Sunday, February 6, 2011

Europe's new economic constitution

France and Germany, with the support of the Netherlands, have agreed on the price for supporting the euro zone's weaker economies. It will be a stronger economic constitution devoted to a supply-side competitiveness policy for the euro zone, and indeed for the entire EU. The agreement will form the centrepiece of the EU's Spring Council on 24-25 March.

What does this mean? It means that national governments must do everything in their power to make their economies attractive for private investment capital. This means limiting government spending and  borrowing, and restructuring the economy to promote economic renewal in new economic activity. Subsidies must be cut, job protections removed and unemployment insurance modified so that capital--financial, industrial and human--can be re-allocated to more productive endeavours. Government spending and market intervention is allowed to the extent that it encourages businesses and individuals to shift from sunset industries, where emerging markets are on an equal footing with the advanced economies of Western Europe, to sunrise industries where first-mover advantages are hopefully still to be had.

France and Germany's demands will likely be a reform of an existing instrument, the Integrated Guidelines. These Guidelines are decided collectively by the European Council under the advice of the European Commission and are used to set the standard that national governments are supposed to strive for in economic, and increasingly social policy. National governments are then required to prepare National Action Plans each year, which the Commission reports on and their colleagues in the Council then evaluate--with approval or disapproval--and if they feel it is required, recommend changes to the government in question.

Once upon a time, the Integrated Guidelines were limited to macroeconomic policy and known as the  Broad Economic Policy Guidelines (BEPG). They were designed to coordinate economic policy for the euro zone members, but also for non-member states, as the idea was that they would join the euro sooner rather than later. That process started after 1992, once the political agreement to launch the euro had been made. The Integrated Guidelines added similar benchmarking, reporting and peer review for labour market policy (which covers certain aspects of skills development, education,  unemployment insurance and measures to promote work by older. minority and female residents) from 1997 onward, and competitiveness policy more broadly from 2005 onward. That was the year that the EU reformed and strengthened its goal to become the world's most competitive economic zone by 2010.

The Integrated Guidelines were a great idea, but they had very little impact on national policies, and now Germany and France have agreed that they should be granted more importance than they have had before. The Guidelines are part of what is known in Europe as the Open Method of Coordination, which stresses that governments should view the benchmarks as voluntary and that strict demands contradict the spirit of the arrangement, which is to let 1000 flowers bloom.

The Franco-German deal will install a much more extensive economic constitution for Europe, if the Council adopts it. The question is: how many obligations will a successfully agreed-upon reform of Europe's economic constitution place on EU member states? All must agree. France and Germany will not gain everything they want. Now that they have decided what they will strive toward, the next three weeks will be surely be devoted to various combinations of coalition-building, sweet-talking, side-deals, arm-twisting and brow-beating to make an agreement possible.

France and Germany must consider more strongly than they have in their press statements to date what their narrative of success and appropriate policy actually entails.  Messages from Berlin argue that Germany must be the standard for the new economic constitution. Parts of that are right, but parts of that are also surely wrong and inappropriate for Europe. Germany is a highly conservative country in which privilege, class and gender biases are institutionally reinforced. That is hostile to some understandings of how the state should govern society, and of what a good society should strive towards. Economic policy only survives intact if it is embedded in social acceptance. German ideas of what is right are not European ideas, nor should they be. In the time to come, France may prove to be crucial in determining the final outcome. It is not as dogmatic as Berlin, and it has a stronger tradition of state intervention in the economy and social justice as part of the public good that resonates well in many other parts of Europe.

Germany will not only have to make demands; it will have to listen as well and consider alternative visions in good faith of what the state is there to do.

A constitution is a political compromise, and it must reflect everyone to be legitimate and not do harm.

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