not simply by facilitating monetary resources without making structural adjustments.

To that end, a rich German citizen should contribute more to the prevention of the crisis than a poor Greek one.

Regarding the issue of financing, they defend the fiscal approach instead of resorting to debt given that their spending objects are "for the good of the community" to which the community as a whole should contribute. Except for brief periods of time, it does not seem sensible to propose the reduction of taxes and social security contributions, which would lead to lower public spending and social benefits. For this reason, and when it comes to preserving the Welfare State, we should argue in favour of high taxes that ensure the maintenance of social general public rights and their further creation. Otherwise, voters only contemplate a social protection system that is always in deficit.

Both approaches coincide in recognising that most European countries operate below their economic potential.

The undesired result is that the divergences between them increase. To avoid this requires integration and solidarity. Because the maintenance of past investments, as well as other essential current expenses in the European Social Model -again, education, health or dependence, say- should not be systematically financed through public debt. It is wrong to sponsor 'austericide' (suicide by austerity) policies to adjust the fiscal consolidation plans wildly, and suppose that we can live on investments only.

In reality, beyond the size of the public debt, what is truly worrying for some European economies is the payment of premiums for the service of these sovereign debts.

Only by some EU Member States (such as Cyprus, Greece, Italy and Portugal) have had their capacity to sustain their statutory obligations of public procurement and support of their welfare systems severely curtailed. Ultimately, what is at stake are the foundations of our European civilisational model. As the scholar of world inequality reminded us recently, Branko Milanovic, the great "success story" of neoliberalism in recent decades has made people's selfish preferences for private profits prevail to the detriment of public affairs. As a result, we face a crisis of confidence in politics and its ability to preserve the general interest of our democratic societies.



Ronda Universitat 12, 7ª Planta -08007 Barcelona
Tlf (34) 93 301 05 12
Inscrita en el Registro Mercantil de Barcelona al tomo 39.480,
folio 12, hoja B347324, Inscripcion 1




Aviso legal - Política de Cookies - Política de Privacidad - Configuración de cookies