Dorothee Bohle
Central European University, Budapest

Perry Anderson once called the European Monetary Union a revolutionary project. This is for two reasons. First, by making price stability the single obligation of the European Central Bank, and committing members to budget discipline, the Union puts pressure on states to dismantle their inherited systems of social protection, and on organized labor to submit to competitive wage setting. Second, by elevating the ECB high above national electorates, the new currency is entirely separated from broad political accountability and popular-democratic processes. These two aspects are closely related: at its core, the Monetary Union is a project which calls on market forces in order to discipline societies who in the eyes of their leaders have pushed too far in their demands on the state, and it aims to do so by taking crucial aspects of socio-economic governance out of the democratic arena.

How far have the members of the eurozone embraced the revolutionary prospect they signed up to? In retrospect it is obvious that during the first decade of the Union’s existence, Europe has not really been in a revolutionary mood. Although retrenchment has taken place, the welfare state has not been sacrificed on the altar of monetary stability. European institutions were also ready to bend the rules of Maastricht in order to accommodate state behavior inconsistent with the Treaty. Rather than enforcing fiscal and wage discipline, European authorities moreover tolerated the building up of major imbalances. Far from being a disciplinary force, markets themselves were happy to finance growing imbalances, unsustainable levels of debt, and asset bubbles as all of this provided them with handsome profits.

The Greek crisis has given European governments pause. Confronted with an unprecedented attack of the markets which almost made the euro collapse, they agreed on two issues. First, in a heroic act, they set up a stabilization fund which allows to cover the debt servicing need of highly indebted eurozone countries. Second, deadly frightened by the prospect that the rescue effort sends the wrong signals to the markets, governments and European institutions have also committed themselves to finally live up to the spirit of Maastricht. With breathtaking speed, a European elite consensus is being formed according to which EMU members need to trim their public sectors and retrench welfare programs targeting the long-term unemployed, families with children, and pensioners. A framework of multilateral surveillance is being set up, which will monitor member states’ fiscal and macroeconomic policies. Countries that fail to meet the Maastricht criteria are bound to face sanctions. In the words of Commission President Barroso there is a ‘silent revolution’ going on in European economic governance.

While revolutionary indeed, it is difficult to see how the new EMU can work. A continent which in order to satisfy financial markets, is collectively engaged in an austere race to the bottom will have a hard time to ever escape its economic troubles. Simultaneous budget cuts of the dimensions currently envisaged are likely to lead to a downward cycle of slower growth, reduced revenues and new budget cuts. Moreover, the tasks ahead are posing formidable challenges to European democracies. The sheer magnitude of fiscal retrenchment is putting governments at loggerhead with their electorate. The silent federalization of fiscal and macroeconomic policies is only to increase the stress democracies are being exposed to, as governments are becoming unable to bridge the gap between their European obligations and the demands of their citizens.

Can anything be done to set the Monetary Union on a less revolutionary path while coping with the fallout of the financial and Greek crises? There is no doubt that a sustainable Union will require a more coordinated approach to fiscal and macroeconomic policies. It also needs to address the imbalances between creditor and debtor countries, and will have to find a way back to sound public finances. What has to be discussed, however, is how economic growth can be restored, and how the burden of adjustments shall be distributed.

A fundamental condition for restoring growth is to disarm the ticking “debt bomb” underlying most of Europe’s economies. It is not clear why the burden should be shouldered entirely by European societies. Instead, a burden sharing scheme with the states’ creditors could be sought, which would allow to reduce sovereign debt to manageable levels. While creditors would get back much, they do not need to get back all of what they lent.

Second, in order to address the huge imbalances, debtor countries should have to adjust as well. For instance, rather than focusing uniquely on restoring national competitiveness, wage formation could be coordinated in such a way that countries that have been engaged in excessive wage moderation in the past commit to a period of faster-than-productivity-growth wage increases to provide for much needed markets.

Third, the federalization of socio-economic governance should not be allowed to happen behind the scenes. This is the moment to bring politics back in. The current austerity wave is said to be necessary in order to satisfy markets. But there is frightening little debate about the fact that the packages violate basic norms of social justice, as they put an overly large burden on poorer strata of society, while those groups who already profited most from the past boom years are being largely spared. More generally, Europe needs a new debate about how much it wants to allow markets to determine the fate of its citizens and countries.