Can DiEM25 produce a new deal for Eastern Europe?

In this paper I would like to highlight what the DiEM25 movement is about, what made it appealing to me, what its political and economic agenda would be, and how I see those things in relation to the main social and economic needs in Eastern Europe and particularly in Romania. Furthermore I need to underline that the opinions expressed here are only my personal ones and do not reflect the official positions of DiEM25.

DiEM25 is a pan-European, transnational movement of democrats co-founded by Yanis Varoufakis and Srecko Horvath. Apart from them, members of its coordinating body are an ecclectic mix of artists, academics, human rights activists, journalists, radical lefties, greens and liberals.

What made it appealing to me was its power and capacity to transform all the social unrest which has built up on so many occasions (such as during the anti-G20 protests, the 15-M (Indignados) movement in Spain, and the Occupy movement) into a political agenda with meaningful economic proposals beyond simple anti-capitalist discontent. As a Romanian expat living in Germany I have to confess I had to put myself through many mental recalibrations in order to start perceiving the social conflict at the core of Western Europe. Before settling in Germany my perception of Western European societies was that they were “liberal democracies”. So I had a kind of cognitive disonance noticing how the people in Brussels, Paris and Berlin talked about “lack of democracy in Europe”. They were criticising the fact that in every highly industrialised West European country, around 20% of the vote was taken by “eurosceptic”, or worse, extreme-right, fascist parties at the last polls.

Coming from a country cruelly hit by austerity, its DiEM25 funded critique provided answers and seemed very appealing. This was actually what brought me in and made me sympathize with the movement. I had had enough of ortho-liberal sermons preaching “fiscal discipline”, economic frugality, irrelevant or even nonsensical micro-economics allegories of macro-economics or pitifully inadequate moralizing fables. By the way, in this sense I consider Mark Blyth‘s Austerity: The history of a dangerous idea a must-read for all those seeking reasonable arguments in this endeavour.

What, then, is the DiEM25 European New Deal about? Before proceeding I just need to point out that I consider economic aphabetization paramount for understanding and fostering a democracy, and the fact that the organization intends to build up its Agenda around an economical proposal made it very attractive.

The European New Deal consists of eight pillars, and as our colleague and member, Adam Newby, here states, it is extremely clearly worked out and detailed. It is meant to tackle the existing crisis in Europe in all of its four dimensions: debt, banks, investment and social crises. It has its roots in an academic paper outlined by Varoufakis, Stuart Holland and James K. Galbraith called A modest proposal to resolve the Eurozone crisis. One important thing should be emphasized about it, since it was not unusual for radical left-wing allegations to be thrown at DiEM25 and at Varoufakis and his program. This document contains hardly any of the typical leftist agenda, no tax increases, no additional euros to be printed, no assets nationalisation; rather it is about taking more control of finance and channeling it, with the help of existing European institutions, towards innovative start-ups and SMEs bringing “green” technologies from labs to the market.

The first two types of crises – banks and debt – have mainly to do with the eurozone. Here one series of statements can essentially summarize our politics: tame finance, compel banks to clearly distinguish between investment and capital, re-politicise the money creation, also make money lending more responsible and penalize surpluses as well, not only deficits. The extended version of the New Deal sets up the framework for those measures. The ones meant to prop up the banks are about a European Bank Clearing Union – an idea going back to John Maynard Keynes’ proposal, outlined in section 2.2.3 and detailed further in Appendix 3. It drafts four ways of reducing banks’ payment imbalances: have a limit to the possibility of accumulating positive or negative balances, depending on each country‘s trade volume; have a symmetrical rate of interest for both creditor and debtor; restrict credit to commercial inter-nations transactions; and have the possibility of adjusting the interest rate in case imbalances get out of control. Another essential point of the program, complementing the points above, is to decouple the banking system from the sovereign debt crisis. More on that can be read in Appendix 6, Policy 1 – Case-by-case bank program.

Regarding the debt crisis, DiEM25’s proposal would be a sort of debt collectivization carried out by the European Central Bank. It is an idea similar to what Alexander Hamilton did back in the 1800s, right after the end of the American Revolution. The ECB will take over sovereign debts, “redeeming” them on maturity to the states at a level up to the 60% of Maastricht Treaty. This means, for instance, for a country having a 90% debt-to-GDP ratio, it will be paid back 2/3 of the value its bonds. You can find more on this in Policy 2 – Limited debt conversion program. How will the ECB pay it back? Here we link the measures dealing with the investment crisis. It will be done basically via an expansionary monetary policy. The ECB will sell eurobonds issued by the European Investment Bank. In order to understand this matter better, a reading of section 2.3.1 (Linking Public Investment Banking with Central Bank Quantitative Easing) would be required. The liquidity source necessary to put an end to the eurozone debt trap, to restore trust in the euro and control the huge asymmetries on the continent is to roll out an investment program of high proportions, about 5% of eurozone GDP. This is something which Juncker’s plans would be targeting too, but of bigger proportions and more focused.

This goes to the roots of the common mercantilist mindset currently ruling throughout the European Union; namely that nations should compete between themselves in order to ensure economic growth. This cannot work inside a monetary union, as Heiner Flassbeck so vividly explains. Countries cannot compete in the same ways as companies, because otherwise not only their social contract but also the business sector in those countries would go bust, forcing them to introduce restrictions on the labour market to limit its mobility. As Yanis puts it in his post, the euro area should be essentially a union of countries agreeing on a common inflation target and adapting wages to productivity. It is a zero-sum game of the four economic indicators; households, public and business expenditure and trade, where integrated countries have common policy instruments to manage it. Those should be harmonized so that blatant discrepancies do not arise.

Those would be, in a nutshell, some of the main means of rebalancing the huge difference between the level of savings, accumulated mostly from pension funds in Western Europe, and of public investment (continuously dropping in Europe since 2007) to halt the lurch into austerity and set the stage for economic growth inside the European Union, after experiencing a persistent unemployment rate (at EU level a 10% average) and stagnation, for the last 10 years.

There is much talk about the euro and its perils, but what about the European periphery not belonging to the euro? Here I have to confess that one of the main frustrations I experienced as a DiEM25 member was the continuous sweeping under the carpet of our “Eastern question”. Indeed, together with my DiEM25 fellow and friend, Florin E. Platon, we strove to temporarily assemble together a small group of members from Hungary, Bulgaria and Serbia. We even managed to jointly write a call which we got published on the main site and we are also trying to keep alive a Facebook discussions group, but we’re constantly feeling a lack of interest from the “epicentre”. It is indeed somehow comprehensible that all energies within the movement should focus, until the next European elections in May 2019, on the eurozone crisis and gaining public acceptance within Western Europe, but the manner in which the DiEM25 coordinating body looked away from our matters seemed unjust to me.

What were these matters? Unfortunately I’m not in a position to outline here some concrete proposals, not even in the broad way currently presented in the New Deal, but I’ll draw some connections and place them in the context specific to Eastern Europe. Before talking about that it’s worth mentioning a discussion with a colleague from DiEM25 Croatia (Rjeka) which popped up in an email exchange between her and Yanis about possible scenarios of her country joining the eurozone. The questions, or concerns, are illustrative of the main concerns of a country being in the EU but not in the eurozone. Will the access to capital be easier and cheaper, consequently appreciating sovereign credit ratings and making Croatia a safer and more attractive place to invest? Consequently, will domestic private loans “benefit” from low euro interest rates, not being so exposed to currency fluctuation risks? Will the trade with the eurozone grow, leading to a better “economic integration” of its economy with those of Central and Western Europe? Will Croatia be better sheltered in cases of financial crises, having a currency backed by the ECB? … and ultimately, will Croatia be more integrated, politically but also culturally with the “European core“?”

This could be sufficient to grasp the level of reliance of Eastern economies on Western capital. This is reflected in the huge dependency on trade with Western Europe (almost all Eastern countries have around 70-80% of their trade with the eurozone) and on foreign direct investment. Indeed Eastern Europe has been in permanent need of Western goods and capital since the post-1990 collapse of its industrial and banking system. But this should not be seen only in the context of their ingratitude towards European public funds and support coming from Brussels, or Paris, or Berlin. As Thomas Piketty puts it, Western investors became increasingly the owners of Eastern assets and furthermore the profit margin extracted out of them exceeded the level of public funds flowing into those countries. This is also reflected in the NIIP (net international investment position) expressing the level at which a country possesses or owes assets to other countries. As in Europe one can quickly notice that the whole of Eastern Europe is practically a debtor to a few nations in the West, mainly Germany, but also the Netherlands and Austria. As outlined by Cornel Ban, there are variations and different types of economies within Eastern Europe. There are the Baltic states, small nations highly dependent on external capital, experiencing some of the harshest neo-liberal austerity measures in the post-2008 era. There are small export-oriented economies such as the Czech Republic, Slovakia and Hungary and bigger economies, like Poland and Romania, where internal demand and consumption plays an important role in domestic growth.

So, some myths are to be deconstructed. Eastern economies are highly reliant on the eurozone and the fact that they were not held in the same euro straight jacket did not mean they were spared from economic austerity and immense social crisis. Wages came to levels which were still beneath their productivity and, for the Baltic states, Romania and Hungary, they have still not converged, as this article points out. The East has the same trade and current account asymmetries with Western and Northern Europe, as the South. Banks have not been as harmless as probably the general perception of them in the East may be. Indeed, they helped by providing the capital necessary to fuel the economies after the post-1990 collapse and by re-stimulating domestic consumption, a permanent frustration at least in Romania, dating back to the last communist decade. Also they did not fall into the hands of the local oligarchs which made them more trustworthy, but on the other hand they tied the local economies to the European main financial market, making them, as peripheries, more sensitive during downturns.

I would like to conclude by outlining some key points which should be on the DiEM25 agenda of any of the Eastern European countries. Firstly labour should get its share in this part of Europe. Strengthening trade unions and collective bargaining, through renegotiation of the social contract between capital and labour is vital. As we saw above, wages have not caught up with productivity in large parts of Eastern Europe, but this can be achieved via different taxation schemes. Flat tax, which is quite common across the East or tax reductions favouring “key industries”, like “raw export” IT knowledge, as in Romania, or tourism services in Bulgaria, were deepening the current periphery status quo, especially in a region having the highest levels of social inequality. Restoring trust in public institutions, which is a major stumbling block in the East, is a key element. Public fostering of “green” innovation is a key feature of the DiEM25 New Deal. In this sense Mariana Mazzucato’s book, The Entrepreneurial State, provides concrete examples on how the state not only stood behind the innovation of essential technologies we know today, such as the Internet or integrated circuits but was necessary for this because otherwise “small enterprise” would not have got the same results. It is important in this context to mention that Eastern and South-Eastern European countries have the smallest share of GDP spent on research and development.

This is one way to help peripheral economies to develop added value products and services on their own, to diversify their exports, instead of lagging behind as maquiladora economies, and to stand on their own feet. It is essential to get out of this mindset where we perceive Western Europe solely as do-gooders saving us from Russia or whomever else, and start building a fair and trustworthy social contract.

As staunch Europeanists, we Diemers (DiEM25 members) consider that tomorrow’s Europe should be built on common and humanist principles and not on kin, language, ethnicity or some “common enemy”. Join us in making it a reality, as Yanis put it in an earlier article of his.

Carpe DiEM!

Photo: Pixabay, CC0