Why the Stability and Growth Pact does not work

Till van Treeck

The current crisis of the Eurozone clearly shows that the European Stability and Growth Pact (SGP) does not work. A European “rescue plan” was finally agreed upon by the member states on May 9th 2010 after a long period of hesitation, especially in Germany. It has, for the time being, prevented the breakdown of the monetary union, as it could potentially grant up to €750 billion of credit to Euro countries with financing problems. But this rescue plan has merely bought time. The structural flaws of the SGP are still to be addressed.

The main problem with the SGP is that it focuses on the financial position of only one sector of the economy, namely the state. According to the SGP, no state should ever run a government deficit of more than 3% of GDP, with the further stipulation being a balanced budget over the medium term. Moreover, public debt shall not exceed 60% of GDP. The only legally binding constraint for any government is the excessive deficit procedure which will set in as the government deficit exceeds 3% of GDP. The two other important sectors of the economy, that is, the private and the foreign sectors, are ignored by the SGP.

More pay and more jobs: how Brazil got both

Paulo Eduardo de Andrade Baltar

So far, the 21st century has been good to many Brazilians. Formal employment and the minimum wage have risen, the purchasing power of those earning average pay has recovered, open unemployment has fallen, and undocumented subcontracting has been curbed. Average household incomes have risen and poverty has declined. Positive macroeconomic developments, a range of progressive government policies and improved collective bargaining outcomes have all played a part in this.[1]

Purchasing power regained

Under the two successive presidencies of Luiz Inácio Lula da Silva (“Lula”), income inequality in Brazil has shown just a small decrease, from a Gini index of 0.58 in 2002 to 0.55 in 2008. Much more significant is the marked change in the labour market configuration, which has had a very positive impact on poverty levels. From 61.4 million people in 2003, the number living in poverty dropped to 41.5 million in 2008 (a cut from 34.3% to 21.9% of the total population). Those in absolute poverty fell from 26.1 million in 2003 to 13.9 million in 2008 (from 14.6% to 7.3%).

Crisis of Distribution, not a Fiscal Crisis

Özlem Onaran

We are in a new episode of the global crisis: the struggle to distribute the costs. This crisis has been one of the outcomes of increased inequality at the expense of labour post-1980s. Lower wage share created demand deficiency; this coupled with financial deregulation reduced investments despite increasing profitability. Financial innovations and debt-led consumption seemed to offer a short-term solution, which has collapsed since 2007. The crisis was tamed via major banking rescue packages and fiscal stimuli. Now the speculators and business lobbies are relabelling it as a “sovereign debt crisis” and putting pressure on governments in a variety of countries ranging from Greece to Britain to cut spending to avoid taxes on their profits and wealth.

Beyond neoliberalism?

Nicolas Pons-Vignon

For the generation that came of age in the 1990s, the belief in the labour movement’s ability to inspire progressive change collapsed soon after the Berlin Wall. Not unlike the Wall, this belief had been seriously shaken during the 1970s and 1980s, which saw the rise of neoliberalism from Chile to the United Kingdom and, thanks to the Washington-based international financial institutions, to much of the developing world. Jan Breman (1995), in a biting analysis of the triumphant World Bank’s World Development Report on “Workers in an integrating world”, notes that the Bank saw “drastic restructuring in the balance of power in favour of capital” as a necessary condition for both economic growth and poverty reduction. Written at the height of the Washington Consensus, the report represented an arrogant dismissal of workers as political actors. Only if they would keep quiet, letting the invisible hand of the market decide how many shillings (3, maybe) to put in their pockets, would their lives improve.