Event Highlights: The EU Inside Out – A Panel Discussion with Petr Gandalovič, Czech Ambassador to the US, and Peter Kmec, Slovak Ambassador to the US
On Wednesday, October 23, 2013, we had the honor of hosting Petr Gandalovič, Czech Ambassador to the US, and Peter Kmec, Slovak Ambassador to the US, for the third event in our “EU Inside Out” series of conversations with European Ambassadors. The panel discussion, which was attended by over 100 people, marked 24 years since the “Velvet Revolution” that put an end communist rule in Czechoslovakia and 20 years since the “Velvet Divorce,” or the break up of Czechoslovakia into two independent states. The event was accompanied by a poster exhibit, courtesy of the Czech and Slavic Association of Boston.
The Eurozone crisis formed the back drop of the conversation, which was moderated by Alan Berger, Retired editorial writer for international affairs at the Boston Globe. The conversation was a friendly one, with both ambassadors expressing generally favorable views of the European Union, acknowledging the benefits of membership, supporting EU expansion into the western Balkans and Turkey. Neither blamed the EU for the economic crisis, which Ambassador Gandalovič asserted was rather the result of unsound policies on the part of individual member states. He pointed to Slovakia, which has experienced growth over 2% since joining the Euro in 2009, and which has weathered the crisis better than his own country, as an example.
Ambassador Kmec agreed that the Euro currency has indeed helped Slovakia to stabilize its economy in macroeconomic terms, putting it on the same footing as its western European partners. Both pointed to the need for structural reforms within the EU, though Ambassador Gandalovič was quick to point out that achieving fiscal and political union in Europe is something easier said than done and that the nation state will continue to be the arena of democratic politics in the foreseeable future. Finally, the Ambassadors expressed their support of the Transatlantic Trade and Investment Partnership (TTIP), not only as a way to boost bilateral trade and to overcome unnecessary regulation in Europe but as a way out of the crisis for both continents.
Perhaps the most interesting part of the discussion was the efficacy of austerity vs. growth policies, in particular, in the Czech Republic, which under its center right government has been trying to squeeze its deficit under 3% of GDP with painful consequences including a significant drop in domestic demand. To be fair, as Ambassador Gandalovič stated, this is question for the future as policies can have adverse effects in the short-term while laying grounds for future growth. He pointed to Latvia as an example of a country where austerity policies appear to have paid off after a significant drop in demand.
The “EU Inside Out: Conversations with European Ambassadors” series is funded in part by a grant from the European Commission Delegation in Washington DC and co-sponsored by the Center for Finance, Law & Policy at Boston University. The series addresses, broadly, the theme of democratic politics under conditions of globalization from an “inside” point of view. Centering the conversations around global challenges, which by their nature do not yield to nation state solutions (whether economic crisis, transnational terrorism, or global warming), highlights the value of the European Union as a model for transnational cooperation, regional integration, and cultural coexistence.
Event Highlights: Federalism by Exception – The Future of Economic Governance in the Euro Area with Henrik Enderlein
On Wednesday, April 24, the Center for the Study of Europe hosted Henrik Enderlein, Professor of Political Economy at the Hertie School of Governance and Pierre Keller Visiting Professor at Harvard University, for its final luncheon discussion of the semester. In his presentation, entitled “Federalism by Exception: The Future of Economic Governance in the Euro-area,” Enderlein took up the question of how to make a currency union work in the absence of political union. This is not, Enderlein suggested, merely a technical question – there are broader issues, issues pertaining to democracy, at stake. The Euro Area represents an attempt to organize a transnational economy in the absence of a nation state. No easy task, as the crisis reveals!
When thinking about transnational economic order, Enderlein said, where optimal currency conditions are not fulfilled – in the Euro Area, for example, you are faced with a “trilemma” insofar as you can combine only two of three policy goals:
- National economic policies
- Avoidance of moral hazard
- Crisis prevention
According to Enderlein, the Maastricht framework combined national economic-policy making with avoidance of moral hazard in a straightforward way: no bailouts, no hazards. The underlying logic, he said, was “keep your house in order.” But the system could not deliver on the third policy objective – crisis prevention – on the contrary, it has resulted in massive economic imbalances.
Since the crisis, Enderlein said, policy-makers have been searching for various ways to introduce crisis prevention into the current system. But the first approach – some sort of transfer union – raises fears of moral hazard, especially among Germans, while the second – full hierarchical fiscal federation – would result in the transfer of sovereignty to the European level.
The trilemma, Enderlein said, maps the debate in the euro area. Pondering the three contradictory regimes, he raised the question whether we could design something that might work, given the suboptimal context, namely, a heterogeneous currency area. Since the criteria for a single currency union are not fulfilled, he said, there should be other safeguards in place. What might a system of governance in the euro area look like? Enderlein proceeded to answer this question – the subject of his talk – by turning to the root causes of the crisis, in order to understand what went wrong and how to fix it.
The first “root cause” of the crisis, Enderlein said, was “instability.” He blamed the ECB’s “one size fits none” policies for the bifurcation between the eurozone core and periphery. Rather than stabilizing the economies of northern and southern Europe, he argued, ECB policies drove the two blocs apart. The destabilizing effects were reinforced by financial markets and without the institutional frameworks in place to offset matters, some countries built up surplus positions while others grew deficits. He suggested that short of fiscal federalism, which is inconceivable in the next decades, the solution to the instability problem is to integrate trade in order to allow regions to become more similar in terms of production and process. Regional buffers, he said, would provide a kind of “cyclical stabilization,” which is one element of “federalism by exception.”
The second cause, which Enderlein identified as “self-fulfilling fiscal crisis,” is connected to the question of state liquidity and solvency. As Enderlein explained it, without the tool of currency devaluation or the ability to print money, if a country in a monetary union gets into a situation in which it is illiquid and cannot finance its debt in the market, the next move on part of creditors is to give a loan or buy bonds. When investors question a country’s ability to fulfill its debt obligations, they will demand higher interest rates. Rising interest rates make it more difficult for the country to fulfill its debt obligations. This, Enderlein said, is the “self-fulfilling crisis” described by Paul Krugman, in which “fear of default is precisely what leads to default.”
As the risk of insolvency spread, the euro area was quick to understand that it had to breach the Maastricht Treaty’s “no bailout” clause and provided bailouts to Greece, to Ireland, and to Portugal. The result, Enderlein said, has been an “imbalanced transfer union,” wherein the EU’s negotiating position is relatively weak. Introducing the second element of “federalism by exception,” he spoke of the need for a system whereby countries in normal times retain control of their fiscal policies; only when they are in trouble is there a step-wise transfer of sovereignty.
The third cause of the crisis, Enderlein said, was the “nexus between banks and sovereigns.” Because the banking system in Europe is largely national, he said, risk is not allocated effectively. Banks buy the debts of *their* governments, who in turn guarantee the debt of *their* banks. Enderlein proposed a single resolution authority at the European level along with common deposit insurance.
Concluding, Enderlein said that there can only be such transfers of sovereignty if there is sufficient democratic control. The euro area, he argued, was based on “output legitimacy,” that is, it derived its legitimacy from the results it obtains – there is no “input legitimacy” at the European level. Achieving democratic legitimacy at the European level means answering the question of what kind of European Union do we want? Here Enderlein stressed the importance of thinking innovatively, getting rid of the idea that “when you have a finance ministry you also have to have a common soccer team.”
On Thursday, April 8, Daniela Schwarzer, Fritz Thyssen Fellow at Harvard University’s Weatherhead Center and Head of Research Division on EU Integration at the German Institute for International and Security Affairs (SWP) in Berlin, gave a lunchtime talk provocatively titled “Why Germany Will Not Run the EU?” In her remarks, Schwarzer offered an assessment of Germany’s role in Europe and the seeming contradiction between German power and leadership in its management of the crisis in the Eurozone. Her argument, in a nutshell, was that German economic hegemony has not translated into political supremacy. On the contrary, since the onset of the crisis, Germany has been losing influence both at home and abroad.
Schwarzer began by addressing the urgency surrounding the question of Germany’s hegemonic position in Europe in the context of the current situation in Europe, namely, the sovereign debt and banking crisis. Following a review of German policy decisions and their impact on both responses to the crisis and the future shape of the Eurozone, Schwarzer offered an explanation for why Germany became such a dominant player in Europe. After enumerating Germany’s sources of strength, she raised the question whether they might be fading away, arguing that they are, both internally, in Germany, and also, in the overall context of the EU.
On Thursday, March 28, we hosted our second luncheon discussion of the semester: “The Economics of the Eurozone Crisis” with German political economist Stefan Collignon, ordinary professor of political economy at Sant’Anna School of Advanced Studies, Pisa, since October 2007, and International Chief Economist of the Centro Europa Ricerche (CER), Roma, since July 2007.
Collignon took the crisis in the Eurozone as his starting point, asking whether the political will to save the European Union still exists. After 60 years of “ever closer union,” has the European adventure come to an end? There is a fundamental contradiction in Europe, Collignon said, insofar as national policies have external effects in other member states, externalities that European policies must address if Europe is to survive, yet “decisions are taken by representatives of partial not general interest.” He devoted considerable time to popular explanations for the crisis, on the premise that how one explains the crisis will shape one’s response: “epistemic divergence” (different understandings of what is wrong) lead to “preference divergence” (what shall we do?). Throughout the talk, he argued that Germany’s (mis)understanding of the crisis has had political reverberations that have made matters worse.
Collignon laid out two common explanations for the crisis in the Eurozone: Fundamentalists, he said, want to say crisis was caused by lack of discipline and excessive deficits, whether public, as in Greece or Portugal, or private, in Spain and Ireland, or macroeconomic unbalances. Where as the monetarists say it is a liquidity crisis, resulting from a series of shocks – the global financial crisis in 2008, the Greek confidence shock – that have accumulated into a crisis of confidence in financial markets.
Disputing the theory that Europe’s crisis is a debt crisis, Collignon compared the Euro Area to Japan, which has higher debt ratios and no crisis.
Examining debt to GDP ratios in individual member states of the European Union before and after the crisis tells a different story:
The two countries that stand out as countries that did not respect fiscal discipline are Germany and France. Not countries in crisis. The charts belie the explanation that the so-called debt crisis was caused by fiscal profligacy and irresponsible borrowing by governments.
It becomes even clearer looking at Greece:
While it is true that Greece was not following its obligations under the stability and growth pact, according to Collignon, its structural deficit – given the substantial increases in Greek GDP – was stable, or at least not an enormous problem. The real problem started in 2008 with the collapse of Lehman Brothers. At that time, revenues began to fall while expenditures grew for another year. This, Collignon said, was not irresponsible – governments should spend money to compensate shortfalls. But then came the second shock, when true picture of Greek borrowing was revealed. This time the financial markets reacted and European authorities pushed Greece into a negative feedback loop, reinforcing negative growth. With each round of consolidation, output has shrunk, along with revenue, forcing further consolidations. Whereas before the crisis, Greek GDP was growing at 3% a year, it is now down by nearly 20%. This is just one example, Collignon said, of how Germany’s misunderstanding of the crisis as the result of fiscal policy irresponsibility, has exacerbated tensions and reinforced the crisis.
As for the explanation that the crisis is the result of macroeconomic imbalances, Collignon, citing Blanchard and Giavazzi, explained that “they are exactly what theory suggests can and should happen when countries become more closely linked in good and financial markets.” The problem, Collignon said, is that people don’t understand how a monetary union works, i.e., through the “efficient allocation of resources according to comparative advantages.” The notion that policy intervention is required to rebalance current accounts, he said, is intellectually flawed, because we are talking about domestic debt, not foreign debt. This becomes obvious if we compare current account deficits in individual member states to the Euro Area as a whole:
As Collignon explained it, current account positions depend on government deficits and the savings investment balance. To reduce the current account deficits, you either have to reduce the budget deficits, as the fiscal fundamentalists advise, or reduce investment and increase savings. But such policies, he explained, further reduce demand in countries that are already having problems with demand, worsening the crisis.
According to Collignon, in a monetary union, the current account between countries or regions doesn’t really matter as long as it is financed. He recommended a better analytical tool than current accounts would be “flow of funds.” If we look at the Euro area as a single economy, he said, we see that the external relationships are balanced: for the Euro area as whole, households have been saving, companies have been borrowing, and governments have been borrowing. It is nevertheless important, he conceded, to examine the separation between north and south, in particular, in the years preceding the crisis when the corporate sector in the north, instead of borrowing, became a net lender. While it may have been sustainable, within a monetary union, which is a closed system, it created the regional imbalances in terms of employment and economic growth that are plaguing Europe today. It is, however, impossible to say the southern countries were acting irresponsibly, all on their own; the boom in the south was financed by lending in the north.
Collignon similarly dismissed the argument that the crisis is a liquidity and banking crisis. He defined a liquidity crisis as follows: “a local liquidity shock causes a deterioration in a specific class of asset values, which spills over into banks, which need liquidity. Banks get distressed because the deteriorating asset prices put their balance sheets into difficulties and reduce bank capital. Finally, the crisis spills over into the real economy.”
Here, Collignon explained, government bonds play a key role insofar as they determine financing conditions in the banking system. When uncertainties affect sovereign bond markets, they feed negative expectations regarding the conditions of local banks and borrowers. The reason being is that government securities are used as collateral, which banks use in order to obtain liquidity from the central bank. In Europe, tensions in the sovereign debt markets, reduced the collateral base of banks contributing to the “freezing” of the interbank market. As market dried up, the ECB became lender of last resort to banking system as a whole, enabling Europe to weather the crisis.
The fragility in the banking system is depicted in the following slide, which shows the balance sheet exposure of banks in different members states to southern debt:
Collignon argued that the “negative spillover” from the sovereign debt crisis into the real economy was exacerbated by the “no-bailout” principle. It is not, he said, simply because the markets were short-sighted before the crisis. More serious has been the so-called “home bias,” which he described the home bias as the “tendency to keep a considerable share of assets in domestic equities despite the purported benefits of diversifying into foreign equities.” Simply put, local banks will often hold disproportionate amounts of debt issued by their own governments. This regional segmentation in Europe’s financial markets has become a source of increased financial vulnerability for Europe as a whole.
The “no-bailout” principle was, Collignon said, conceived as a market mechanism to ensure fiscal discipline – the idea being that the financial markets would “punish” excessive borrowing on the part of governments by raising interest rates. In practice, however, the principle the negative impact on balance sheets of banks and borrowing conditions more generally, causing local banks to suffer disproportionately from deterioration of local economic conditions. If the “no-bailout” principle had been valid, Collignon argued, a rise in government bond yields would not have led to a credit crunch in affected markets. In fact, the resistance of “certain authorities” to bailouts has made things worse.
Collignon laid out his own understanding of the dynamics of the crisis, arguing that the markets are reflecting political chaos and resistance:
- Global financial crisis reduces asset values.
- Greek confidence shock affects Greek bonds.
- Germany resists bailout.
- Banking system deteriorates further.
- Crisis spills over into real economy.
- Other countries are affected.
- Europe’s way of dealing with it, through inter-governmentalism, creates gridlock.
Evaluating policy responses, he claimed that it has been measures taken by the ECB as lender of last resort to European banking system that have helped to stabilize financial markets. Contradicting worries that monetizing government debt will lead to inflation, he pointed to examples of central banks around the world that have intervened in crises. In Europe, he said, government bond purchases remain a very small percent of ECB assets.
He argued that the best remedy would be issuing Eurobonds; it would solve the “home bias” problem and it would provide a benchmark to the rest of the credit markets. Unfortunately, he said, Germany has blocked proposals put forth by the European Commission. And this, Collignon stated, is the core problem facing Europe today, namely, who controls what. He suggested a number of policy responses to address the institutional dimension of the crisis, notably, strengthening of fiscal surveillance, coordination of national budget plans, creation of a fiscal compact, and finally, imposition of financial sanctions. To address the macroeconomic imbalances, he said that the European Commission has developed a surveillance mechanism aimed at preventing and correcting such imbalances.
In conclusion, Collignon said that Europe will take the “Federalist leap” or it will disappear as a global player and sink into irrelevance – in either case, Europe’s future is a matter of political will.
As part of its contribution to International Education Week at Boston University, the Center for the Study of Europe hosted Kalypso Nicolaïdis, Professor of International Relations and director of the Center for International Studies at the University of Oxford, to speak “Europe’s Crisis and the Pathologies of Democracy.” Nicolaïdis, who has coined the term “demoicracy” to describe a “third way” of understanding Europe as something other than a federal state on one hand or a collection of democracies on the other, was previously associate professor at Harvard University’s Kennedy School of Government. She is also chair of Southeastern European Studies at Oxford and Council member of the European Council of Foreign Relations. In 2008-2010, she was a member of the Gonzales reflection group on the future of Europe 2030. She also served as advisor on European affairs to George Papandreou in the 90s and early 2000s. Her research combines long-standing interests in exploring the dynamics of European integration, issues of identity, justice and cooperation in the international system, the sources of legitimacy in European and global governance, the relations between the EU and the Mediterranean/Turkey as well as preventive diplomacy and dispute resolution. She has published widely on international relations as well as the internal and external aspects of European integration in numerous journals including Foreign Affairs, Foreign Policy, The Journal of Common Market Studies, Journal of European Public Policy and International Organization. Her latest book is European Stories: Intellectual Debates on Europe in National Context (OUP, 2011).
Taylor Boas, Assistant Professor of Political Science, and Vivien Schmidt, Director of the Center for the Study of Europe, served as commentators.
Greece and the Eurozone were the subjects of Kevin Featherstone’s luncheon discussion at the Center for the Study of Europe on Tuesday, November 13. Featherstone, who is Eleftherios Venizelos Professor of Contemporary Greek Studies and Director of the Hellenic Observatory in the European Institute at the London School of Economics, is author of The Limits of Europeanization: Reform Capacity and Policy Conflict in Greece (with D. Papadimitriou) (2008); The Last Ottomans: The Muslim Minority of Greece, 1940-49 (with D. Papadimitriou, A. Mamarelis, and G. Niarchos), and the forthcoming The Emperor has no clothes! Greek Prime Ministers and the Challenges of Governance.
In his talk, Featherstone argued that the crisis in the eurozone has brought a number of issues to the fore, not least of which is the challenge of managing a heterogeneous currency union. The euro, he said, was always primarily a political project, with governance problems and vulnerable legitimacy. If there is a lesson in the Greek crisis, it is namely that market discipline did not work–by 2013, Greece will be in its fifth continuous year of recession. The Greek case warns of the dangers of the EU imposing unremitting austerity, when growth is a shared interest, raising the question of what “Europe” was for.
See also Kevin Featherston on The Maastricht Roots of the Greek Crisis.
On Thursday, April 12, the Center for the Study of Europe hosted a luncheon discussion with Luís Miguel Poiares Maduro, Visiting Professor of Law and Gruber Global Constitutionalism Fellow at Yale Law School and Professor and Director of the Global Governance Programme at European University Institute. Maduro served as Advocate General at the European Court of Justice in Luxembourg from 2003 to 2009. A graduate of the European University Institute and the University of Lisbon, he specializes in European Union law, international economic law, constitutional law, and comparative institutional analysis.
Maduro’s talk, The Euro’s Crisis of Democracy, focussed on the Eurozone crisis and the lack of political will in Europe to address it. Mustering political will, he said, will mean changing the nature of political incentives so that Europe does what Europe needs. Elaborating, he argued the scope and level of politics has not followed the scope and level of political problems in Europe. Member states have yet to grasp the consequences for their democracies of the interdependence generated by economic, social, and political integration. While politics have remained mostly national, problems are increasingly European in scope. There is no “political space” for European citizens to address European issues, hence the “democratic deficit” between national politics and European problems.
The Eurocrisis, Maduro argued, is an opportunity to address both the crisis itself and the democratic deficit underlying it, by expanding the Union’s political power and its democratic legitimacy simultaneously. He emphasized what could be done at the European level, one, by tying the outcome of European elections to the determination of the Commission President, incentivizing citizens to take more interest in European politics and encouraging parties to develop European agendas, and two, by making full use of its regulatory capacities and market clout to reign in market actors that cannot be effectively regulated by the member states.
Later in the afternoon, Maduro gave a second talk on The Promises of Constitutional Pluralism, in which he distinguished between internal and external sources of pluralism in the European legal order and competing normative claims within the EU. The talk was broadcast on WBUR radio’s “World of Ideas” program on Sunday, April 22. [Listen to Miguel Maduro on WBUR]
On March 25-26, following the Council for European Studies meeting in Boston, the Center for the Study of Europe hosted a workshop entitled Resilient Liberalism: European Political Economy Through Boom and Bust [download program]. The two-day workshop brought together the contributors to a forthcoming Cambridge University Press publication on the state of European political economy, co-edited by Center Director Vivien A. Schmidt and Mark Thatcher from the London School of Economics as part of a larger study of the role of ideas in political economic change. The workshop was generously funded by the Center for the Humanities at Boston University, with contributions from the Departments of International Relations and Political Science. It will be followed by a second workshop at Sciences Po in Paris, funded by the European Science Foundation.
Although from the standpoint of the United States, Europe appears as a haven of social democracy, strongly opposed to economic liberalism, in truth since at least the 1980s the influence of neo-liberal ideas, institutions, and policies has grown steadily. These have profoundly changed the ways in which capitalism works across Europe’s different national economies as well as had major impacts on its welfare states. The central question addressed by the authors concerns why neo-liberal ideas have proven so resilient even in a ‘cold climate’ such as Europe, and despite apparently large-scale failures, theoretical critiques, and the existence of powerful alternatives. To answer the question, contributors examined the in-roads of economic liberalism on the European Union and its member-states as well as its spillover effects on political liberalism and democracy from historical, philosophical, and political economic vantage points.
Following the workshop, four of the authors, top experts on different aspects of European economics, politics, and welfare states, took part in a panel discussion on the European financial crisis – The Eurozone Crisis: Is There a Way Out? The public event, moderated by Vivien Schmidt, featured Maurizio Ferrera from the University of Milan, Andrew Gamble from Cambridge University, Mark Thatcher from LSE, and Sigurt Vitols from the Wissenschaftzentrum Berlin für Sozialforschung.
Event Highlights: Social Europe in Crisis – The Impact of the Eurozone Crisis on National Welfare States
On Wednesday, March 21, Maurizio Ferrera and Anton Hemerijck took part in a luncheon discussion hosted by BU’s Center for the Study of Europe on the impact of the ongoing Eurozone crisis on European social policy.
Maurizio Ferrera is Professor of Comparative Public Policy at the University of Milan. He is also the President of the Graduate School in Social, Economic and Political Sciences and director of the Research Unit on European Governance (URGE) of the Collegio Carlo Alberto Foundation in Moncalieri (Turin). His research interests include comparative public policies and European integration, with a special focus on the development, crisis and perspectives of the European welfare state.
Anton Hemerijck is the dean of the Faculty of Social Sciences at the VU University Amsterdam, and vice rector. Between 2001 and 2009 he was director of the Netherlands Council for Government Policy (WRR). He publishes widely on issues comparative social and economic policy and institutional policy analysis.
Anton Hemerijck’s presentation followed the main argument of his forthcoming book Changing Welfare States, a major new examination of the wave of social reform that has swept across Europe over the past two decades.
In his talk at BU, Hemerijk challenged the perception that European welfare states are crumbling under weight of domestic and external pressures, and offered a view of “welfare recalibration” quite different from the “frozen welfare landscape” depicted in academic literature. He argued that European social policy has undergone profound transformations in recent decades in response to a wide range of challenges – not excluding the current financial crisis – from intensifying globalization, de-industrialization, aging populations, declining birthrates, and the rise of women in the labor market to European integration and more. The resilience of the European welfare state throughout, he said, owes not to its “stability” – something which threatened its undoing during the monetarist challenge of the 1980s – but rather to its adaptability, as evidenced in cumulative adjustments across a number of macroeconomic policy domains.
Hemerijck highlighted the cognitive dimension of the adjustments, describing how shifting norms and values have shaped social policy in Europe since the 1990s. He explained the recalibration of the European welfare state as a form of “social learning,” a phenomenon first described by Hugh Heclo in 1974. He then outlined four dimensions of social learning, the first being functional recalibration, which pertains to the social risks against which welfare states desire to protect. In this regard, he said, there’s been a shift from a static perspective to a more dynamic one, from income support for disadvantaged groups to social investment in human capital over the life course. The second is distributive recalibration, which concerns the (re)distribution of costs and benefits in society. The third is normative recalibration, which concerns the norms and values guiding search for effective and fair policies. Europeans, Hemerijck said, want to live in “harmonious societies,” and as a consequence, the welfare state enjoys huge normative support throughout the EU. Nevertheless, there has been a shift from a Rawlsian notion of fairness to a more “capacitating fairness” balancing rights and responsibiliites. Finally, there is institutional recalibration, which concerns not only levels of decision making but also responsibilities of individuals, states, markets, and families.
Optimistic that European societies remain capable of re-adapting their welfare institutions to the new context.Hemerijck concluded by saying that there is much more policy intelligence, or social learning, than meets the eye if you look at the world through the new politics of the welfare state.
Maurizio Ferrera focussed his remarks on Italy, and in particular, on the new Monti government, for which he had high praise. The policy innovations Mario Monti has succeeded in pushing through are, Ferrera said, an example of how a traditionally “inert” country, under the right conditions, can become a quick mover. He argued that recent events in Italy highlight the role of the European Union in shaping and re-shaping domestic politics. At the domestic level, he said, they offer an illustration of something Anton Hemerijck alluded to in his discussion of welfare state politics, namely, the ways governments initiate unpopular reforms.
After a recap of the events of 2011, culminating in Berlusconi’s resignation in November 2011 under pressure from Italian President and implementation of a “technocratic government” under Mario Monti. Ferrera underscored the democratic nature of the process, over against accusations to the contrary in and outside Italy. He went on to outline the Monti program, which, he said, aims to restore fiscal sustainability and financial stability and to promote growth and to restore stability in a fair way. The first component, titled Save Italy, dealt with pension reform, redressing inequities in terms of gender and intergenerational fairness. The second, Grow Italy, introduced a number of “liberalizations,” essentially removing barriers to growth. This package, Ferrera said, should result in 1% growth in Italian GDP per annum. The last package, Work Italy, introduced on March 20, promises major reform of the Italian labor market, allowing for firings under certain conditions; more secure contracts for younger works; and overhaul of the Italian unemployment system. While the reforms are not without opponents in Italy, so far, he said, markets have responded favorably: spreads for Italian bonds, which traded at junk levels at the end of 2011, have been slashed in half.
According to Ferrera, the Eurozone crisis has proved, in Italy’s case and also in peripheral countries, to be a spur in domestic policy realm. He argued previously, in a book co-authored with Elisabetta Gualmini, that Italy and the other south European countries were rescued by the EMU, insofar as the EMU made the status quo in those countries unviable. The Eurozone crisis, he said, presents a similar challenge and he referred to the European pressure to get rid of Berlusconi. We are seeing a “Europeanization of politics,” he said, admitting that Monti’s accomplishments highlight the increasing relevance of “European” credentials. It is interesting therefore – according to Ferrera – that Monti has said he will never say, “Europe is demanding …” He’s promised whatever he proposes is because it is good for Italy. On the plus side, there’s been a rapprochement between political parties in Italy, who for now are backing Monti’s reforms, maybe because they know they won’t get the blame.
“Ireland and the Euro” was the title of Wednesday’s luncheon discussion with Professor Brigid Laffan of Ireland, a leading scholar on the European Union, at BU’s Department of International Relations. Laffan, who is principal of the College of Human Sciences and professor of European politics at University College Dublin, is currently is a visiting fellow at the Centre for European Studies at Harvard. Her teaching specialities include European integration, international relations, comparative politics, and Irish public policy. Co-author of a 2008 book titled Ireland and the European Union, she is at work on a new book on the future of the Eurozone from the Irish perspective.
Laffan discussed the Eurozone crisis in general with particular attention to the situation in Ireland. She identified the main causes of the Irish economic crisis, beginning with exogenous factors, namely, membership in the eurozone, which exposed Ireland to cheap credit because of a sudden inflow of “cheap money”, and moving onto endogenous reasons including, a loss of competitiveness, an inflated reliance on the construction industry to sustain the boom, the expansion of public expenditures and weak oversight. According to Laffan, Ireland made an effort to redress the situation as early as 2007, introducing austerity budgets, making painful cuts, attempting to regain competitiveness by taking on sheltered sectors of the economy, and finally, recapitalizing banks and guaranteeing deposits.
She emphasized that Ireland’s problems were not caused by an excess of sovereign debt but rather a banking crisis. On the 28th of September 2008, the then Irish Government guaranteed the vast bulk of bank liabilities without knowing the extent of the toxic assets in those banks. By socialising the liabilities of the banks, the Government undermined its own fiscal standing. Ireland experienced a 21% decline in GDP by 2010 from its peak in 2007. The collapse proved too much for the country to cope with. An outflow of capital, reliance on the ECB for liquidity, and widening spreads made a November 2010 EU-IMF rescue inevitable.
It would be impossible, Laffan said, to overstate the reverberations this has caused. In February 2011, when the Irish electorate was afforded an opportunity to pass judgement on the then Government, it reduced the once dominant ruling political party, Fianna Fáil, to 20 seats in parliament and only one seat in the greater Dublin area.
As for impact of the crisis on relations between Ireland and the EU, so far, a majority (46%) of the Irish electorate believe that Ireland should continue to comply with the terms of the bailout although a sizeable minority (30%) disagree and 20% expressed no view.
For the time being, Ireland is the best performing of the program countries. Competitiveness and growth have returned thanks to booming export sector and a reduction in unit labour costs. However, unemployment is rising, emigration has accelerated and the domestic economy continues to decline. If the bailout strategy does not work in Ireland, Laffan stated, it will not work in the other peripheral countries.
One aim of the EU-IMF rescue plan was to contain the threat of contagion spreading to other eurozone countries. Another goal was to give the Irish authorities breathing space to introduce reforms, regaining competitiveness and paving the way for a return to the debt markets in 2012.
According to Laffan, it is not in Ireland’s interests to default given its reliance on inward investment and exports. As long as the situation in Europe remains unstable, the Irish Government has to navigate the pressures emanating from two sides. Just how long any Government can manage sustained austerity is difficult to judge. There may well be a tipping point into social unrest but so far, the Irish Government, economy and society have displayed considerable resilience.