LSE’s director Craig Calhoun: austerity helps creditors, not the economy

Craig Calhoun

Europe is at the heart of any economic debate right now, but taking into account its lack of integration in almost every sense, does it really exist?

Europe is only partially economically integrated, and this is the most important integration for all European countries. The political integration is also lagging, because the focus is not Europe but each state government. And regarding social cohesion, this is the weakest and probably poses the biggest barrier for the development of a European national identity. The fact is that, for many Europeans, their identity is closely linked to their cities, which is one of those wonderful things about Europe, but there should be a parallel effort to improve the overall organisation of the Union.

Are we living a second wave of European integration, though? Will we get there or are we stuck with a Europe of nations?

Potentially, a Europe of nations is positive. The problem is the ambiguity of a process we don’t know yet if it’s leading to a complete integration or simple aspires to protect each country’s position. The structure of a Europe of the nations seems perfectly valid, anyway. My fear is that, in a second phase of further integration, it would be a mistake to make citizens feel that they’re being forced to become something else without them effectively deciding to be Europeans but just as a result of losing autonomy.

Does Europe have any strengths, too?

Well, of course, it has the highest quality life and levels of welfare in the world. Nevertheless, this can also turn into one of its weaknesses, because as Europe puts so many resources into keeping the existent welfare system up, its dynamism and the potential of Europeans entrepreneurs may be harmed. Emerging regions, on the contrary, are much more focused on creating wealth and future opportunities, while Europe struggles to defend what has already achieved. So there’s here a combination of strengths and weaknesses.

Another point in favour of Europe is the way the knowledge isn’t only concentrated within Universities but across the populations: Europe has more readers than anywhere else. That is a very important strength, indeed, its commitment for democracy and public freedoms. What worries me is that the current plans to solve the crisis have sparked a sense of urgency to unify Europe in a manner that discourages the commitment to public interests and reduce social cohesion.

Why has austerity been unchallenged for so long despite its reversal effects? Is it because Germany is slowing down as anyone else?

It must be said that the austerity programmes fitted into the mentality of the main financial centres. In principle, the problems were not the national structures but certain industry sectors–some which had been designed by their national governments, obviously. And the use of austerity tools to manage the European crisis from a fiscal viewpoint made sense as well, because the nature of the European crisis wasn’t, as in the US, strictly financial but the consequence of public finances assuming large junks of private debt. This means we have now a fiscal crisis of which the states are the protagonists.

Germany hasn’t been, and is not, at risk of falling in the same trap. But it is at risk of being force to share the debt burden through the structures of the euro and the European Union. On the other hand, the Eurozone has been extremely useful for Germany: had it had its own currency, the Deutsche Mark would be so expensive that German exports would have lost competitiveness–where would the German car manufacturing sector be now, for instance? So Germany needs the Eurozone but sees itself threatened by its debt levels and the consequences of the austerity its neighbours are experiencing. Germany remains a supporter of the Eurozone, but doesn’t want to pay for its survival.

We must acknowledge, too, that those in defence of growth policies have been on the losing side of the economic debates during the last 30 years. It’s only now that there’s a timid change, and only so because the global financial entities begin to realise the option left would be to apply debt haircuts–that is, banks and other financial institutions would have to shoulder some of the costs of the toxic debt of some European countries.

One of the meanings of austerity was “pay back your creditors, then your citizens.” This made sense for the creditors only, not for the industry and the trade sectors. The change has been brought about not out of these tensions but as a confirmation that the financial sector dominates over the rest: when the financial sector starts suffering defaults, plans must be modified.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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