Europe in Crisis, Part I: The Age of Austerity

Europe in Crisis, Part I: The Age of Austerity
Europe in Crisis, Part II: China to the Rescue?
Europe in Crisis, Part III: The German Engine
Europe in Crisis, Part IV: The Brussels Behemoth
Europe in Crisis, Part V: The Death of Liberalism
Europe in Crisis, Part VI: The Future of Europe

It seems like a distant memory now: a triumphant Nicolas Sarkozy going on record in 2008 to profess the death of Anglo-Saxon free-market capitalism and the victory of France's regulatory étatisme.

In the wake of the collapse of the great Wall Street investment banks and insurance brokers, many Europeans, like Sarkozy, secretly delighted in a morbid sense of Schadenfreude. At long last, the continental social welfare model had been vindicated. Or so we thought.

Two years later, just when our leaders were starting to hallucinate about the 'green shoots of recovery,' the reality of Europe's involvement in the global debt bubble finally hit home. Seemingly out of the blue, Greece sank into the dark abyss of global capital markets.

Before long, the European periphery found itself at the very core of the next phase in the first-world debt crisis.

The Dawn of the Age of Austerity

Today, with the bankruptcy of Greece and Ireland only narrowly avoided and with Spain, Portugal and Italy still balancing on the precipe of fiscal collapse, the roles seem to have reversed: not the US, but Europe is crumbling. Even the EU President is warning that if European leaders fail to rise up to the challenge, the Union as a whole might collapse.

Whether or not one agrees with such blatant scaremongering, one thing is now abundantly clear: this is the dawn of the Age of Austerity -- and nothing will ever be the same again. The coming year will see the very rules of European politics thrown out the window and rewritten altogether. The consequences of the crisis for the European people, economy and environment will remain with us for decades to come.

Over the next two months, Breakthrough Europe will publish a six-article series deconstructing the European political and economic crisis bit by bit, elucidating its complex relationship with that other great crisis of our time -- climate change -- and charting an ambitious new path forward into the 21st century.

Our starting point for this two-month discussion inevitably has to be with Merriam-Webster's word of the year: austerity. Where did this radical idea come from -- and, perhaps more importantly, how will it affect Europe and the world in the months and years ahead?

The Politics of Recession and the Idea of Austerity

In his 2009 book, The Specter at the Feast: Capitalist Crisis and the Politics of Recession, Andrew Gamble, a respected political economist at the University of Cambridge, reminded us that all economic crises are invariably events of a political and social nature.

Because people ascribe different meanings to different events, depending on their particular interpretations and ideological preconceptions, the ideas and narratives that emerge during a crisis end up playing a crucial role in the way in which the crisis is subsequently addressed by policymakers.

In this respect, the outbreak of the Greek debt crisis marked a watershed in the ideational and discursive development of the global financial crisis. While Skidelsky's masterwork, Keynes: the Return of the Master, was still a bestseller in 2009, the months after the Greek debt crisis yielded a rapid turnaround in the fortunes of the regulatory liberals.

Convinced by the myth that it had been the profligacy of an excessively burdened welfare state that had caused the Greek debt crisis, the neoliberals went on the offensive. In less than half a year's time, deficit reduction, the appeasement of foreign investors and the calming of global capital markets had replaced fiscal stimulus, financial regulation and progressive taxation as the overwhelming priorities of governments across Europe.

The Iron Law and the Long Winter of Discontent

By the end of 2010, austerity measures had been firmly entrenched in Europe, not only in the political debate but also in the practical world of policy. Across the continent and the islands, people were starting to be confronted with what the IMF, foreign investors and conservative politicians informed us was the 'necessary pain' of public expenditure cutbacks.

As a result, unemployment and inflation are now soaring, while social benefits are being cut across the board and taxes are being raised. Pension funds and welfare schemes are being restructured, tuition fees doubled or tripled, and culture, education and healthcare budgets slashed -- all in the name of the good old neoliberal axiom of restoring market confidence.

In this economic climate, it's no surprise that violent anti-austerity protests have broken out from Athens to London. British commentators have already hailed the arrival of the next 'winter of discontent.' But while the left is angrily defending its basic income, every leftist politician knows that speaking out about that other specter at the feast that Gamble wrote about -- climate change -- is the surest way to electoral defeat.

As a result, the austerity debate has all but swept the European climate debate off the agenda. In this political climate of discontent, Roger Pielke Jr.'s Iron Law of Climate Policy appears truer and more relevant than ever before: "when policies on emissions reductions collide with policies focused on economic growth, economic growth will win out every time."

In the UK and Portugal, where austerity-affected lower and middle class families are beginning to feel the pinch of higher electricity prices resulting from the aggressive promotion of expensive wind power, popular support for climate action is dwindling. Citizens are often smart enough to realize that they have been forcefully sold a Green luxury good they can ill afford.

The Death of Neo-Keynesian 'Green Welfarism'

At the same time as social spending is being slashed and climate concern is dwindling, financial support for the clean energy transition is being axed as well. Germany, Spain and the UK are all cutting back on their wind and solar feed-in tariffs.

As a result, Spain's solar industry has all but collapsed, transforming its much-touted miracle into a mirage. Germany, the world's leading manufacturer of high-quality solar PV, could go down the same road. Various UK charities are already warning that the collapse of the country's wind industry is nigh.

But it's important here to realize that this doesn't necessarily imply the death of the Green economy. What it does imply is the death of 'Green welfarism'. For many years now, Europe has taken a similar approach on environmental issues as it has taken towards social issues: throw money at the problem and it will go away.

This Keynesian line of reasoning created not just social welfare but 'Green welfare' too. In essence, immature and unproductive Green technologies were living on government fiat. As for climate policy, this meant that European leaders holily believed that the regulation of carbon emissions coupled with the subsidization of renewable industries would automatically lead to energy transformation. It clearly didn't.

With this realization, a frustrating new picture emerges: the main political debate in Europe has been hijacked by the two zombie ideologies of the 20th century. Between 2008 and 2010, neoliberalism and neo-Keynesianism both died agonizing deaths at the altar of the global economy. Neither proved resilient to crisis and neither provided the transformative potential that is so urgently needed in our current predicament.

Towards a New Political Economic Paradigm?

It's becoming increasingly clear that we need a radically new political economic paradigm that can deal with the challenges of the 21st century. A model that is both dynamic and resilient; aspirational and inclusive; emancipatory and sustainable. A model beyond carbon commodification and deficit fetishism -- and, at the same time, a model beyond regulatory limitations and spendthrift subsidization.

At the heart of this new paradigm must be a recognition that social and technological innovation is key to economic prosperity in the 21st century. Neoliberals tend to treat innovation as a "black box," believing it important but exogenous -- unable to be influenced or accelerated. Neo-Keynesians, in the meantime, appear to believe that subsidization and deployment alone will drive innovation.

Rather, a new economic paradigm for the 21st century must recognize innovation as an evolutionary process that takes place through complex interactions among firms, industries, entrepreneurs and institutions, and that one of the overarching goals of economic policy must be to create the institutional conditions for widespread technological change.

Indeed, it is this active and evolving partnership between national governments, EU institutions, academia, private industry and entrepreneurs that has led to the development of new breakthrough technologies that drove waves of past economic prosperity. These technologies were too risky for the private sector to create or adopt on their own, and proactive government investments in education, infrastructure and technology catalyzed private sector innovation and helped steer private investment into more productive activities.

Exorcising the Specters at the Feast

Needless to say, however, technological change is necessary but not sufficient. In the years to come, Europe will also need to address some of the fundamental socio-economic and fiscal imbalances that lie at the heart of the current crisis, as well as developing new institutional frameworks to govern financial markets, prevent future crises and direct capital to where it's most needed.

Thus, as Anthony Giddens correctly observed, under these unprecedented conditions of crisis, "active industrial policy and planning" -- long considered a dirty words among Europe's ruling elite -- are due for rehabilitation. This issue will be addressed in more detail as we progress in our analysis over the next couple of weeks.

For now, it's becoming increasingly clear that Europe should abandon both the neoliberal politics of austerity and the neo-Keynesian politics of profligacy, embracing instead an ambitious new economic paradigm geared towards creativity, innovation and transformation.

Only by defeating the two zombie ideologies of the 20th century can Europe begin to exorcise the two great specters of the 21st.