A Common European Home

Cameron's meeting with Hollande last week underlined again our isolation from the central European debates, while last month's vote European Parliament indicates the strong majority in favour of total free movement within Europe. While it would be wrong to suggest that there is anything like consensus over this issue, since there are already many anti-immigration members of the Parliament and their numbers are likely to swell after May's elections, there is a centre of gravity around the idea that once within the Europen home, citizens are free to seek better lives in other member states.

The moral commitment supporting this position, although often unstated, is that everybody within the European Union has an equal right to a certain standard of living, usually measured in purely material terms. This position has been driven particularly by German members who extended their own sense of responsibility for their brothers and sisters in the East to make this a Europe-wide understanding that the countries of Central and Eastern Europe deserved a lifestyle similar to those in the West. After the fall of the Soviet Bloc it seemed churlish not to welcome Czechs, Bulgarians and others who had escaped communist domination into the wealthy and free culture of western Europe.

At an ideological level this position is fine, noble even; the problem arises when it runs up against the limits of political economy. We are being asked to share the wealth of Europe more equally between citizens who begin with wildly different levels of income. Yet this is not to be a managed process it is to be a process determined by ambitious individuals who follow their dreams in a random process. Aside from the financial transfers through the European Convergence mechanism, what was the policy to ensure and equalisation of incomes? Perhaps equally important, where was the questioning about quality of life, and about what the accession countries might be losing in their headlong rush to consumerism?

It adds to the complexity that the movement to equalise standards of living between very different societies has taken place against a backdrop of increasing corporate power, as trade unions have been attacked and governments have retreated from strong regulation. In this context the Enlargement made available to global corporations a skilled and yet poorly paid workforce, and whether these people arrived in our countries or stay in their own countries it is hard to argue that they do not put downward pressure on wages and cause jobs to move eastwards. Given that at the time of Enlargement many western democracies had socialist leaders, it is quite extraordinary that they did not include in the deal some requirements for minimum wages, even the transition towards an EU minimum wage. If the assumption behind policy-making is really that we seek a Europe where citizens are equal in civil rights and also in standards of living then such a policy was always essential.

The vision of Europe we were sold was one where our cousins to the east would rise upwards to meet us in our halcyon luxurious lifestyles. Yet such a vision always required rapid economic growth across the European economy, for without it equality was bound to mean those in the pre-2003 EU states facing a lower standard of living. Any growth that Europe experienced in the past decade was largely credit driven, and now that the bubble has burst growth is hard to come by and hence the pressure for equalisation has become a downward pressure on living standards in EU member states.

As a Green Economist I am entirely committed to equality but I must also recognise the limits of the ecological system on which we depend. I cannot share the irrational exuberance of a socialist politician I once discussed this with who told me 'I'm an old fashioned socialist: I believe everybody should have a Ferrari'. The widespread and growing evidence that we have reached the ecological limits, whether we are thinking about climate change or biodiversity loss, suggests that the earth simply cannot sustain Ferraris for all. The choice for European citizens is whether we follow the Nationalists in keeping our Ferraris and leaving the Romanians with Ladas, or whether we accept an egalitarian future even if it might mean rehabilitating the bicycle.

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Chronicle of a Crisis Foretold

A guest post by Paola Raffaelli, who is an expert in the Argentinian social economy and is studying for a PhD at Roehampton University

The crisis that occurred last week in Argentina is the unleashing of a cycle that began 40 years ago with the onset of neoliberal policies. This was exacerbated by a complex domestic and international situation. These factors that converged this time will be analysed, not losing sight of the structural perspective.

This most recent crisis in Argentina is part of an economic cycle that has recurred frequently during the last 40 years: cycles of currency appreciation, currency flight, devaluation and financial strangulation. The reason lies in the national productive structure of the country: the agricultural sector dominates Argentina's exports but only provides a low level of employment whereas the industrial sector requires imports and but generates high levels of employment. Therefore, from the early 20th century onwards, productive (and Peronist) national models faced recurring crises caused by the limitation on obtaining the necessary dollars for the industrial sector to continue producing. The agricultural sector, that was advantaged by the 2002 devaluation but lost in economic terms during the last five years, has been pushing for a currency devaluation since 2008.

The relationship with the dollar also has a social component. During these 40 years, Argentina’s economy has depended on the dollar, including the 10 years in which it was de facto dollarised as a result of the convertibility Law. Major purchases such as property are always made in dollars which helps to explain why Argentina is the country with the most dollars per capita after the US (around U$S1600 per person).

Economic growth during the 10 years after the 2001 crisis averaged around 7% per year. But growth in a country that does not have its own energy resources (hence the motivatation for the the renationalization of YPF oil company) and with an outdated productive infrastructure is severely constrained. In turn, the lack of control over inflation, which was around 40% in 2013, and lack of trust in the government led to a currency flight of 20 billion pesos during the last 3 years.

In order to wriggle out of a crisis that appeared inevitable, Cristina Fernandez de Kirchner’s government has, since April 2012, implemented restrictive measures to prevent currency flight. These began with the inability of withdraw cash outside the country and deepened to reach a 35% tax on purchases made abroad. Such measures are as impossible to understand for someone who is not Argentine as the despair we have about saving in dollars. These restrictions created a black market for dollars, called the 'blue dollar'. The escalation in the price of ‘blue dollar’ and the inflation increase in recent months could only lead to one outcome. Even if the government had tried to hold the price of the dollar in the last week there was a devaluation of nearly 20%, which adds up to 50% in the last six months (32% of devaluation and 15% increase in the purchase tax).

What is driving the speculation is expectations. Speculation in the agricultural sector, where farmers hoarded their crops in expectation of the dollar increase (it is estimated there are crops stockpiled in silos worth about US$4bn). Speculation among importers, who due to an increase in the dollar, accelerated their purchases in order to reduce costs. Speculation of international companies waiting for a devaluation that would allow them reduce labour costs. From the most important communication media, government opponent since 2008, propaganda emerged during these five years in favour of devaluation and increased inflation. Thus, society as a whole acts according to a self-fulfilling prophecy.

In turn, these crises that are brewing gradually take place within a conducive international framework. In recent times, the fall in commodity prices affected the inflow of dollars to Argentina, and the increase in energy imports to supply production further damaged the national current account. The crisis also occurred at the time when the US was withdrawing stimulus dollars for emerging economies such as India, Turkey and Brazil, Argentina's main trading partner. Finally, the Minister of Finance himself linked the outbreak of the crisis with international pressure, denouncing Shell for having withdrawn capital last week and trying to increase the dollar price.

This crisis is the result of a distributive struggle among different actors, both internal and external, which play a role in Argentina's economy. And government by 'market pressure', which we can equate with the agricultural sector, international companies, domestic inflation and social pressure of banning the purchase of dollars within a more difficult international context than in previous months the months before, finally led to the devaluation.

Argentina has a difficult scenario for 2014 with union claims of around 30%, 40% inflation and national currency reserves of less than US$30bn. Undoubtedly, Cristina Kirchner’s government faces its most difficult year and will have to find answers within heterodox economics if they do not want to betray their principles.
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