What Mario Draghi really proposes is a ‘Suicide Compact’

Business lobbies and conservatives have become extremely good at hijacking progressive policy concepts and perverting them into something that suits their own agenda. European economic governance is a perfect example of this. In the nineties, trade unions and progressive politicians were staunch defenders of economic governance. At the time, the idea was that if all member states were to pursue expansionary fiscal policy at the same time a strong and powerful economic recovery would follow. Today, however, the concept has become to mean the exact opposite: European economic governance is now a system of rules and sanctions forcing member states into common and synchronized strategies of brutal austerity and wage dumping.

ECB president Mario Draghi, however, has outdone himself. Even prior to candidate president François Hollande’s official proposal of a “Growth Compact”, the ECB president took over the initiative by offering his own version to the European Parliament. As could be expected, the ECB’s version of such a “Growth Compact” is based on the idea of structural labour market reforms, thereby making explicit reference to the German Hartz reforms.

The problem is that labour market reform produces the same effects as fiscal austerity. Both policies have the immediate effect of taking demand out of the economy, thereby depressing instead of relaunching the economy. In a deregulated labour market with low job protection, poor unemployment benefit systems and very flexible wage formation systems, workers do not have the bargaining position to resist wage cuts and wage freezes, let alone to negotiate a limited wage increase. Moreover, a flexible labour market is also an insecure one: In the absence of stable jobs and robust social safety nets, households will be much inclined to save more and spend less. By devaluing labour, structural reforms deepen the recession.

What’s worse is that there exists a vicious link with fiscal policy. Structural reforms create recessions, which create deficits and debt, which forces governments to impose even more fiscal austerity, which then amplifies the recession.

The next predictable event is of course that financial markets, alarmed by the fact that the economy is caught in a persistent recession, continue to hike up interest rates on sovereign debt and restrict the lending of funds to the banking sector of the countries concerned. Official policy makers will take this as a further opportunity to argue that fiscal austerity needs to be stepped up to restore financial market confidence (which it evidently won’t do). It is a never ending horror story of cuts, leading to depression leading to even more cuts.

Mr. Draghi, along with the rest of the financial elite of Europe, will no doubt respond to the comments made above by arguing that it takes time for the benefits of structural reforms to materialize. If we simply wait long enough – so goes their logic – the economy will rise as a phoenix out of its ashes.

As president of a central bank, Mr. Draghi of all people should know better. Indeed, the bridge that usually links up the short with the medium term and helps economies to get over a situation of a chronic excess of supply over demand is monetary policy. At present however, monetary policy is severely constrained: Interest rates are almost at the zero mark and private sector agents across the Euro area member states are deleveraging excessive debt positions and so not willing to take on more debt regardless of lower interest rates. Monetary policy, to use a famous quote, is ‘pushing on a string’. Promoting policies that will choke off demand when the tool to kick start the economy is no longer operational is not a smart thing to do.

Besides monetary policy’s ineffectiveness, there is an even more fundamental reason why structural reforms will not work – not even in the long run. The basic fact is that one cannot build an innovative, productive and competitive economy on the basis of an impoverished society. With young qualified people massively leaving the country, the future work force increasingly being deprived of education because of fiscal austerity and a situation that is socially explosive, how are countries going to succeed in upgrading their economic and industrial structures so as to be more competitive in global trade? Even if wages are cut to the bone (and remember, others can always cut wages even more), is it realistic to think that industry in the North will close highly sophisticated plants and/or shift complex production techniques to countries where the human capital and social basis is in the process of breaking down? European policy makers are confusing industrial policy with labour market misery.

Recently, Mr. Draghi was quoted as saying that “social Europe is gone”. What he and others are ignoring is that when social Europe disappears, the strength of the European economy will disappear as well… It is time to stop Mr. Draghi and the rest of the financial elite in Europe from imposing their ‘Suicide Compact’ upon us.