The road to Europe: when Europe went right it went wrong

The turn into a neoliberal direction of European integration is at the root of the present crisis. In the search to avoid a global depression, European leaders may be forced to move closer towards a federation. Such steps are fraught with difficulty and will meet nationalist populism head-on in a Europe without a democratically rooted common vision that goes beyond the common market.
Bengt-Åke Lundvall
29 August 2011

In opening the debate on, ‘The road to Europe’ in il Manifesto, Sbilanciamoci and openDemocracy Rossana Rossanda asked economists and others to exchange their assessments of the Euro-crisis and Economic and Monetary Union (EMU). Mario Pianta and Donatella della Porta gave their responses, and I am in agreement with their main arguments. Pianta is right to point out that growing economic inequality and neoliberal dogma have contributed to the current crisis. And Donatella della Porta correctly cites the lack of democratic legitimacy as a major problem in the current situation where the integration process is forced ahead by the economic necessity of addressing the acute world-wide crisis. I will show that precisely the form and depth of this crisis reveals fundamental weaknesses in the roads travelled by European integration.  I argue that the Lisbon Strategy from 2000 was derailed midway when it went in a neoliberal direction and that the Europe 2020 Strategy simply continues on the wrong track. These did not constitute the kind of underpinning that was needed for EMU. Therefore while EMU was designed to protect member countries from economic instability it has now become a major source of instability for the world as a whole. If EMU was a misconstruction from the very beginning, now it would be extremely dangerous to let it cave in. Therefore in spite of a discourse putting all the blame on national governments, European leaders may be forced to drive Europe full speed ahead towards a federation, not because it is part of their vision but because they need to avoid a global depression. Such steps are fraught with difficulty and will meet nationalist populism head-on in a Europe without a democratically rooted common vision that goes beyond the common market. 

Comparing the Lisbon Strategy and Europe 2020 

The global contexts in 2000 and in 2010 were quite different. During the 1990s, at the launch of the Lisbon Strategy, both employment and growth rates were higher in the US and this flourishing of the ‘new economy’ in the US was generally assumed to be down to more unregulated markets, more entrepreneurial activities and higher rates of investment in knowledge capital. It followed that that growth in Europe was thought to be hampered by ‘rigidities’ especially in labour markets together with underinvestment in research. The EU2020 strategy is introduced in a very different context where both the US and Europe suffer the consequences of the financial crisis, where the ecological crisis is high on the agenda, and where the major competitiveness challenge comes from China and India rather than from the US. 

These differences in process and context are to some degree reflected in the content of the new strategy. In the Lisbon Strategy, the EU had set itself a new strategic goal:to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion.’  Achieving this goal required an overall strategy aimed at ‘preparing the transition to a knowledge-based economy and society by better policies for the information society and research and development (R&D), as well as by stepping up the process of structural reform for competitiveness and innovation and by completing the internal market; modernising the European social model, investing in people and combating social exclusion; sustaining the healthy economic outlook and favourable growth prospects by applying an appropriate macro-economic policy mix.’ 

The new EU2020 strategy puts forward three priorities: ‘smart growth’ - developing an economy based on knowledge and innovation; ‘sustainable growth - promoting a more resource efficient, greener and more competitive economy’; and ‘inclusive growth - fostering a high-employment economy delivering social and territorial cohesion.’ One major difference deserves to be pointed out: ambitions have become much more modest. In EU2020 there is no promise that Europe will become the most competitive region of the world and it is realised that the economic crisis has had a major negative impact upon employment and income. 

How Europe went to the right 

There is continuity in the general orientation of the two strategies, but a shift in priorities had already taken place a few years into the Lisbon strategy period, with a weakening of the social dimension of the strategy and a stronger focus upon growth and employment.  This came out of a mid-term evaluation in 2004-05 that argued that the strategy was ‘too complex’ with too many targets. All attention should instead be focused upon employment and economic growth. This change also reflected a change in the political landscape where social democratic governments were replaced by more right-wing regimes. 

The shift narrowed the goal of ‘more and better jobs’ to ‘more jobs’: it gave emphasis to ‘flexicurity’ but with exclusive focus upon flexibility.  The change in priorities is reflected in the new strategy EU2020 where the concept of social cohesion is understood narrowly and translated into targets related to poverty reduction. It is noteworthy that ‘more and better jobs’ now appears in the introduction to the EU2020 as the vague ‘more jobs and better lives’. 

While the general direction of the Lisbon Strategy, and especially the focus upon social cohesion and the knowledge-based society pointed in the right direction, those in charge of implementing the policy saw ‘social cohesion’ as a burden for Europe rather than as the necessary foundation for the learning economy. Therefore the implementation became increasingly lop-sided and dominated by the neoliberal interpretation of ‘structural reform’ and flexibilisation.

The Lisbon strategy as scaffolding for EMU

Already from the beginning (1996), the European Employment Strategy was presented as a necessary complement to EMU. The same was true for its successor, the Lisbon Strategy. When EMU was established, there were warning voices that a monetary union without a common fiscal policy would be vulnerable to external shocks. The total budget of the EU is only a few percent of GNP and it cannot play the same role as the federal budget in the US as an automatic stabiliser. This was especially problematic for a currency union bringing together countries at very different levels of economic development. The Lisbon Strategy may be seen as an attempt to compensate for this fundamental weakness of EMU. 

There were two competing interpretations of how the Lisbon Strategy could serve as a support structure for EMU. The neoliberal version was that policy coordination should make labour markets flexible in the south of Europe so that any negative shocks could be absorbed by an immediate reduction in real wages. The neo-reformist interpretation was that the less developed regions in the South should be helped to catch up with the North on the basis of ambitious investments in the knowledge base of those regions lagging behind.  

If the Lisbon Strategy had succeeded in reducing regional inequality within EMU by upgrading the knowledge base and the industrial structure in the south of Europe - aiming at better jobs less exposed to global competition, the current EMU-crisis might not have been as dramatic. It is no accident that the countries now most exposed to financial speculation are the ones that have the weakest industrial structure with the biggest proportion of workplaces directly exposed to competition with emerging economies. 

This would have required a stronger, not a weaker, focus upon regional and social cohesion, reforms of labour markets and education systems aiming at upgrading skills and work organisations, as well as massive investment in knowledge infrastructure. But the Lisbon agenda became increasingly oriented toward the first strategy and the current situation demonstrates that this movement to the right was not only inadequate. It ended up building a faulty institutional infrastructure that now threatens to bring down not only the European economies but the whole world economy.

EMU and the threat of global crisis

The Euro-crisis needs to be seen in a wider context whereby the globalization of financial markets has resulted in small economies becoming more exposed at a time of narrow scope for autonomous economic policy. In this global perspective, to be sure, all European countries are small. The big ones such as the US, Japan and China are less vulnerable when it comes to the exposure to financial speculation. But they too are becoming smaller, in the sense that the margins for what they can do in terms of autonomous economic policy have become narrower.

Economic and Monetary Union may be seen as an attempt to transform Europe into a big country, to protect the small European member-countries and to make them more resilient to external speculation and crisis. But the attempt has failed and those who argued that it was unwise to create a currency union without establishing a fiscal union have been proved right. Greece, Portugal, Spain, Italy and most recently France have all seen financial speculation raising the borrowing costs for national governments. A scenario with one or more of these nation-states going into bankruptcy followed first by major bank crack-ups and then by a generalized global financial crisis resulting in a world depression has become a real threat.

The fear of finding one’s national economy trapped in the searchlight of financial speculation forces individual national governments to pursue budget cuts while attempting to stimulate investments through lowering taxes upon the rich and upon companies. This is the kind of response that the German chancellor, Angela Merkel, has also hit upon as solution. But these efforts to strengthen the ‘international competitiveness’ of individual countries have a negative impact upon aggregate demand at the global level. While they may be seen as rational in leaving the single economy less exposed, they increase the overall probability of a financial tsunami.

Since it seems impossible for European leaders to reform one of the fundamental sources of instability - the mode of operation of global financial markets in the short term - alternative strategies have to be considered. It becomes crucial for them to avoid the euro-crisis leading to insolvency in any of the member-countries. One of the proposals is to establish Eurobonds, whose value is guaranteed by a number of countries working together. This would be a first step in any process moving Europe toward a federal state. But while the need for ‘more Europe’ is acute, when it comes to building barriers against a threatening financial tsunami, the sense of crisis tends to give new energy to nationalistic feelings, strengthening those political forces that are opposed to actions of international solidarity.

The roads ahead for Europe

Most of the priorities set out in EU2020 are relevant responses to the challenges facing Europe today.  But they do not add up to a protective wall against a financial tsunami in the short term. The Lisbon Strategy may be seen as an attempt to establish regional and political convergence in Europe with the ultimate aim of building a strong and cohesive union built upon the principle of solidarity. But the Lisbon Strategy approach, with its emphasis on ‘best-practice’ and benchmarking in specific policy areas was technocratic in essence: and the strategy has not been successful in stimulating popular participation in the project. To mobilise citizens for the European project there is a need for a vision that goes beyond the common market.

In a seminal paper written at the occasion of the conference on, ‘The Construction of European Identity in a Global Economy’ in preparation for the Lisbon Summit under the Portuguese Presidency, Manuel Castells argued that there is a need for, ‘a common European identity on whose behalf citizens around Europe could be ready to share problems and build common solutions’.  After rejecting common religion and culture he pointed to ‘shared feelings concerning the need for universal social protection of living conditions, social solidarity, stable employment, workers’ rights, universal human rights, concern about poor people around the world, the extension of democracy to regional and local levels…’. He proposed that if European institutions promoted these values probably the ‘identity project’ would flourish. 

To mobilise popular support and to reconstruct EMU there is a need to redefine it so that it recognizes the ‘social dimension’; transforming it into an Economic and Social Union (ESU). This should be linked to reforms of the decision-making process that combine democratic participation with efficiency in new ways. There is also a need for a paradigmatic shift where the fear of state intervention and the belief in markets is changed into a pragmatic perspective where governments are allowed to take on the tasks necessary to promote stable economic growth. This includes establishing a much stricter transnational regulation of financial markets. But, most importantly, it involves a redesign of all institutions and sectoral policies so that they take seriously into account the fact that we are in a new phase, where knowledge is the most important resource and learning the most important process. 

But time is running out and what we are more likely to witness is European leaders taking reluctant and unenthusiastic steps toward a federation with a common fiscal policy, small halting steps that will certainly be taken without popular support and with little involvement of any democratic institutions. Their own discourse - where they present each successive reform as being forced on them for the sake of Greece, Portugal, Spain and so forth, rather than to save their own economy from depression - is not at all helpful in this regard. If they stumble on this wobbly path we might end up with the first economic depression since the 1930s.


This article is based upon a paper co-authored with Edward Lorenz, From the Lisbon Strategy to Europe 2020, forthcoming in Morel, N., Palier, B. and Palme, J. (eds.), Social Investment, Policy Press, 2011.



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