Much Pain but Where is the Gain? Economic Adjustment and the Limits of Ordoliberalism – Part II

Part II of the essay by Johan Ekman (@jgekman), BA (Hons) student in European Politics. 

John Ekman is a BA (Hons) student in European Politics with EIS Copyright: private

John Ekman is a BA (Hons) student in European Politics with EIS Copyright: private

After the economic crisis in the southern periphery of the Eurozone, governments agreed to bail out Greece, Portugal and Spain on the condition that they agreed to strict policy conditionalities that entailed economic austerity and substantive liberalizations. Italy, on the other hand, had to respond to a speculative attack through similar measures to avoid the same fate of other southern European countries. It is my proposition that these policy conditionalities, underpinned by ordoliberal theory, put a severe strain on a European integration project with neoliberal characteristics as lack of democratic influence, material deprivation and increasing unemployment came to dominate the lives notably but not exclusively of young people in the crisis-hit countries.

First, I will briefly present the ordoliberal underpinnings of EU policy conditionalities, after which I will use macro-economic indicators and a review of the Commission Memoranda of Understandings (MoU) to illustrate contradictions in the expected outcomes of the policies and the reality in the countries in question. I will conclude by proposing that this has not only rendered neoliberal hegemony in Europe vulnerable to criticism, but it has also endangered the integration project as a whole.

                                                                    I

Following the crash of Lehman Brothers that triggered the crisis, peripheral states in the Eurozone, heavily indebted as a result of their competitive weakness in relation to the Eurozone core, faced severe fiscal deficits that led to a difficulty to access the international bond market.[1] Government spending had in effect reached unsustainable levels. That in turn threatened the peripheral states with insolvency, which made them a risk to their major lenders, the European banks, thus forcing the Eurozone to bail them out.[2]

After the crisis, the state has, as noted by Jamie Peck, been brought back to the fore to impose more orderly forms of market rule in contrast to Chicago school deregulation.[3] Werner Bonefeld, in turn, has argued that this ordoliberalism has, in the Eurozone context, become a form of “authoritarian liberalism”.[4] Both these propositions appear validated if the policies implemented are surveyed: ordoliberalism has replaced a belief in deregulation and a “rolling back” of the state, as that was the only way to prevent full-scale failure of the financial system. The “social” dimension of the “social market economy”, which is a crucial part of legitimizing ordoliberalism, has been conspicuously absent in the “rescue packages”. This has had the effect to render the whole legitimacy of the adjustment operation into question and this in turn fundamentally challenges an integration project built around neoliberalism.

II

Government spending, % of GDP

Government spending, % of GDP, Sources: theglobaleconomy.com, the World Bank

From May 2010 to present day, Greece has been part of three economic adjustment programmes and Portugal and Spain have both gone through one. Italy was subjected to sovereign bond speculation in the summer of 2011, and its technocratic government implemented policies specifically in response to that at least until 2013.

 

table1

Table 1. Economic reforms in the Southern periphery of the Eurozone. Sources: European Commission; Draghi and Trichet Letter to Italian Government

 

The overriding objective of the economic adjustment measures has been to rescue the financial system.[5] While, as Paul Mason has argued, the rescue of the banks was a sound rejection of pro-cyclical policies that in the 1930s “plunged the US into depression and Germany into Fascism”,[6] the measures were problematic as the cost of the operation was “shifted onto society at large”.[7] This in turn triggered popular discontent in the core countries and protest in the periphery, most notably in Greece, where sentiment against the conditionalities attached to the bail outs came to its head in a subsequently ignored referendum rejecting them.[8]

The policy conditionalities have included the established crisis response of a mixture of austerity measures and liberalization.[9] Reforms have been motivated by the expectation that they will, as in the case of Greece, “unleash the huge potential for raising growth”[10] or, as in Portugal, to “create jobs”[11]-a target somewhat ironically echoed by the government itself by adding the intention to create jobs “not least for the young”.[12] In the case of Italy, Draghi and Trichet, on behalf of investors, warned that “wages and working conditions should be tailored to firms’ specific needs” and called for “full liberalization of local public services”.[13]

The reforms, implemented with the whip of the “men in black”[14] raised behind the governments’ back, have resulted in a steep rise in unemployment, particularly notable for young people, while growth levels have remained low. The increases in severe material deprivation[15] and the increased risk of poverty or social exclusion[16] are other indicators of worsening social conditions. Thus, the “no pain no gain” rationale has not been validated by evidence.

The consequences for the EU as a whole, feeding in to the tensions between on the one hand EU ideals of solidarity, and the reality of Eurozone governance on the other, imposes a challenge on the current neoliberal order because “ideas and material conditions are always bound together, mutually influencing one another and not reducible to one another”.[17] Further, there is, in Gramsci’s words “…necessary reciprocity between structure and superstructure, a reciprocity which is nothing other than the real dialectical process”.[18] As the material prospects in the Eurozone’s southern periphery are weak, especially for the young, the contradictions exposed become painfully visible, posing an acute problem for an integration project with neoliberal characteristics. Discontent is expressed through political protests against the current order, in which case a strategy for coopting the discontented would need to include more expansive economic policy, mitigating the oppressive effects experienced by individuals.

 

table2.3

table4

 

III

 

In this piece I have discussed how ordoliberalism is proving unable to both produce sustained recovery in southern Eurozone countries and to re-legitimize the European integration project. Its application in the Eurozone periphery has relied on imposition of neoliberal measures without a social dimension that would protect the social rights of people in the subjected countries.

This piece has examined economic adjustment policies, and their effects, with specific reference to the young, through a review of the MoUs outlining policy conditionalities attached to “rescue packages”. Further, an analysis of macroeconomic data shows that these policies have resulted in higher unemployment and a lack of access to social rights, which further shows how neoliberalism has put social liberalism and social democracy on the back foot, thus risking the long term durability of the European integration project. New, expansive economic policies allowing a better access to social rights are needed if the Eurozone is not to risk throwing its baby out with the bath water when conducting its “rescue operations”.

 

Acknowledgments

 

Part of the research for the piece has been made in connection to a King’s UG Research Fellowship in June and July 2016. Thanks to Roberto Roccu for the helpful comments. Remaining errors are all mine.

 

 

Bibliography

Greece’s Eurozone victory in doubt after decisive No victory, Financial Times, 6.7.2015

 

Alexis Tsipras U-Turn, economist.com, 12.7.2015

 

Bonefeld, Werner, Authoritarian Liberalism via Schmitt to Ordoliberalism to the Euro, Critical Sociology, August 2016

 

Cox, Robert W., Gramsci: Hegemony and International Relations: An Essay in Method, Journal of International Studies Vol. 12, No. 2

 

Draghi Mario and Trichet Jean Claude, Letter to the Italian Government, 5.8.2011, published in Corriere della Sera

European Commission, the Economic Adjustment Programme for Greece, Occasional Papers 61, May 2010.

 

European Commission, the Economic Adjustment Programme Reviews: 1 (Summer 2010); 2(Autumn 2010); 3(February 2011); 4 (Spring 2011); 5 (Autumn 2011).

 

European Commission, Second Economic Adjustment Program for Greece, March 2012, Occasional Paper 94, March 2012.

 

European Commission Second Economic Adjustment Program for Greece Reviews: 1 (December 2012); 2 (May 2013); 3 (July 2013); 4 April 2014

 

European Commission, Report on Greece’s compliance with the milestones for the disbursement of the August 2014 sub tranche

European Commission, Report on Greece’s compliance with the draft MOU commitments and the commitments in the Euro Summit statement of 12 July 2015

European Commission, the Economic Adjustment Programme for Portugal, Occasional papers 70, June 2011.

 

European Commission, the Economic Adjustment Programme for Portugal Reviews 1-11

 

European Commission, The Financial Sector Adjustment Prgramme for Spain, Occasional Papers 118 October 2012

 

European Commission, The Financial Sector Adjustment Prgramme for Spain, Reviews 1-5

 

Eurostat:

 

http://ec.europa.eu/eurostat/tgm/table.do?tab=table&plugin=1&language=en&pcode=t2020_53. Consulted 18.8.2016

 

http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_peps05&lang=en. Consulted 18.8.2016

 

Forgacs David, ed (1988), An Antonio Gramsci Reader-Selected Writings 1916-1935, (New York: Schoken Books)

 

‘Greece’s Eurozone victory in doubt after decisive No victory’, Financial Times, 6.7.2015;

 

Lapavitsas, Costas et al (2012), Crisis in the Eurozone (London: Verso)

 

Mason, Paul ’Are we living through another 1930’s?’, the Guardian, 1.8.2016

 

Peck, Jamie (2010) Constructions of Neoliberal Reason, (Oxford: Oxford,)

 

’Rajoy sets stage for EU-stand-off’, FT, 6.9.2012

 

[1] Costas Lapavitsas et al (2012), Crisis in the Eurozone, London: Verso,, p. iv.

[2] ibid

[3] Jamie Peck (2010), Constructions of Neoliberal Reason, Oxford: Oxford, p. 275

[4] Werner Bonefeld (2016), ’Authoritarian Liberalism via Schmitt to Ordoliberalism to the Eur’o, Critical Sociology, August

[5] Lapavitsas et al. p 113

[6] Paul Mason, ’Are we living through another 1930’s?’, the Guardian, 1.8.2016

[7] Lapavitsas et al. p 113

[8]Greece’s Eurozone victory in doubt after decisive No victory’, Financial Times, 6.7.2015; ‘Alexis Tsipras U-Turn’, economist.com, 12.7.2015

[9] Lapavitsas et al. pp. 59-60

[10] European Commission, Economic Adjustment Program for Greece-First Review, p. 8

[11] European Commission, Economic Adjustment Program for Portugal, June 2011, p.4

[12] European Commission, June 2011, p. 40

[13] Letter of Mario Draghi and Jean Claude Trichet,  5.8.2011, published in Corriere della Sera

[14] The term Cristobal Montoro used to describe Troika officials: ’Rajoy sets stage for EU-stand-off’, FT, 6.9.2012

[15]http://ec.europa.eu/eurostat/tgm/table.do?tab=table&plugin=1&language=en&pcode=t2020_53. Consulted 18.8.2016

[16]http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_peps05&lang=en. Consulted 18.8.2016

[17] Robert W. Cox,(1983)  ’Gramsci: Hegemony and International Relations: An Essay in Method’, Journal of International Studies Vol. 12, No. 2 p.168

[18] David Forgacs, ed (1988), An Antonio Gramsci Reader-Selected Writings 1916-1935, New York: Schoken Books, p.193

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