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Welfare State System at Stake in European Austerity Measures

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In response to austerity measures, proposed as part of the bailout package offered by the IMF and European Union,  workers throughout the European Countries are increasingly joining in strike actions. Ever since the Greek debt crisis surfaced,  European governments as well as financial analysts and economists have talked and written about the need for maintaining fiscal discipline and reducing deficits and debts. The IMF has been  pressuring  European nations, particularly the countries under monitory union to implement austerity measures like spending cuts, jobs cuts and tax increases.

Greece to Hungary

When George Papandreou’s new socialist government came to power in Greece and revealed that  Greece’s budget deficit was actually 12.7 (again modified to 13.6 percent by Eurostat in April) percent of GDP, more than twice the previously published figure by the previous government, the market began to panic. Doubts rose whether Greece could meet its debt commitments in time.

French protest against austerity

The problem was aggravated with the top three credit rating agencies – Fitch, Moody’s and S&P – went on to threaten investors by downgrading the sovereign debt ratings of Greece, Portugal, Spain, Ireland and Hungary. By the end of April 2010, Greece’s government debt was downgraded to junk status. Weather the actual situation led to downgrading or downgrading prepared the ground for the so-called fiscal discipline measures remains a matter of concern.

Meanwhile a sense of urgency for fiscal consolidation was instilled through print, audio and visual media into the minds of the people. The markets and the people were so prepared by the frequent media news and analyses that everyone from common people to top investors began to believe that some drastic measures were inevitable.

Aid (Debt) Package

The run up to the announcement of the joint aid package by the EU and IMF for Greece as well as the Euro Zone was a big fiasco as dramatic as the stage plays scripted by the great “Bard of Avon.” Greek Prime Minister Papandreou repeatedly requested  a guarantee from the EU to prevent the rising sovereign debt costs. On one hand, Germany hesitated to announce any package; the reason given was that it feared it would have to bear a major part of the aid package and that it would  face severe opposition from its people. On the other hand, bond yields demanded by the investors to invest in Greek debt, peaked to more than 22 percent (on 2-year note) at one point.

At last on May 2, with pressure from France and the so-called markets, the EU under the leadership of Germany, announced a 110 billion Euro  aid package to be disbursed over three years, a third of which was agreed to be shared by the IMF. In fact, it was not an aid package but a debt package. It was a debt trap that added more debt to the debt-ridden Greece in the name of helping them resolve their fiscal burden. The IMF is already notorious for its deadly strictures to debt-ridden third world countries so as to make their economies subservient to the interests of the United States of America. The same conditions were stipulated to Greece when granting the aid package.

But, markets were not satisfied. Fresh doubts were raised whether Greece could deliver the required austerity measures along with spending cuts and tax increases. Their doubts extended to other euro zone countries. They continued to demand more profits from the sovereigns of the other highly indebted euro zone countries. Again, discussions, meetings, deliberations, conferences, analyses, pressures, statements, promises and warnings followed.

The situation reached a climax on May 10 with the announcement of 750 billion euros (nearly equal to one trillion dollars) of emergency financial safety net for the euro zone to calm financial markets and to avert contagion from the Greek crisis. With this safety net, the ECB is buying sovereign bonds whenever demand for bond yield soars.

Along Came the Spider

The aid package had a big and long tail of austerity measures, cuts and increases. Generally, it is the dog that wags the tail, but in the present case, it is the tail wagging the dog. A country means the people, and production through their labor. Without their labor, there is no wealth. The wealth made markets (of course, markets made wealthy). Therefore, the people and their needs have to decide what the market is and how should it behave.

The people have to be taken into consideration, because without them the markets do not exist. Ironically, their interests were totally ignored while considering steps for fiscal discipline. Even more ironic is that they were the ultimate targets of this fiscal discipline.

Starting in January, Greece has been continuously announcing stability programmes, cutting programmes and tax increasing programmes to convince the markets that it would not default so as to sell the sovereign debt. Setting a target of fiscal deficit to 2.8 percent of GDP by 2012, Greece passed a package of public sector pay cuts and tax increases in March  to save an extra 4.8 billion euros. It froze state-funded pensions in the same vein. Greece was required to save an extra 30 billion euros over coming three years while getting aid package from the EU and the IMF. So, it continued to pursue more savings and approved another installment of austerity on May 6.

A pay freeze for all public sector workers, some pay cuts, laying-off public sector contract workers, bonus caps and cuts were implemented in Greece from May 2010 onwards. The level of layoffs allowed in the private sector  per month was increased from 2% to 4%. Pension commutation was reduced from final salary to average working pay. As part of tax reforms, VAT was raised by 2% and indirect taxes by 10%. Privatization of the public sector by decreasing public payroll and encouraging private companies was planned for the long term.

Greece unveiled additional spending cuts including 9.2 billion euros of deficit reduction measures for 2011 on October 4 triggering a nation-wide strike on Oct. 7. The state workers’ union ADEDY, representing 700,000 civil servants, led the strike, paralyzing government services like schools, public hospitals and air traffic. The union said wage and pension cuts have sliced 25 percent of incomes.

The Saga Continues

The programme of austerity measures continued with countries one after another falling in line to cut their budget deficits and debts. These measures  were almost the same as implemented in Greece. Ireland raised its pension age from 65 to 66 years in its December 09 budget and announced savings of 4 billion euros. Spain announced a plan to save a whopping 50 billion euros that envisaged spending cuts equal to 4 percent of GDP and 4 percent public sector pay cut as early as January ending. It proposed in first week of February to raise retirement age from 65 to 67 triggering massive protests.

Portugal’s ruling and opposition parties’ leaders approved steps to slash the budget in the second week of May, including public sector pay cuts. They targeted 4.6 percent fiscal deficit for 2011 from 9.4 percent recorded at the end of 2009. The Portugal parliament approved another austerity package in second week of June. Italy approved 24 billion euros worth austerity package aiming reduction of deficit to 2.7 percent of GDP by 2012 from 5.3 percent at the end of 2009. Putting into practice its January plan, Spain won parliamentary approval for a 15 billion euros  austerity package by a single vote on May 27, but the next day, its rating was cut down by Fitch, citing its massive debt as the reason.

Giant Germany’s Giant Austerity

Germany’s ruling coalition agreed to a package of budget cuts and tax increases on June 7 to bring its deficit within  the EU’s limit of 3 percent of GDP by 2013 that stood at only 3.3% by then. The package aimed to deliver savings of 80 billion euros ($100 billion) over next four years. Germany’s fiscal deficit was expected to be around 5 percent (3.5 percent in Aug 2010) of GDP in 2010 and its debt was recorded at 77% of GDP at the end of 2009. France announced reform of its pension system on June 16 that included raising retirement age from 60 to 62. This decision caused outrage among French people, provoked workers to observe two strikes in September 2010.

Welfare Concept at Stake

One might wonder why  austerity measures are being implemented in every European country from Greece to Germany. If Greece has a problem with its public finances, why should Germany and France go for austerity? The answer is very simple for those who can understand the dynamics of the capitalist economies.

It is an opportunity for ruling classes of European countries, who work for the interests of the big business and finance houses, to withdraw welfare state measures like unemployment benefits, child benefits, pension benefits, health benefits, insurance benefits and so on…all in the name of saving countries’ economies. The operation succeeds, the doctor’s pocket fills but the patient dies. So what, several patients are in queue.

Just a week ago, England announced a plan slapping a tax on child benefits for high-income earners startig in 2013. The accounting firm PwC revealed in its survey that almost one million jobs could be lost in the UK because of government cuts in public spending.

One should observe the decreases in the basis amount for pension commutation, decreases in retirement ages in several EU countries and the reduction of scope of job creation in the public sector.

One should also notice the conspiracy of destroying and erasing the concept of welfare states proposed by WW-II era economist Keynes and successfully implemented by all the matured capitalist economies from west to east. The conspiracy is carefully crafted by the European elite business houses in the name of passionate and convincing terms like fiscal discipline, fiscal consolidation and stabilization, to amass more people’s money into their capitalist coffers.

Welfare States

The above-mentioned are the target numbers for achievement documented in the records of the European governments and the IMF. The governments already began the implementation of the approved austerity measures promptly. But, these numbers are proving to be devastating for the European people, from public sector employees and the self-employed to unemployed people.

Welfare measures, achieved over decades of struggles by the workers, are being withdrawn one by one under the cover of austerity. The concept of “welfare state” is being liquidated slowly by injecting into the people’s minds that the austerity measures are inevitable to save their country’s future.

But, the austerity measures are nothing but  measures aimed at withdrawing welfare state principles. A welfare state envisages the welfare of the people with government support, pushing the interests of the greedy private conglomerates to the back burner, at least to some extent.

These principles were not the result of the magnanimity of the ruling classes but brought into being by the hard fought struggles of  workers for decades against  capitalist, oppressive and exploiting rule. Now, such welfare measures that fed the working class, that gave birth to new middle class and built a strong consumer market to be exploited by the same rich classes for six decades, are finally coming to an end, thanks to theoretical help extended by the IMF.

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About Sekhar

  • The fallacy of your last comment is the old one of believing that there is a finite market. Capitalism spins off new sources of profit as it generates growth, so looking for more profit is a positive rather than a negative.

    The problems you see with capitalism are actually problems created when the state interferes in the free market and grants special privileges or places arbitrary restrictions on the functioning of businsses in the marketplace. When that happens then you get monopolies and abusive trade practices and exploitation of the workers.

    But the key problem is government policy. An unhealthy capitalism as we have had in recent years in both America and Europe can only be fixed by ending the enabling role of government and returning to a free and open market.


  • …Continued from #4

    (I wrote in #4 in last para…, as the socialism in those countries began stepping back… It should be, …as the communist leaders of those countries began stepping back from socialism to capitalism…)

    The rest is known. It finds no place here because it will be out of context.

    The bottom line is Keynesian theory or welfare state is only a measure to prevent people from looking towards socialism. But, it did help people. It created new middle class from the public sector. The newly created middle class formed a strong market for for matured economies until the end of the millennium.

    But, capital never satisfies with some or other amount of profit. It hunts for “more profit” after reaching profit, and, for “more and more profit,” after reaching “more profit” and so on. At the same time capital weakens its own markets (consumers’ spending capacity) for which it goes on hunting. That is the basic fallacy and contradiction of the Capitalism.

    We have seen this through past six decades and one cannot disagree with it because my construct sounds some ism. Let us agree the facts and then go for fallacies or greatness of isms.

    So the never-ending crises of the capitalist societies that occurred due to hunt for profits of likes of greedy wall street giants pushed the matured economies to identify the need for withdrawal of welfare state system, that became a burden in the face of never ending crises.

    Unless the capitalism recognizes the need for feeding its consumer market, it cannot keep itself away from crises. If capitalism recognizes such need, that will be the end of the capitalism. It is the basic contradiction.

    Dave, generally I do not incline to write this analysis, instead I prefer to write facts as I see. Every time, I observe, my facts lead to the above analysis.

    Let me make part of this comment, a post on my blog.

  • Hi Tim, I’m happy to find a supporter here. I’ll be looking forward for your comments on my previous and upcoming articles.

  • Dave, I think I got it. It means “it seems to me you protest too much.” Is it?

    Welfare state or the total state as you mentioned, actually helped the US and the European Countries to keep at bay the rising struggles of the workers with the inspiration of success of socialist revolution in Russia and new democratic revolution in China.

    As I see, welfare state system is helpful, to some extent, to the people but definitely a burden for market economy states. The states of market economy are obedient to markets but not to people. That’s what we witnessed on the eve of global financial crisis in the west.

    Market players like investment banks, business companies (MNCs, TNCs) did cause the crisis. This is agreed by the US and EU governments as well as IMF and WB. I assume you have no contradiction with it. Instead of penalizing them, they were granted bailouts, placing more debt burden on the government. Apart from the burden of the crisis, solution of the crisis also has been burdened upon tax payers.

    Where can the tax payers earn money? They earn through work. As you see, it is not provided by private companies till now, in the US as well as the EU. Without work, people cannot spend. Spending by the people is the ultimate market for every sector from manufacturing, service, retail, to real estate. But, that market (consumers) has no jobs to spend. Private companies won’t give jobs because they are in crisis, govt. cannot provide jobs because it should not become welfare state, then who else provide jobs to people? The people chose governments for whose interests?

    If the govt is not allowed to provide livelihood for the people, who will? In free market economies providing livelihood is left to private people. But, they are causing crises again and again in cyclic form. And, they are placing burden of crisis on the governments. This is a vicious circle between the governments and private players in which, people have no part. Even then, they are asked to pay the costs of crises made by private companies.

    Can’t you see here the place of welfare state, that too, to keep the capitalists societies alive?

    Actually, Keynesian thesis was not destined to keep burden on capitalist governments, but to protect capitalism from the advance of the socialism. It succeeded in reaching its destination. Split in Keynes followers was not a big deal. It was about whether to implement Keynes thesis slowly or speedily. It was further mutated into several forms, that’s another matter.

    After the collapse of socialism in Russia and China, or to be precise, as the socialism in those countries began stepping back towards capitalism, the matured capitalist economies began to realize the needlessness of the welfare state measures. As a result, globalization policies have stepped in, as GATT agreement. It was offered cleverly in ‘accept or deny’ mode, with a plan to provide no alternatives to the third world countries.

    I see the comment’s number changed to 4 from 3. I will continue this after reading 3rd one.
    …to be continued

  • Tim J

    Sekhar, this is a really well done article. I also agree wholeheartedly with your conclusions. I think that the death of European democratic socialism is being predicted prematurely. Some change will occur but Europe will never look like the US.

  • Dave, I can’t understand the first sentence of your comment. It seems unless I understand it I can’t take the remaining part as I understand.

  • Methinks thou dost protest too much. The relatively modest and absolutely necessary austerity measures mentioned in the article for most of these countries will do very little to reduce the crushing burden of the welfare state on most Europeans. This may be a small step away from the Keynsian fallacy and the total state, but it will not be enough to save European economies in the long run. They need to go beyond just cuts to genuine restructuring and the complete elimination of many elements of the welfare state.