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ORIGINAL FRENCH ARTICLE: Les Vingt-Cinq à l’heure de l’austérité

by Paul Falzon

The European Union: The 25 Trapped in the Logic of Austerity

Translated Thursday 2 November 2006

The European economy: Tight economic policy is being pushed among the 25 members of the European Union, at the risk of creating slow growth, and increasing the problem of social programmes.

The year 2007 could mark a turn in the economic history of the European Union. If the 25 governments respect the pledge they took in the last few weeks, all 25 national budgets should next year respect the “golden rule” of the stability pact: less than 3% of the gross domestic product (GDP) to be assigned to "public deficits". In some countries (Spain and Ireland), a strong growth is enough to explain their low deficits, but these are the exception.

When expenditures on social programs shrink

In most of the other countries of the European Union, respecting the constraints of the Pact means adopting policies of reducing public spending and contributions to social security budgets. In Italy, the Prodi coalition is trying to save 15 billion euros, by cutting the cost of public administration, the funds allocated to health policies, and subsidies allocated to local authorities – many of which fear that this will result in them effectively becoming bankrupt, as a result of lack of any subsidies from the State.

As for Portugal, the austerity measures are even more drastic. A reduction of 10% for public investments and infrastructure, and of 5% in public sector jobs. Even education has to reduce expenses by 4.5%, which will affect particularly the secondary schools – a serious short-fall for a country whose manpower is inadequately trained to face the mutations in its economy. France, Greece and Germany are also preparing austerity budgets.

Nevertheless, the recent economic recovery in the European Union, even if it already shows signs of slowing down, offers European States some real new policy options. In France alone, there will be 5 billion euros more than had been expected.

Orders from above

But the EU is keeping a close watch: any budget surplus must go “in principle” towards reducing the debt, the president of the European Central Bank (ECB) Jean-Claude Trichet has recently pointed out. Jean-Claude Juncker, the leader of the euro area - all the countries that have adopted the euro currency - has passed the message to member States to allocate any surplus “as an absolute priority” to reducing the debt. Surpluses should not be used to inject funds in the economy.

This has long been opposed by those opposed to the stability pact, among whom the PCF, challenging the “management right” of the ECB to control national budgets within the European Union. All this “austerity politics” is being implemented in a neo-liberal logic.

Throughout the European Union, the presentation of austerity budgets adopted in the last few weeks reflects this neo-liberal logic, whether this calls for new reductions in taxes, either preceding and justifying the austerity measures (in France, Italy), or whether, on the contrary, it results in changes leading to reduced public spending (Sweden, Holland). In the name of good budgetary policy – reducing the expenditures during times of growth to have more resources available for periods of economic recession - the austerity policies are, among other things, threatening future economic growth.

Education and infrastructure are the first victims of the belt-tightening, while the crumbling of social protection systems impoverishes millions of citizens, with predictable secondary effects on consumption, the primary contributor to economic growth in the EU. Without forgetting that the ECB is still pushing for increasingly higher interest rates, currently at 3.25%. This is a potential discouragement to borrowers and risks to discourage growth just as it is beginning to happen.

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