Debt, Creditors and the Social Failure of the EU

The movement to occupy on behalf of the ninety-nine percent has flagged, but the wealthiest one percent have not relented in their campaigns to enrich themselves at the expense of others. This was made clear in the recent World Economic Forum, in Davos, Switzerland. The tone was set by Canada’s Conservative Prime Minister, Stephen Harper. He blamed Europe’s social entitlements for current government debt problems, and then came back home to call for cuts in Canada’s pension entitlements.

Europe and Canada are facing crises of unsustainable entitlements, but social programs are not to blame. In Europe the countries with the most comprehensive social programs — Norway, Sweden, Denmark, Finland, Germany, and the Netherlands — are not facing severe deficit crises. The countries that are — Greece, Spain, Portugal, Ireland, and the U.K. — have far less generous social programs.

Rapidly expanding capitalist entitlement began in the 1980s with the election of neo-conservatives Margaret Thatcher, Ronald Reagan, and Brian Mulroney. Their governments rejected government intervention to maintain employment and consumer demand, substituting what they called supply-side policies, claiming that putting more money in the hands of the rich would increase the supply of money available for investments and employment.

Giving to One Percent, Taking from 99 Percent

Since then, the governments of most countries have adopted supply-side policies. Taxes on higher incomes, on corporations, on capital gains and dividends have been methodically lowered. In the 1950s and 1960s the effective tax rates on the highest incomes in Canada and the U.S. were 70 percent. In the early years of this century, these had fallen to 30 percent, much the same rate as paid by median income earners. (A smaller number — who may earn millions a year from capital gains and dividends — pay as little as fifteen per cent of their income as taxes.) As the tax on upper incomes fell, government revenues as a proportion of total income fell, even though governments increased sales taxes, value-added and payroll taxes.

Putting more money in the pockets of the rich did not lead to more investment. In fact, the rate of growth in private and public investments was higher in the 1950s an 60s than in the 1980s to the present in North America and Europe. The super rich do have money to spend on luxuries, private jets, yachts, and mansions. As money was available for financial speculation, share prices grew faster than the real economy, increasing capitalist claims on existing means of livelihood. To sustain and increase profit margins, corporations turned to places with cheaper labour, further reducing domestic employment. As disparities between rich and poor widened, governments with shrinking revenues were faced with expanding needs for social programs.

In Europe the most prosperous countries were shielded from the most damaging consequences of neo-conservative policies by more comprehensive social entitlements—pensions, unemployment insurance, retraining, and childcare. Poorer countries have not been as fortunate. Europe’s problem is not overgenerous social programs, but the failure to harmonize social conditions.

The European Union began with the Treaty of Rome in 1957, a time when most governments accepted the responsibility to maintain employment and improve living standards. Initially signed by Belgium, France, Italy, Luxembourg, Netherlands, and West Germany, the Treaty of Rome envisioned a Europe with a common market for goods, workers, services, with common transport and agricultural policies, and with a European social fund that would help harmonize social conditions in all countries.

The EU’s Social Failure

As it now exists, the European Union began with a treaty signed in Maastricht, Holland in 1992. By this time, most of the continent’s major political parties had come to adhere to the Washington Consensus, a set of policies promoted by the International Monetary Fund, the World Bank and the World Economic Forum. Its ten points can be summarized as holding that governments should give transnational corporate interests precedence over domestic employment and enterprise, and give creditors’ interests priority over social programs.

In harmony with the Washington Consensus, the Maastricht Treaty provided for a common currency, common interest rates, and agreement to limit government deficit and debt levels. The idea of a social fund was dropped and no effort was made to harmonize wages or living standards.

For a time, the economies of poorer countries like Ireland, Greece, Portugal, and Spain did grow substantially. Their lower wages did attract investment until countries with even lower wages like the Czech Republic, Hungary, Latvia, Lithuania, Poland, and Slovenia joined the EU. As the continent’s major corporations moved more operations east in pursuit of cheaper labour, workers’ income declined; markets stagnated.

Before the financial crash of 2007-08, the decline in employment and markets was masked by bubble economies — European versions of the U.S. sub-prime mortgage crisis. Interest rates of one per cent and lower in Japan and the U.S. allowed German, French, and U.K. banks to borrow abroad and to lend these funds at three or four per cent to countries desperate for investment. As it became obvious that debts were unsustainable, interest rates jumped to six and seven per cent and to double digits. As more public revenues were diverted to pay creditors, governments cut spending and employment. In the U.K., Portugal, Spain, Italy, and Greece unemployment rose to ten per cent and higher. Youth unemployment rose to 20 per cent, 30 per cent, and even fifty per cent. Nonetheless governments focused on creditors’ interests continue to promote spending cuts which will increase unemployment and reduce consumer demand.

Stephen Harper in Davos encouraged further attacks on social entitlements. He then came home to call for reduction in future pension entitlements here. Why? Old Age Security and the Guaranteed Income Supplement for seniors currently costs less than three percent of Canada’s national income. Factoring in the expected growth of the population of seniors, the cost will rise to around four percent. In Italy, public pensions cost fourteen percent of national income. The current conservative coalition insists that Italy will have no problem meeting these obligations.

Yes, prolonged public deficits can lead to future problems. Costs of borrowing may rise. The value of a currency may erode. Taxes may have to be raised. For minorities preoccupied with maximizing capitalist profits, these are concerns. For majorities who depend on income from labour and social entitlements, declining wages, and reduced benefits are far more serious problems.

Stronger Economies with Progressive Taxes and Social Programs

Deficits would not be problems for governments focused on the interests of the vast majority. Unsustainable debts would be written off, reduced, and rescheduled. What remains would be paid at fixed low interest rates. Where financial institutions that engaged in reckless lending practices must be bailed out to sustain credit markets, public funds would become public equity. Publicly owned financial institutions, transparently and democratically regulated, would focus on providing access to credits for community-owned, cooperative, and owner-operated enterprises.

To weaken the power of transnational corporations, governments would actively expand social entitlements, institute guaranteed annual income legislation, expand access to pensions, health care, post-secondary education, and public child care. The public revenues required could be raised through steeply graduated income taxes on the highest incomes. Tobin taxes on financial transactions and international agreement to raise tariffs enough to encourage domestic production for domestic markets everywhere would generate further public revenues.

Instead of giving priority to the interests of capital-owning minorities, governments would focus on policies that sustain employment, working-class income, and social entitlements. They would promote and support initiatives the are intended to provide everyone with a voice and equal vote in their communities and employment.

Al Engler is a long-time social activist, a retired towboat cook and trade union official. He is the author of books and numerous articles against capitalism and for economic democracy. Read other articles by Al.