Alternative European Economic Policy?


Francis E. Andrews

This article is a response to the work of the economists who have contributed to the project to develop alternative European economic policies by preparing papers for the conferences of the progressive economists' group EPOC in Budapest in March 2003 and in Brussels in September 2003. I apologise for omitting references to some of these individual papers. In the interest of brevity, however, I would like to acknowledge the excellence of the papers as a group, and the fact that these papers have informed the opinions expressed in this article to a large extent. It is my hope that the following will add further ideas and support to the project of developing alternative European economic policies.


Economic policies as ideology   


After the Second World War, the great debate between socialist and capitalist economic systems was dominant, but since the demise of the Soviet Union the conservative or neo-liberal  "Washington Consensus" has increasingly occupied the position of a new orthodoxy.


Surely this is a function of the victory of American power over the Soviet system and the role attributed to free markets in this success. This connection between the actual power of the USA and the ideological underpinnings of the "Washington Consensus" is controversial and I intend to look at this in more detail later in this article; but for now the important point to be made is that "Washington Consensus" took on the trappings of victor of the Cold War and therefore claimed to be 'the way, the truth, and the light'.


Nobody should be surprised by this, as politics and economics are, and have been throughout history, inextricably intertwined. However, it should be mentioned that in this case the social democratic European economic model has at least as great a claim to the victory over Communism. Inconveniently for the propagandists of the "Washington Consensus" the European social democratic model is not only successful but with its emphasis on "the social contract", welfare systems and deficit financing, it contradicts and is anathema to the "Washington Consensus". Furthermore, whilst it was strategically necessary to tolerate these 'heresies' during the Cold War, it is no longer necessary to do so and the focus of the conservative ideologies has now switched to a concentrated attack on the economics of social democratic Europe. It appears that the institutions of the European Union have been infiltrated en masse by the triumphant dogmas of the "Washington Consensus" and a protracted struggle is taking place, the mantra is that public ownership is bad. Taxation must be kept to a minimum as it is inimical to wealth creation. Market forces must be allowed to have their head and competition will deliver price stability and economic growth.


This mantra is repeated ad nauseum even when economic developments in the real world flatly contradict it. In the homeland of the "Washington Consensus" the Bush administration is running colossal deficits and pursuing protectionism in world trade. The 'global competitive rankings' compiled by the "World Economic Forum" placed Finland, Sweden and Denmark as amongst the top nations for growth competitiveness and business competitions. The Nordic countries are stereotypical examples of social democratic high taxation and high public spending economies. True, the USA comes second behind Finland in these rankings but we have already mentioned the budget deficits and I will explore later just how neo-liberal the economics of the USA really is. Even more alarming for the "Washington Consensus" is the high ranking that Germany is given in the business competitiveness index (5th) ahead of the much vaunted flexible labour markets and privatisation of Britain which is ranked 6th. (Rankings reported in the Financial Times Thursday October 30th 2003)


In Continental Europe, the European Commission has been unable to enforce the provisions of the stability and growth pact because France and Germany are the most powerful countries in the Eurozone and are running budget deficits which break its provisions. Their budget deficits pale into insignificance compared with the USA and if they did comply with the stability and growth pact it would guarantee an increase in already high levels of unemployment and probably extinguish the cynical economic recovery which is tentatively underway. In short, the stability and growth pact provisions make no sense in the current economic conditions. Fortunately pragmatism has prevailed over ideology in this instance. The stability and growth pact has failed because it was too inflexible and therefore could not be adapted to the economic cycle. Equally inflexible is the European Central Bank's interest rate policy. This is solely concerned with maintaining an inflation target rate of 2%, again without due consideration of the economic cycle. Furthermore, the target set is too low and risks tipping the European economy into a deflationary spiral. The ghost of John Maynard Keynes is stalking the corridors of power in Brussels and Frankfurt.


Actually existing economic systems


I am going to take a brief look at the two economies which are most often associated with the economic theories of the "Washington Consensus" - the Anglo Saxon economies of the USA and Britain.




I mentioned earlier that the "Washington Consensus" has taken credit for winning the Cold War. So what is the relationship of the USA's economic system to this ideology? In his paper prepared for the Budapest Conference of EPOC in March 2003 (What is the American model really about? Soft budgets and the Keynsian devolution) James. K Galbrath exposes the myth that the USA's economic system operates in accordance with the tenants of the "Washington Consensus". He describes this mistaken perception as "a dangerous fantasy for European progressives", and goes on to outline the extent to which hospitals, universities, housing and pensions are funded by 'soft budgets' or a form of quasi-public support in a myriad direct and indirect ways, including direct appropriations, loans, guarantees, and tax favours." Galbrath calls these schemes 'soft budget constraints' and compares their effect on the economy to the giant industrial complexes of Communist Eastern Europe in that they provide cradle to grave services for people which are beyond the direct control of central governments. Therefore, much of the public spending in the USA is outside the control of both federal and state governments. Galbraith compares this situation with Europe where government can use 'hard budget constraints' to limit public spending and this leads directly to high unemployment.


The implication is therefore that despite the wishes of the ideologues in the Republican party, they only have limited powers to influence quasi-public spending and therefore the areas of the economy which in the Nordic countries are funded by central government find alternative sources of funding in the USA. Furthermore, American monetary and fiscal policy remain governed by the 1978 Full Employment Act and therefore the USA cannot solely focus on inflation when setting interest rates, it must also consider the impact on employment. If you add to these observations the massive military spending and budget deficit incurred by the Bush administration, it is clear that the economics of the USA is not governed by the doctrines of the "Washington Consensus".




The British economy has been lauded by right wing economists as a paradigm largely because of the historical legacy of the Thatcher regime in the 1980's. It is true that mass privatisation of public utilities and telecommunications, a weakening of trade unions and consequently employee protection have made wide ranging structural changes to the British economy. However, as with the USA, there are important areas of the economy which are not in thrall to the orthodoxy of the "Washington Consensus". Gordon Brown (Finance Minister) has introduced an American style system of tax credits which has re-distributed significant wealth to lower middle class families and, to a lesser extent, families of the poor. Tax credits subsidise low wages and therefore employers and so encourage the maintenance and creation of jobs. The system has a dark side as it is accompanied by a campaign to make it more difficult for the childless, sick and disabled to retain entitlement to welfare benefits. Nevertheless, the welfare benefit system which preceded tax credits is still substantially in place and the two systems together amount to a major state subsidy.


People on low incomes are entitled to claim housing benefit, which is a contribution to their rent and can be up to 100%. This is means-tested. Housing associations are given government grants through the 'housing corporation' with which they build houses for low rents or 'affordable' prices for sale.


In the last two years the British government has pumped increasing amounts of money into the National Health Service which is still free at the point of use. Equally, British budget surpluses acquired during years of steady economic growth have been diverted into education and the government is currently running a substantial budget deficit. I could go on. But the point is made that the running of the British economy owes more to the theories of Keynes than it does to those of Milton Friedman!


European Union enlargement 


The European Commission policies for the Eastern European enlargement are potentially disastrous. As has been pointed out the USA and Britain are maintaining economic growth and social stability by running a mixed economy (public and private) and Keynesian budget deficits. The Nordic countries are successful in implementing social democratic tax and spend economies. This is the real world.


The Eastern European countries need an East European "Marshall Plan" but what is proposed is a rigid "Washington Consensus"-inspired set of policies limiting budget deficits and public investment.  It is probably unrealistic to hope for the funding of social democratic tax-and- spend economics for the Eastern Europeans but is it too much to ask for systems to be put in place which mirror the 'soft budget constraints' of the USA or the public health and education of Britain?


If pragmatism does not triumph over ideology in Eastern Europe then Bertholt Brecht's warning "the bitch that sired the beast is on heat again" may find a new context.


Francis E. Andrews is a welfare right adviser in Salford in the north-west of England.