It is amazing how history is revised when it is convenient. It is also amazing how the same events, that from my perspective are rather clear, can be diametrically interpreted by others, who want to run a different agenda. A good example of these phenomena can be found in a recent UK Guardian article (August 11, 2017) – Jacques Delors foresaw the perils of austerity. How we need his wisdom now. When I saw the headline I thought it must have been an article seeking to elicit some sort of deep irony. Jacques Delors – perils of austerity – wisdom – all in the same title. Ridiculous. Through the lens I view the work of Jacques Delors I can only see the abandonment of a progressive social vision, the unnecessary surrender to neoliberalism, and then, a bit later, as an inevitable consequence of these shifts – the disastrous and dysfunctional creation of the Eurozone with all its embedded and destructive austerity biases. The unfortunate fact is that the UK Guardian article was deadly serious. Oh dear!
Delors has been trying to reinvent his ‘image’ since the GFC exposed the failure of the original design of the Eurozone.
On December 2, 2011, the UK Telegraph published an interview with him – Jacques Delors interview: Euro would still be strong if it had been built to my plan.
No shrinking violet!
When the journalist asked whether he had got the Eurozone plans all wrong:
Unhesitatingly, he denies it. It is a fault in the execution, not of the architects, which he claimed to have pointed out in 1997 when the plans for introducing the euro finally came together. At the time, he says, the best of the eurosceptic economists, whom he refers to as “the Anglo-Saxons”, raised the simple objection that if you have an independent central bank, you must also have a state.
He claimed that the nations should have had a “common economic policies”, which as you will read is not what he argued in the lead up to Maastricht.
He also claimed in 2011 that:
There was also a problem of “surveillance”. The Council of Ministers should have made it its business to police the eurozone economies and make sure that the member states really were following the criteria of economic convergence.
And had they enforced the ‘rules’ that Delors and his cronies had created then the recessions in the early stages of the common currency – when France and Germany were in breach of the Stability and Growth Pact limits (2002, 2003 etc) – would have been much deeper and, in all probability, the common currency would have collapsed then and there.
It was not a problem of “surveillance”, but, rather, the rules that Delors introduced that meant the Member States were incapable of defending their economies from sharp contractions in non-government spending without their fiscal positions breaching the rules.
And then the Interview really went off the rails. He claimed that the problem that the GFC created was worsened by:
… a combination of the stubbornness of the Germanic idea of monetary control and the absence of a clear vision from all the other countries.
This “Germanic idea of monetary control” was, as I will argue, central to Delors’ embrace of austerity in 1983.
It was Delors, as French Economics, Finance, and Budget Minister who motivated the so-called ‘austerity turn’ while serving under President François Mitterrand, by seeking to impose German-type values (austerity, strong franc) onto French politics. More later on that.
And then the Interview seemed to ‘prove’ what Delors denied at the beginning.
When asked what the survival of the euro depended on, Delors replied:
… only if two conditions are met. “The first is that the firemen must put out the fire. The second is that there must be a new architecture. If you have one of these things without the other, the markets will be skeptical.
But earlier he had claimed the architecture – his plan – was fine – the problems were all in the way the Member States and Brussels had perverted his plan.
That was in 2011.
Fast track to 2017 and last week’s UK Guardian article, cited above.
Apparently, Delors is now seen as:
1. Designing Europe’s “social dimension: a “social chapter” designed to protect the rights of people at work.” That is, if they can keep their jobs. And even then the rise of precarious work and the working poor throughout Europe doesn’t suggest his efforts have been very effective.
2. Apparently, Britain “also needs new leaders of the calibre of Delors. He was a wise man, an instinctive social democrat and an internationalist”.
The article discussed an upcoming UNCTAD report which (quote):
Across the developed world there are insufficient levels of productive investment, precarious jobs and weakening welfare provision; and this has become self-perpetuating. Top income earners remain unscathed, while the financial crisis aftermath is marked by austerity and stagnating incomes at the bottom.”
The UNCTAD Report (yet to be released) argues that the obsession with austerity in Europe and elsewhere has created:
… the disruptive forces of extreme nationalism, racism and division. These evils thrive when levels of inequality begin to mirror those of the Great Depression and when trade unions are as weak as they are in countries such as Britain and the US.
Permanent austerity is the reason why Britain and much of the Eurozone continue to record such sluggish economic performances.
It contrasts this austerity obsession with the willingness of China to use fiscal policy aggressively to promote growth.
The prescription for Europe is to end austerity and create “a new economic and social direction that presents an alternative to hyper-globalisation and the race to the bottom”.
I agree with all the UNCTAD conclusions, although I haven’t read the full report yet so I am only prepared to give cautious (conditional) approval. The devil is always in the detail after all.
But while the UNCTAD Report appears to get to the nub of the problem, the UK Guardian article is very remiss in arguing that Delors was a man of vision who devoted his career to opposing this obsession with austerity and fiscal vandalism.
In my view, nothing could be further from the truth.
I remind you all of events in 1983, when Delors was the French Economics, Finance, and Budget Minister. The following discussion appears in my new book (with Thomas Fazi) – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World.
I also considered the contribution of Delors in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale.
By the early 1980s, the French economy had succumbed to the disastrous austerity imposed by the Barre Plan.
Unemployment had risen sharply and the French people were in a mood for a change away from the conflictual politics and poor economic outcomes that had characterised the 1970s.
The Socialist François Mitterrand was elected president on 10 May 1981, after more than two decades of the French left being excluded from office (ever since the establishment of the Fifth Republic in 1958).
Five weeks later, the Left backed up Mitterrand’s success by winning a majority of seats in the National Assembly in legislative elections.
That set the stage for the formation of a government that (for the first time since 1947) also included Communist ministers.
This inspired a widespread belief – as incredible as that may sound to us today – that France was headed for a radical break with capitalism.
To appreciate this point, it is important to understand the context of the French Left’s triumph in 1981.
By the late 1970s and early 1980s the Monetarists had already won some significant ideological and political battles against the post-war ‘Keynesian’ consensus – most notably in the US and UK. But the war was far from over, especially in continental Europe.
At that time, the old continent was still very much wedded to the ‘old’ post-war social-democratic consensus.
Socialist/communist parties – notwithstanding a slide to the right among their ranks following a period of increased radicalisation up to the mid-1970s – still yielded significant political and electoral power.
Even though the balance of power had already started to shift away from labour towards capital, unions were still capable of paralysing economic activity through massive general strikes.
Social and protest movements – not to mention various left-wing paramilitary organisation, such as the Red Brigades in Italy and the Rote Armee Fraktion in Germany – were sending shockwaves across the continent (barely over a decade had passed since May 1968, after all).
Most European countries (with the notable exception of Germany and a few others) still firmly believed in the need for capital controls and regulated financial markets. The need for capital controls was even ‘embedded’ in the EEC’s directives.
This reflected the fact that in the early 1980s economic policy was still very much defined along national lines.
Throughout the 1970s, national rivalries had led to a stagnation of the European integration process known as ‘eurosclerosis’.
Economic problems, the slow pace of enlargement and a perceived lack of democracy meant that negative and apathetic attitudes to the EEC were high. The French, in particular, were reluctant to agree to any supranational authority – a consistent position that had hampered progress towards economic and monetary union since the inception of the idea.
In general, globalisation was not yet seen as something inevitable and inescapable; there was still the belief that individual nations had the power to shape their own economic and political destinies – and even to challenge the capitalist system itself.
Nothing exemplifies this better than Mitterrand’s victory in the spring of 1981.
The new president’s policy agenda embodied an ambitious reform programme, encapsulated in his campaign platform – the famous ‘110 Propositions for France’. Mitterrand came to power in the midst of a deep crisis of French capitalism.
Confronted with rising unemployment (largely as a result of the previous government’s austerity policies), growing inflationary pressures, low productivity growth and stagnant business activity, the new president promised to take drastic measures to revive the French economy.
As radical as it may seem to us today, Mitterrand’s manifesto was, in fact, a pretty straightforward programme of Keynesian economic reflation and redistribution. It proposed to fund research and develop innovative ways to fund small and medium businesses that struggled to gain working capital through conventional means; to create at least 150,000 jobs in the public sector as a vehicle for improving health services, education, the postal service and the efficiency of government; to reduce working hours to 35 hours per week; and to impose a solidarity tax on wealth to reduce inequality. Income support payments would also be increased.
It also proposed extensive nationalisations of France’s increasingly uncompetitive industrial conglomerates, in order to maintain employment levels and aid the process of economic reconstruction.
In the context of French politics in the late 1970s, the government’s nationalisation plan was not as radical as it might appear in retrospect. Indeed, French capitalism had a long tradition of government planning and state-led economic growth.
Essentially, Mitterrand’s nationalisation plan represented an attempt to revive and extend the post-war dirigiste model that the previous right-wing government had attempted to dismantle.
The government also intended to subsidise economic activity through deficit spending, primarily through a major expansion of the welfare state.
By implementing this platform, Mitterrand claimed, his government would precipitate a ‘rupture’ with capitalism, and lay the foundations for a ‘French road to socialism’.
It’s easy to see why this represented a moment of immense hope not just for the French left, but for the entire European left – of the kind that Europe has not witnessed since.
Soon after the Mitterrand experiment began, however, it started to unravel. The president’s reflation efforts were hampered by a number of factors.
First, capital started fleeing the country almost immediately – a sign that French capitalists and financial markets didn’t appreciate the government’s plan of economic reform and social redistribution.
The Government responded with tightened capital controls, which had limited success.
Second, French capital also went on strike, refusing to invest in the economy. Meanwhile, France, at the start of the 1980s, was also confronted with a particularly unfavourable global economic environment.
The French economy was still reeling from the effects of the second oil crisis (1979) and subsequent global recession, which had hammered France’s already-weakened industrial sector, crippling traditionally important industries like steel.
Moreover, the effects of the recession were exacerbated by the US Treasury’s high interest rate policy. The shakeout from the Volcker shock had not only resulted in a severe decline in the US economy, but also in ripple effects throughout Western Europe.
In response to the US Federal Reserve Bank’s move, the Bundesbank also hiked interest rates in 1981 in an effort to stabilise the mark against the dollar.
The effects of these deflationary policies were felt all over Europe, particularly in France, where Mitterrand’s reflationary policies exacerbated the downward pressure on the franc.
The problem was that Mitterrand’s domestic policy objectives were incompatible with France’s membership in the European Monetary System (EMS), the precursor to the Eurozone.
The EMS essentially anchored all participating currencies to the German mark, by means of the Exchange Rate Mechanism (ERM), effectively forcing the central banks of other European economies to shadow the Bundesbank’s monetary policy.
This meant that a nation facing reduced international competitiveness had to cut costs (for example, by constraining wage rises) to bring its inflation rate down and constrain domestic demand to reduce growth in national income and GDP, which would lead to reduced spending on imports.
By tying the French franc to the German mark, through the ERM, the EMS restricted the French government’s ability to adjust monetary policy to meet the country’s macroeconomic needs.
France was always going to face downward pressure on its exchange rate while it tried to maintain the currency peg with the mark; by the same token, domestic policies that sought to expand employment and increase domestic spending were always going to come up against a balance-of-payments constraint.
With rising imports and a widening external deficit, especially in the context of Germany’s mercantilist policies, central bank policy was biased towards higher-than-warranted interest rates and domestic recession. The same problem plagued all the members of the EMS.
One could say that the French wanted everything: political popularity associated with lower unemployment and improved living conditions on one hand; a straitjacket on perceived German pretensions to European power and continued German subsidies to the Common Agricultural Policy (CAP) on the other.
This proved impossible.
Continued speculation against the franc forced the Banque de France to buy the currency in large quantities in international exchange markets to maintain the peg.
By the time of the third currency realignment, in March 1983 – the French government had already devalued twice, in 1981 and in 1982, mostly to deal with the strengthening mark and the diverging economic policies between the two nations – the French were at a crossroads and the incompatibility of these competing ambitions was obvious.
Mitterrand found himself in a position where a decision had to be made about whether to leave the EMS or abandon his progressive agenda.
Regrettably, he chose the latter path.
In the spring of 1983, Mitterrand and the Socialists suddenly and drastically reversed course, in what came to be know as the tournant de la rigueur (‘turn to austerity’): rather than growth and employment, the emphasis was now to be on price stability and fiscal restraint.
Indeed, by this time Mitterrand had become ‘obsessed with inflation’ (to quote one of his colleagues).
Mitterrand was convinced by Jacques Delors to adopt a ‘strong franc’ (or franc fort) policy, in which the French currency would be purposely overvalued to ensure monetary stability and to counteract inflationary pressures.
On May 16, 1983, the European Council extended a large foreign currency bailout to France to stabilise the franc on the condition that it tighten fiscal policy.
The French agreed to limit their fiscal deficit to 3 per cent of GDP in 1983 and 1984, restraining social security and unemployment insurance payments and cutting the capacity of state-owned enterprises to borrow.
For being compliant and abandoning its ‘Keynesian’ programme, the French government was given some short-term foreign currency funds to bolster the exchange rate – in a manner not dissimilar from the IMF’s policy of offering loans to struggling nations in exchange for harsh conditionalities.
After the turn to rigueur, the president’s economic outlook began to mirror the concerns of the business establishment.
By 1984, the government had begun to relax employment regulations and this resulted in a spate of mass layoffs in the country’s once-core industries: among the hardest-hit sectors were steel, where the government announced that it was eliminating 25,000 jobs; ship building, which saw its capacity reduced by 30 per cent, resulting in a loss of 6,000 jobs; and mining, which suffered a reduction of state aid by more than a quarter over just five years, resulting in a loss of 20,000 jobs.
Meanwhile, capital controls and restrictions on financial activities were rolled back. In 1985, the Socialists began to liberalise virtually all transactions.
Domestic capital markets also experienced a complete transformation, and the process of deregulation between 1982 and 1985 was just as profound.
Oriented around a new banking law in 1984, the French financial reform involved privatisations and, ultimately, the removal of credit controls.
The reduction in domestic inflation and shift to a current account surplus that resulted from the government’s ‘scorched earth’ approach were celebrated as a demonstration of the policy’s success. And on its own terms – centred on a very narrow set of macroeconomic variables it was.
Yet the social and economic costs of that success were enormous. Net wages fell by 2.5 per cent in 1984, with the wage share, after peaking in 1982, dropping steadily thereafter.
The official unemployment rate rose from 7.4 per cent in 1982 to 10.2 per cent in 1985 and continued to increase after that.
Not surprisingly, the savings ratio (household savings out of disposable income) fell from 16.4 per cent in 1982 to 13.5 per cent in 1985 as a result of the declining economic growth and rising unemployment.
France’s output gap (the difference between actual output and the maximum potential output) nearly trebled between 1982 and 1985.
Mitterrand’s victory in 1981 had inspired the widespread belief that a radical break with capitalism – at least with the extreme form of capitalism that had recently taken hold in the Anglo-Saxon world – was still possible.
But the tournant, the Mitterrand U-turn, was an admission of defeat: capital had won the battle of wills and ideologies. The socialist experiment had failed.
Mitterrand had succeeded only in destroying Keynesian reflation and redistribution as a legitimate alternative once and for all, or so it has seemed since then.
The repercussions of that decision are still being felt today.
The popular narrative claims that Mitterrand had no option but to abandon the Keynesian agenda. To most modern-day leftists, Mitterrand thus represents a pragmatist who was cognisant of the international capitalist forces he was up against and responsible enough to do what was best for France.
For the left, this has essentially meant giving up on the notion of achieving any form of meaningful change at the national level, and accepting the idea that true change can only come at the supra- national (and ideally global) level.
Delors had his hands all over that surrender.
His policies accelerated the trends that he now decries. He cannot escape from that.
He was instrumental in persuading the Socialist Party’s hardliners that Keynesian (let alone socialist) national economic strategies were no longer an option in an increasingly globalised world.
He strongly expressed the view that national sovereignty had been usurped by gloablisation and that supra-national arrangements were imperative. Wee now see these technocratic empires (such as the European Commission) as trampling national democratic rights.
By choosing EMS membership above domestic policy considerations, France (and other EMS member states) had effectively chosen to subjugate its own monetary/fiscal policy independence to the Bundesbank, which had became the de facto central bank of the entire EEC.
For all of France’s historical concerns about supranational (that is, ‘European’) encroachment on its national sovereignty on the one hand, and German hegemony on the other, it is somewhat ironic that it took the Socialists (pushed by Delors) to give up that freedom – and then not to Brussels, but to Germany of all nations.
It was argued that the growing acceptance of the primacy of ‘price stability’ among French politicians on both sides of the political divide was a reflection of their desire to regain some semblance of French domination in Europe
The ‘franc fort’ policy has been seen as providing France with an elevated status in Europe at the time – to bolster its reputation against the dominant Germany.
In other words, the French political establishment saw ‘rigueur’ as a way to retain power, and the cost to the citizens in the form of suppressed real wages and rising unemployment was subsidiary, at best.
Delors was a central player in pushing this delusion.
Then, after creating economic chaos in France, he moved to his next job in 1985 – he became president of the European Commission, a post he would hold for a decade.
The Delors presidency (1985–95) is understood to be groundbreaking, giving the European integration process a forward momentum that had been lacking in the preceding decade.
It is also the period in which the foundations of monetary union, and more generally of neoliberal Europe, were laid down – a development in which Delors played a key role.
The French understood that, within the EMS, the Bundesbank effectively set the interest rates for all EMS nations, irrespective of whether the rates were appropriate for other countries.
Further, while the formal EMS understanding placed equal burden on the central banks to maintain currency stability, the reality was that nations facing downward pressure on their currencies had to shoulder the burden of adjustment because the Bundesbank increasingly refused to do its share, given that the mark was the strongest currency.
For the Germans, intervention would have meant selling marks in the currency markets, which they feared would have ignited domestic inflation as a result of the expanding money supply (in line with monetarist theories).
I describe that in detail in my 2015 book.
Thus, the French became increasingly convinced that the only way to preserve a fixed exchange rates system (which they were strongly committed to since the introduction of the CAP and, later, the adoption of the franc fort policy) while at the same time regaining a degree of policy independence and wrestling control of monetary policy away from Germany, was to push for a full European monetary union.
For Delors, EMU – that is, a single European currency – became a priority, and in his role as president of the Commission he set out to persuade his reluctant fellow European policymakers to embrace it.
I documented the role that Delors then played in my 2015 book – so I won’t go into more detail here.
1. He pushed hard for freeing of capital controls – the so-called Basel–Nyborg agreement. This allowed the banks to become casinos and you know what happened then. It also meant that nations such as Italy and France found it much harder to defend their currency pegs without severe domestic austerity.
2. The Delors Committee, set up in 1988 to develop a detailed implementation plan for the creation of an economic and monetary union, deliberately excluded the economics and finance ministers at the suggestion of Delors himself.
He wanted the committee to comprise of central bank governors because they were already firmly Monetarist and wer less inclined to reflect the concerns of the voters.
Delors thus constituted his committee to minimise any (legitimate) discussions of member state sovereignty and to push through a homogenised monetarist vision for the new united Europe.
In simple terms, the exclusion of the ECOFIN ministers meant that the monetarist-oriented central bankers would quickly come up with a consensus. All members of the committee were firmly wedded to the abandonment of Keynesian macroeconomic policies in favour of the hard-line pursuit of price stability.
3. Delors’ plan deviated starkly from the vision for a European-level fiscal capacity outlined in the 1970s Werner Report. Modern federations align the primary fiscal responsibility at the level of the currency issuer. But the Delors Committee concluded that the primary fiscal policy responsibility would remain at the member state level; that is, at the level of the currency user rather than the currency issuer.
The European-level oversight would be limited to imposing arbitrary but binding fiscal rules and, importantly, prohibiting the newly created central bank from directly supporting member state governments in times of need.
The Delors plan ignored the conclusion of both the Werner Report and the MacDougall Report that the European Parliament should take responsibility for economic policy decisions at the Community level.
4. The Delors plan constructed counter-stabilisation policy purely in terms of central banks adjusting interest rates to maintain price stability, with an independent central bank being the macroeconomic policy institution deemed necessary at the federal level.
This starkly contradicted basic Keynesian theory, and represented a triumph of Bundesbank-style monetary discipline – and a victory for Germany.
So, you can see why I thought the UK Guardian’s headline was an exercise in irony.
Delors was the champion of austerity.
He shifted power to finance and capital and created laws that allow profit to dominate over workers’ interests.
He pushed the flawed Eurozone architecture onto the Member States.
He created a system that was bound to fail at the first crisis and now has the hide to say it was because others didn’t implement his plan properly.
The ideas and structures that Delors pushed through are a significant reason why millions of people are now unemployed in Europe and many more are scraping through as working poor.
To say he had a grand vision for a Social Europe is to use words in a way that makes them devoid of any reasonable meaning.
Crowdfunding Request – Economics for a progressive agenda
There are 13 days to go in this request and already the effort has raised 49 per cent of the target.
I received a request to promote this Crowdfunding effort. I note that I will receive a portion of the funds raised in the form of reimbursement of some travel expenses. I have waived my usual speaking fees and some other expenses to help this group out.
The Crowdfunding Site is for an – Economics for a progressive agenda.
As the site notes:
Professor Bill Mitchell, a leading proponent of Modern Monetary Theory, has agreed to be our speaker at a fringe meeting to be held during Labour Conference Week in Brighton in September 2017.
The meeting is being organised independently by a small group of Labour members whose goal is to start a conversation about reframing our understanding of economics to match a progressive political agenda. Our funds are limited and so we are seeking to raise money to cover the travel and other costs associated with the event. Your donations and support would be really appreciated.
For those interested in joining us the meeting will be held on Monday 25th September between 2 and 5pm and the venue is The Brighthelm Centre, North Road, Brighton, BN1 1YD. All are welcome and you don’t have to be a member of the Labour party to attend.
It will be great to see as many people in Brighton as possible.
Please give generously to ensure the organisers are not out of pocket.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.