Which Generation are we saving here?

British Chancellor George Osborne said yesterday that another £25 billion in welfare cuts are needed to close the deficit:

"Do we say: the worst is over; back we go to our bad habits of borrowing and spending and living beyond our means - and let the next generation pay the bill? Or do we say to ourselves: yes, because of our plan, things are getting better. But there is still a long way to go - and there are big, underlying problems we have to fix in our economy."

With the pensions part of the welfare budget protected under the Conservative promise of the triple lock - that pensions will increase in line with average earnings, inflation or by 2.5%, whichever is the largest - and the under-25s the targets of most of the cuts, it's an odd rhetorical direction to take. It's traditional austerity rhetoric to insist that the costs of borrowing mean that the next generation is being weighted down by debt instead of the current generation dealing with their own problems.

But the under=25s are the main target of these austerity policies, be it an end to housing benefits or employment benefits. It's difficult to claim that the generation that finds itself under the 25 year threshold played a part in causing the current deficit or economic crisis. When did they speculate on house prices or recklessly run financial institutions? Are these people not the "Next Generation"? Even if they're not, presumably the benefits will still remain withdrawn for whoever this Next Generation turns out to be until they are 25.

This raises a few questions about what the morals behind the Tories' version of austerity. Why should the under-25s have access to fewer benefits than the rest of the population? At 25 you can vote, serve in the army, pay taxes, are entitled to the full minimum wage... but you can't be trusted with housing benefit? Which implies that you won't be seen as a full citizen in the eyes of the British state until you're over 25, and that you're really expected to live with your parents in tough times.

Protecting pensioners - a key voting group for the Conservatives - might be seen as a cynical political ploy (and to an extent it is), but I think you can see the basis of the Tory view of the state in the targeting of the young to close the deficit. The state, or the welfare part of it, it really a giant insurance vehicle in the Conservative view: benefits should really only be paid out to those who pay in. Pensioners have paid in, so their contribution must be protected; under-25s cannot safely be assumed to have paid much tax yet, so they should not have access to the same range of benefits as other citizens. Taxpayer payment to (or investment in) the state should be prioritised.

The problem with this view is that young people start off with nothing or not-very-much (unless they have a generous family) because they are just starting off in life and have yet to establish themselves in work and the world at large. Generally there is a redistribution of resources to the young (education, etc.) to equip them with the skills to establish themselves (and to give the state higher earning workers who will pay higher taxes). People established in careers are expected to pay not only because they have benefited from the system in the past, but also because they want their children to have a good start in life and they want later generations to continue to be able to pay for the state (including eventually their pensions).

By focusing so much on who pays in as a taxpayer, and that on an individual level they broadly get what they paid in back out in the end, it misses the point that the state acts as an investor. Taxpayers matter more than citizens, so if you can't be assumed to have paid much in, then it's not that big of a deal to withdraw benefits. So if you are in (university) education, you're expected to pay tuition fees and to take on debt to do so because you're investing in yourself, and if you're under 25, you don't deserve access to the same benefits as anyone else because we can't assume that you've paid in yet. Of course this kind of thinking means that the welfare state becomes more about those who can or have been able to pay at some point, leading to more inequality.

This attack on the young is an extremely clear sign that we aren't "all in this together", particularly as youth unemployment remains high.

Ironically it seems to be the "pro-business" Conservatives that don't know much about investment - after all, the Royal Mail was sold off at a bargain basement price while the government guaranteed its returns for a year, and the oldest student debt was sold off at a loss rather than the government even bothering to maximise the returns on even the loan system. No wonder the Tories think the private sector can do it better when they do it so badly.

A Strong Europe?: What the Grand Coalition has in store

Two months after the German elections the Grand Coalition deal between Merkel's CDU (and their sister party, the CSU) and the SPD has been signed. It's not a done deal until the SPD membership has endorsed the coalition treaty, and there is some resistance to it given their anti-Merkel election campaign and the frequency with which Merkel's coalition partners have the political life sucked from them. Still, the SPD leadership are likely to have their way, and with a membership vote on the deal the coalition will have a firm foundation for the next 4 years.

The headline policies, such as the minimum wage and reduced pension age (SPD) and road tolls for foreigners (CSU) have tended to be driven by the junior partners of the coalition. It's been suggested that the leadership style of Merkel's CDU (focusing on her leadership rather than policy) may have worked well in the campaign, but was a weakness when it came to coalition negotiations. So how is Germany's Europe policy shaping up?

The coalition agreement can be read here (PDF - in German), with the European policy at pp.15, 156-167.


Eurozone and the Single Market

The big one and, despite the hopes that the SPD may have moderated the austerity-centric policy, there is really no change here. In fact the strongly conservative tone is startling - there's plenty of talk about reducing debt and deficits and working on competitiveness, but when you turn to the "social Europe" section the rhetoric is pretty much repeated: austerity is the only way to ensure a social Europe seems to be the message.

On banking union there is little new. Yes, there must be banking union, and, yes, private banking debt must be separated from public debt (with banks taking the hit first). However the deal underlines that releasing funds under the European Stability Mechanism (ESM) or otherwise will remain subject to a vote by the Bundestag and emergency credit lines are a last resort only. The agreement both stresses that there will be no common liability at the European level since budgets are a national competence, and that budgets must be effectively overseen and co-ordinated at the European level. (It appears that the joined-up thinking demanded of Brussels has not similarly been applied here...). The SPD's leanings towards Eurobonds have apparently been stamped out altogether for the purposes of coalition.

On the future of emergency credit and the "reform contracts" that are supposed to accompany them, the German government supports the contract idea, though such deals must be "democratically legitimised". Presumably this means that the national parliament of the bail-outee will have to ratify the contract before being lent money.

Interestingly, the agreement states that there will have to be changes to the treaty basis of the currency union - a bit hint in favour of treaty change.

The new German government will support the completion of the single market, to which you can add the usual talk of both requiring further harmonisation to help create a level playing field and also ensuring the reduction of red tape, etc., etc., that always bolted on statements about the single market these days (and apparently copy-pasted here for emphasis). The stand out policy here is on posted workers, which should be "developed" to ensure that posted workers work under the same pay and conditions as nationals of the host country would.


Social Europe

Not much here at all. Under this heading the austerity rhetoric is repeated, perhaps on the basis that since times are tough austerity will have to stand in to reduce the number of policies, ironically causing a policy deficit in the process. There's not much here that isn't already long-standing policy at the EU level. Youth unemployment is bemoaned (the answer is held out to be structural reform and making free movement of this young educated workforce easier). Social and wage dumping are to be fought, and the new government will be supportive of tax harmonisation, which will have the alarm bells ringing from Dublin to Helsinki.

Money from the European Investment Bank has been promised for several types of projects and policy. Honestly, so many people have promised EIB money for so many things at this point that I'm starting to wonder if the next financial crisis will be when it collapses. It seems that when the EU budget is so small and you're cutting it, the answer is to promise to get the EIB to lend money for it. Just wait til the Europarty manifestos come out....


EU Democracy and foreign Policy

Enlargement, while supported, will face a tougher Germany: criteria must be more strictly applied, and Turkey's accession process won't "automatically" end in membership. Berlin also wants to beef up EU foreign policy through its humanitarian and development aid policies - and even military planning. It foresees a close cooperation between the EU and NATO here, which is probably something that would happen to a certain degree, directly or indirectly, though the neutral Member States may not be so happy with this.

When it comes to EU Democracy, there is nothing new: more education about Europe and supporting a more uniform electoral code seems to be the extent of the coalition's thinking here. There's not even a mention about how the 2014 elections can be used, never mind how they might affect the formation of the next Commission. Berlin will, however, want to see German on a more equal footing with French and English as a working language of the EU - it will be interesting to see how it pushes for this in practice.


Overall, very disappointing, if not entirely unexpected. For those of us on the left, the agreement's European paragraphs appear to contain no "social democratic handwriting". For those hoping for a change to Germany's Eurozone policy there is not only nothing, but a vigorous restatement of that nothing. For those looking for renegotiation there is an encouraging hint here, though the passage on social standards and the attitude towards the posting of workers will - or should - worry some British politicians who perhaps project too much of themselves into Germany's pro-single market outlook.

EU Budget: a victory for the Council

The passing of the EU budget last week by the European Parliament was definitely a win for the Council and the fiscal hawks amongst the Member States. For the first time the EU budget will be cut, and cut by €35 billion (3.5%) over the next 7 year period (this "Multi-annual Financial Framework" allocates the budgets for 2014-2020).

While the European Parliament was able to wring a few concessions from the Council, given that it supported an increase, it's hardly a sign of parliamentary muscle. The centrist alliance of the European People's Party, the Liberals and the Socialists and Democrats bloc were key to passing the budget (537 to 126 votes), with the Greens, United Left and the Eurosceptic Europe of Freedom and Democracy group being the main opponents. The centrist alliance made a few demands that were mostly reflected in the concessions.

In return for its support, the Parliament got:

- Protection of EU funds for research, humanitarian aid and border controls from cuts;
- Retention of unspent funds by the EU, so that these can be used elsewhere (instead of returning to Member States);
- Agreement to ensure the payment of existing commitments under the 2013 budget;*
- Review of the EU's own resources (money directly received by the EU rather than given by the Member States).

The cut in the budget was also reduced from the level demanded by countries such as the UK.

The rationale behind the cuts is that the EU budget needs to reflect the austerity of the Member States - a bizarre idea if the austerity currently practised is supposed to be a policy of necessity rather than ideology, since the EU as an organisation has no debt or deficit. This is because the EU cannot borrow money. The "need" for the EU to reduce spending for the same reason as the Member States is therefore an ideological position rather than an actual attempt to balance a budget or EU public finances. The end result is a reduction in the already low fiscal transfers from the EU in investing in the poorer regions of the EU - taking away an important, if small, support at a time when money is being sucked out of vulnerable economies. So much for solidarity.

It is even more perplexing when a supposedly centre-left party takes this approach.


* The EU budget in 2013 seems to be in a similar position as in 2012, with Member States ironically happy to sign up to spending commitments and then not budget properly for it...

An Emergency EU Budget

The Commission will table an emergency EU budget - a "supplementary amending budget" - to plug an estimated €10 billion funding gap across several EU projects, including Erasmus and the European Social Fund. Erasmus is probably one of the EU's most famous projects, funding the exchange of European students across the continent, but the European Social Fund is meant to deal with employment, and is linked with the Lisbon Strategy:

"In order to support the Lisbon Strategy the ESF adopted the following priorities in the 2000-2006 period:

• active labour market policies to combat and prevent unemployment
• equal opportunities for all in accessing the labour market
• improved training and education, as part of a lifelong learning policy to improve access to the labour market, maintain employability, and promote job mobility;
• a skilled, trained and adaptable workforce and new forms of work organisation
• entrepreneurship and conditions facilitating job creation"

The ESF takes up around 10% of the EU's budget, so to have such a key area "insolvent since the beginning of the month" is clearly a big problem.

The European Parliament has also backed the Commission's budget proposals for a 6.8% increase for the next 5 year budget, compared to the Council's position of an increase of 2.8%. It's been argued that the Lisbon Treaty and the projects voted for by the Council has added to the expense, while the Member States are unwilling to pay for the policies they bring in on a European level. The Member States have argued that the EU shouldn't increase its budget at a time of austerity.

It should be noted that the 6.8% increase in the budget would be an extra €9 billion - and if the EU's struggling to cover a gap of €10 billion in the budget, it's hard to see how programmes on employment and regional development won't be affected. The regional funds and funds aimed at aiding employment - like the European Globalisation Adjustment Fund - help the poorer and more crisis-hit countries in the EU. EU budget austerity will end up hurting those countries and regions that need it most, as modest as the help can be when the budget is only 1% of the EU's GDP.

Whether or not you agree with EU austerity, I think there is a good argument for adapting the timing of the EU's 5 year budget plan ("Multi-annual Financial Framework") to bring it closer to the European Parliament election cycle. Passing the budget is a main task of the Parliament, and if cuts or increases are to be made, then making it a more prominent part of the election campaign would bring more legitimacy to the process.

Amartya Sen: Democracy, Austerity and Social Justice in Europe

I came across this interesting article by Amartya Sen via the CELS: "What happened to Europe?" It's a very broad article, but covers the connection between politics (and democracy) and austerity, social justice and European integration. An extract:

"That austerity is a counterproductive economic policy in a situation of economic recession can be seen, rightly, as a “Keynesian critique.” Keynes did argue—and persuasively—that to cut public expenditure when an economy has unused productive capacity as well as unemployment owing to a deficiency of effective demand would tend to have the effect of slowing down the economy further and increasing—rather than decreasing—unemployment. Keynes certainly deserves much credit for making that rather basic point clear even to policymakers, irrespective of their politics, and he also provided what I would call a sketch of a theory of explaining how all this can be nicely captured within a general understanding of economic interdependences between different activities (emphasizing in particular the fact that someone’s expenditure is another person’s income). I am certainly supportive of this Keynesian argument, and also of Paul Krugman’s efforts in cogently developing and propagating this important perspective, and in questioning the policy of massive austerity in Europe. 

But I would also argue that the unsuitability of the policy of austerity is only partly due to Keynesian reasons. Where we have to go well beyond Keynes is in asking what public expenditure is for—other than for just strengthening effective demand, no matter what its content. As it happens, European resistance to savage cuts in public services and to indiscriminate austerity is not based only, or primarily, on Keynesian reasoning. The resistance is based also on a constructive point about the importance of public services—a perspective that is of great economic as well as political interest in Europe.

THERE IS A CENTRAL ISSUE of social justice involved here—that of reducing rather than enhancing injustice. The public services are valued for what they actually provide to people, especially to vulnerable people, and this is something for which Europe had fought. Savage cuts in these services undermine what had emerged as a social commitment in Europe at the end of World War II, which led to the birth of the welfare state and the national health services in a period of rapid social change in the continent, setting a great example of public responsibility from which the rest of the world—from East Asia to Latin America—would learn.

In order to understand the inadequacy of Keynes as a guide to solving the European economic crisis, we have to ask: what kind of an economist was Keynes in terms of his vision of a good society? Keynes did say—famously, and accurately enough—that paying laborers to dig holes and then to fill them up can be a very good thing, because of its impact on increasing effective demand to combat a recession or a depression. This is fine as far as it goes, but Keynes had extremely little to say on what social commitments a state should have—what public expenditure should be for, other than for just strengthening market demand through state intervention."

 And:

"[...]

If we add to this economic argument the long-term concern in Europe about some form of social justice and the more immediate political worry about the undermining of the European sense of solidarity, we can see what a disaster the recent European financial policies have been. The case for resisting the savage cuts in public services can hardly be ignored. This is not because the commitment to social justice must always be paramount, but surely it must be a serious concern that cannot simply be discarded by bankers and financial leaders. There is, of course, always a need for rational scrutiny and examination of what a country can afford and what it cannot—taking into account all the relevant factors, including the changing age distribution of the population. But this is not the same question as checking what a country can afford with inefficient economic and financial management, with fuzzy thinking on exchange rates and market demands and economic competitiveness."

The first two pages are a bit of European integration history, and the substantive argument really gets going from page 3 onwards.