Volume 44, Number 173,
April-June 2013
Adjustment: Origin of the European Crisis
Andrés Musacchio

Besides the common market, another factor to consider was the strengthening of the European Monetary System in effect at the time. Although not a coordinated program, the need to retain capital as the liberalization plan progressed obliged European countries to maintain rigid monetary policies and, as such, the realignments that had occurred prior to 1987 became more frequent. Greater monetary strength, however, conspired against the economic growth and job creation that the single market should have driven. As a result, projections that forecasted the multifold benefits of integration, such as the Cecchini Report, soon became unattainable figures.

Still, the process of concentration proceeded at an accelerated pace. The profile of competition policy outlined in the 1990s maintained the traditional line of avoiding the abuse of dominant positions, but not the dominant positions themselves. But the equation was altered by the need to maintain a fine balance between competition and competitiveness. If the European problem is the smaller size of their companies, concentration must be tolerated and promoted. As such, competition policy sought to give the system some coherence, mitigate domination without eliminating it and reduce State intervention with national subsidies where possible. The wave of mergers and acquisitions was especially problematic, because it was clear that it affected competition. But lax policy prevailed in that realm, favoring competitiveness over competition. Studies from the European Commission note that since the new competition policy took shape, 90% of 3,000 applications for merger were approved without conditions. In the last 17 years, only 19 mergers have been denied, while a select few other cases required additional conditions (Davies and Lyons, 2007).

The path to a neoliberal Europe was sealed with the agreement to establish the monetary union, a process to which all members of the Community did not agree. Still, the results of the choice would leave no nation untouched in the long term. The features of the monetary union solidified neoliberal tenets as policy. The objective was to maintain inflation below 2%, which required strong monetary and budgetary restrictions.6 Thus the Maastricht Treaty (which defined the conditions to be met and the adjustment path to join the union), and later the Stability and Growth Pact (which regulated policies once the union was implemented), established specific restrictions on the fiscal deficit (less than 3% of gdp) and public debt (60% of gdp) and required average annual inflation to remain below 2%. These measures made “competitive austerity” a reality, ensuring discipline for governments to close their fiscal accounts. National governments lost economic policy tools, because they were handing over part of their capacity to regulate their internal markets. They were no longer able to make currency policy, and monetary policy decisions fell under the jurisdiction of the European Central Bank. Strong restrictions were also placed on fiscal policy (cf. Musacchio, 2008). The goals set did not require permanent adjustment in and of themselves. Rather, the problem is that these objectives were set as a function of an expected growth rate of 5% that would allow debt to remain constant with the authorized deficit. But the scenario ran up against two problems. The first was a possible doubt concerning the consequences of an external shock that would reduce growth and obligate economies to adapt to the basis of the pact, due to recessive, and as such, pro-cyclical, forces. How then to return to growth? The second and more concrete issue was the adaptation of established criteria. In other words, the initial adjustment that rapidly put the growth path far below the expected 5% and set off an uninterrupted series of cuts (Mazier, 1997).

There are two ways to adjust a budget: reduce spending or increase taxes. The latter path, moreover, includes the possibility to increase indirect taxes or tax revenue, capital and financial income. None of these questions was defined in the combination of the single market and regional currency. But there is a third dimension of integration as well: the influence of expansion on the process of integration with Eastern Europe. These eastern countries provided extraordinary salary conditions following the collapse of socialist models, but more importantly, their tax structures were supported by strong exemptions and tax relief for capital. This combination could become highly attractive for investors from the west.7 Under these conditions, options for fiscal adjustment were highly limited. If a nation chose the path of tax increases, they would be charged as indirect taxes like the value added tax. If not, the only option would be to reduce spending, which again, would not affect business costs. As a result, social spending, public investment and spending on education and culture would be the target of cuts.8 In practice, though, both options were combined.

All integration processes combine regional competition with other levels maintained in the hands of national authorities. On the basic level, this combination defines what type of integration is sought, what economic model and society is profiled, who will benefit and who will not. Clearly, post-war integration did not regulate capital flows, which were maintained in State hands. Restrictive national policies – in keeping with the Bretton Woods perspective on reorganizing the international system – fractured and divided production and accumulation spaces. This put final products in partial competition with each other,9 but not production spaces, which prevented systematic capital migration. As such, labor conditions and salary levels were determined in each national space. However, the new integration plan lifted these capital divisions and put productive spaces in direct competition with each other. Greater limits on labor mobility, due to language, training, relocation and cultural reasons, put national unions of workers in competition with each other, reducing job security and labor standards. Likewise, the absence of a common tax system, a regional tax model, internalizes a tendency among States to compete to attract and retain capital. Cuts in adjustment policy to rebalance public accounts thus obliged nations to avoid greater taxes on capital. Alternative options were therefore to increase indirect taxes or, above all, decrease the scope of the welfare state.

6 It was explicitly assumed that inflation was due to monetary expansion and that it would be directly related with fiscal deficits. Thus, restrictive fiscal and monetary policies would ensure low inflation and guarantee growth, something the Union could not verify.

7 Still, “fiscal dumping” was not only practiced by eastern countries but also by some older members of the Union, especially Ireland.

8 Paradigm studies include France and Germany, for their symbolic value. Other sector studies analyze spending cuts, transformations due to privatization and growing restrictions. Cf., for example, the path of the health sector in France in Theret (2007) or an extensive analysis of the welfare state crisis in Germany, from Ritter (2007).

9 Although only in part, as the main market was the internal market.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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