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Economic homogenisation and its consequences: How the EU sparked its own legitimacy crisis

Image credit: Alan Klim (cropped) (Flickr: Creative Commons)

Looking back at 2016, it will be a year remembered for one defining feature: the revival of economic populism. All across the world, the ‘establishment’ order has been rocked by supposed ‘one in a million’ outcomes. Yet upon closer critical examination, these outcomes are no surprise. Seemingly forgotten/insignificant political parties, figures and ideologies are resurgent, and no case better represents this than the continuing political-economy crisis spreading through the European Union (EU).

Whilst many of the debates and news headlines have been grabbed by identity politics, there's been a fundamental lack of attention and blame placed on the real driver of crisis. The rise of what I term ‘economic homogenisation’ has played a crucial role in causing the political-economy problems of Europe. With the tightening of the political union since the global financial crisis (GFC), many economic matters have increasingly fallen out of the hands of state legislators to be homogenised by an ever-increasing set of inter-governmental rules and regulations. The rise of the ‘fiscal compact’ has been front and centre in this regard. The consequence of ‘economic homogenisation’ has increasingly manifested itself in situations where states are increasingly incapable of acting independently; most notable are France and Italy. These two states will be a core focus of this article.

The 'fiscal compact' and homogenisation

In 2012, the EU created what is now commonly called the ‘fiscal compact’. The inter-governmental agreement was sold as the ‘preventative medicine’ to prevent future economic crises like those which occurred in 2008. The argument put forward suggested the ‘fiscal compact’ would allow for EU institutions to coordinate state budgetary policy and punish reckless states. However, what's been significantly overlooked among most policy circles and commentators since 2012 is the unintended consequences of this kind of economic policy in a single-currency market.

Examining the compact’s text, we find a bewildering and binding requirement to never run deficits. The ‘balanced budget rule’ requires states to find ways out of deficit at any cost or face European court action. However, the problems emerge once one begins to examine the makeup of European economies. For example, when large and powerful states such as Germany run ever increasing surpluses due to favourable EU policy and manoeuvring its economic industry into exports, surpluses in one state have to be met by deficits in another state. However, this seemingly benign, basic understanding of economics takes on a completely different context in a single currency system. In the case of Europe, it’s the ‘consumption economies’ such as France and Italy that are burdened with unworkable economic situations; and by signing on to the fiscal compact, are burdened with austerity economic policy on top of having lost the economic tools (currency devaluation) to deal with these problems as any other country could. However, this alone doesn’t explain why the economic homogenisation has caused a political-economy legitimacy crisis. For that, we need Max Weber.

Weberian bureaucracies and economic homogenisation

Borrowing loosely from Weber’s work on democracy and bureaucracy, we can understand why a European political-economy legitimacy crisis exists. Weber argues that bureaucracy can suffer from ‘technocratic thinking’ as a result of democratic deficits. The problem with this, Weber argues, is that ‘technocratic thinking’ tries to solve all issues with one uniform response, with little regard for unforeseen consequence and outcomes. This of course doesn’t mean the EU is a Weberian bureaucracy. With the homogenisation of economic policy, however, we see this Weberian notion of ‘technocratic thinking’ on full display within the EU. As mentioned earlier, the ‘fiscal compact’ requires EU member’s states to find ways out of deficit at any cost or face European court action. This kind of inter-governmental agreement is ‘technocratic thinking’ at its worst. By imposing deficit restrictions of EU members with a single currency, the EU has essentially told states to run permanent austerity budgets. Since the GFC, one can make a strong case that France and Italy have been in permanent forms of austerity. But it has done little to solve their economic woes, and enjoyed little concern from the EU as for the consequences and outcomes of these actions.

France and Italy on a tipping point

Since the GFC, austerity has been ‘all the rage’ throughout France and Italy to deal with deficits. Whilst some might argue there were pockets of ‘non-austerity government spending’, policy has been austerity-focused for close to a decade. The consequence of this austerity has been well documented.

Just looking at standard economic measures, France’s general unemployment has stalled at around 10%, whilst youth unemployment increased to its highest level in 2013 and remained just as stalled as overall unemployment well into 2016. On top of this, GDP growth has flatlined for close to a decade. And whilst France has looked to kick start government jobs programs throughout 2016, the French finance ministry has called for further austerity to pay for these programs. In regards to Italy, we see a similar picture. Italy is currently suffering with youth unemployment at around 40% and general unemployment has risen year-on-year since the GFC to around 11%. GDP growth in Italy has also been stagnating at around 0% since 2010. However, in comparison to the French, a significant number of Italians now believe the economic situation in Italy has created a near-permanent, depression-like economic environment with no real prospects.

By implementing the ‘fiscal compact’ with a single currency, the EU has removed the ability of France and Italy to use economic tools to devalue. Devaluation of independent currencies would have allowed France and Italy to become increasing competitive in Europe, and perhaps more importantly, impact on state debt by making it easier to handle debts without permanent austerity. Austerity over such a long period fuels the kind of despair that is visible in Italy. Not only does it supress economic activity, but when it is undertaken within the realm of fiscal compact rules, the government of the day is made to look almost insignificant on the economic playing field. Thus, the consequence of austerity and technocratic thinking for France and Italy is unrelenting deflation, inescapable debt and populist revival. These are the ‘unforeseen consequences and outcomes’ of the EU’s economic homogenisation.

Here come the populists

From the French perspective, we see the resurgence of the National Front. Putting aside an analysis of their social policies around immigration and so forth, all of which have been extensively covered elsewhere, it’s extremely simple to see where the party has found new support. Marine Le Pen’s rise to political fame is based on an enticing mixture of economic reforms. These reforms come in two parts, part one of Le Pen’s reforms highlight nationalisation of banks, protectionism and a surge in welfare spending. Whilst part two of her economic reforms revolve around leaving the EU and scrapping the currency. What is obvious about these reforms is that the economic message of Le Pen is all about recapturing economic policy on a nationalistic basis, and it’s working. As the French government falters with the fiscal compact, politicians like Francois Hollande look increasing incapable of acting independently. Thus, Hollande has dived to 4% in approval ratings and Le Pen's rise to prominence makes herself a presidential contender.

Two weeks ago, there was also renewed rumblings of an anti-establishment retaliation gaining steam in Italy. The Italian referendum brought forward by Prime Minister Matteo Renzi on 4 of December morphed from a seemingly simple referendum on constitutional amendments around parliamentary powers, to a referendum of Renzi and his support for Europe. The Five-Star Movement, which has pledged to call for a referendum on leaving the Euro if they win power in the next election, used the December referendum to campaign heavily for the ‘No’ campaign. The movement used the referendum as a measuring stick for its support. With the result heavily favouring the ‘No’ campaign, the outcome has led the resignation of Renzi and the Five-Star Movement calling for swift elections.

The movement has skilfully played to the same economic issues Marine Le Pen has highlighted in France. Alessandro Di Battista, spokesman for the movement, used the Renzi referendum to highlight the economic issues plaguing Italy and how the euro is to blame. Like Le Pen, the movement uses its new-found popularity and media attention to discuss economic policy in terms of recapturing policy on a nationalistic basis. Whilst neither the National Front or Five-Star Movement are guaranteed electoral wins, nationalist sentiment throughout Brexit and Trump campaigns starkly highlight the possibility of such things occurring.

Moving forward

Moving in 2017, the European Union is in real trouble. France and Italy are the glue that hold the Union together. If both states follow the populist wave in upcoming elections, there is little chance both the currency and political union survive together. However, if Le Pen is defeated by Francois Fillon and Paolo Gentiloni, Renzi’s replacement, can come together to work on reforming the EU and its monetary policy, there is still a hope for survival. France and Italy have potential allies in Spain and Greece. Both states that have suffered greatly since the GFC and austerity has played a role in creating political upheaval in both countries with the rise of Podemos in Spain and numerous far-left/far-right parties in Greece. The ability to form a new economic coalition around EU reform and challenge the might of Germany in EU negotiations is the first step towards solving a multitude of problems. If reform doesn’t occur, one struggles to see how the Euro survives.

Charles Bryant is the International Trade & Economy Fellow for Young Australians in International Affairs

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