Christian Heitsch, 'Shock Therapy' – Austerity – 'Populism' – Brexit: How to (not) jeopardize the cohesion of the EU in:

Jörn Axel Kämmerer, Markus Kotzur, Jacques Ziller (Ed.)

Integration und Desintegration in Europa | Integration and Desintegration in Europe | Intégration et Désintégration en Europe, page 197 - 224

1. Edition 2019, ISBN print: 978-3-8487-6131-9, ISBN online: 978-3-7489-0222-5,

Series: Societas Iuris Publici Europaei (SIPE), vol. 13

Bibliographic information
'Shock Therapy' – Austerity – 'Populism' – Brexit: How to (not) jeopardize the cohesion of the EU Christian Heitsch* This paper will argue that the European Union suffers from an incipient crisis of legitimacy, which has as its root a worsening long-term social crisis. It submits that, in order to help stave off an exacerbation of this crisis of legitimacy, the Union should prioritise short-term measures capable of mitigating the social cri‐ sis. The paper will develop this argument in several steps. Firstly, it will propose that the Union's crisis of legitimacy is reflected in the establishment of nationa‐ listic-populist governments in several Eastern Central European Member States, which – so the paper further asserts – likely sets a pattern of what might happen further West in the not-too-distant future. The main proposition is that the conso‐ lidated dominance of right-wing, nationalist, anti-EU parties in Poland and Hun‐ gary and the strong showing of the Alternative for Germany in what used to be the German Democratic Republic are the long-term after-effects of the abrupt transition to a market economy after 1989. More specifically, that transition re‐ sulted in widespread and persistent social dislocation; nevertheless, centre-left parties when in government effectively failed to change their countries' economic policy. Thus, nationalist populism ended up as the only developed alternative ideology to what had become the liberal consensus. As regards developments further West, the proposition is that deliberate poli‐ cies of imposing on periphery Member States of the Eurozone austerity and mea‐ sures designed to promote cost-competitiveness have created similar socio-politi‐ cal conditions conducive to these states joining in the nationalistic-populist trend. As regards the United Kingdom, it was the long-held austeritarian consensus, which helped create the social conditions favourable to the pro-leave outcome of the Brexit referendum. After presenting some data on the social state of the Uni‐ on (A.), the paper will consider the link between the social consequences of 'shock therapy' transition to the market economy and the emergence of nationa‐ lism and populism in Eastern Central Europe, focussing on Poland, Hungary, and East Germany (B.). Next, it will explain why the imposed cure for the Eurozone crisis was flawed as well as how it led to a serious socio-economic crisis in the Eurozone periphery (C.). Further, it will point out why discontent about austerity lies at the root of the Brexit vote (D.). The final section will make short-term * Professor, Senior Lecturer at Brunel Law School, London. 197 proposals to help alleviate the social crisis – the establishment of an Emergency Social Solidarity Programme and the activation of social rights by the European judiciary (E.). The paper relates to the rather extensive literature about the Union's post-2008 crises. Its contribution to the discussion endeavours to identify the root cause for the Union's crisis of legitimacy and to advocate short-term measures to help miti‐ gate the social crisis which – so it submits – at present is the main factor under‐ mining the legitimacy and ultimately the cohesion of the Union. When discus‐ sing the imposition of austerity and of structural reforms within the Eurozone, the paper presupposes the Treaty-mandated convergence criteria relating to the national debt and to the budget deficit of the Eurozone member states,1 the body of secondary law for their enforcement,2 as well as the 2011 Treaty establishing the European Stability Mechanism. By spelling out the socio-economic effects resulting from the way this body of law is applied in practice, the paper hopes to support calls for fundamental legal reform in this area. Discussing which shape such a reform should take would exceed this article's confines, though. The Union's Social Crisis The Union's social crisis is reflected in the following data:3 1. Percentage of people at risk of poverty or social exclusion:4 – Poland: 27.8% in 2010; 24.7% in 2014; 21.9% in 2016; – Hungary: 29.9% in 2010; 34.8% in 2013; 26.3% in 2016; – Greece: 27% in 2010; maximum of 36.0% in 2014; 35.6% in 2016; – Spain: 26.1% in 2014; 29.2% in 2014; 27.9% in 2016; – Italy: 25.0% in 2010; 29.9% in 2012; 30.0% in 2016; – France: 19.2% in 2010; 17.7% in 2015; 18.2% in 2016; A. 1 TFEU, article 140, Protocol No. 13. 2 For a list of the relevant regulations, see European Commission, 'Legal basis of the Stability and Growth Pact', available at nd-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/st ability-and-growth-pact/legal-basis-stability-and-growth-pact_en (accessed 31 October 2018). 3 All information and data in this section are from Eurostat. 4 According to the Eurostat definition, this category comprises people affected by one or more of the following phenomena: risk of poverty after social transfers (disposable income of less than 60% of the median national income); severe material deprivation (inability to afford at least four out of the following: pay rent or utilities; keep home adequately warm; face unexpected expenses; eat meat, fish or a protein equivalent every second day; a week holiday away from home; a car; a washing machine; a colour tv; a telephone); low work intensity (households where adults during the past year have worked less than 20% of their work potential). For this category, 2016 at present is the most recent year with a Eurostat data set covering all EU countries. 'Shock Therapy' – Austerity – 'Populism' – Brexit 198 – United Kingdom: 22.0% in 2010; 24.8% in 2013; 22.2% in 2016 – Between 18 and 19% in Austria; about 20% in Germany. 2. Since the beginning of the financial crisis in 2008, GDP per capita has stagnated or even decreased in the whole EU periphery, whereas it has re‐ covered and increased in most of the EU core. 3. Unemployment among 15 to 24-year-olds: – Greece: 21.9% in 2008; rapid increase from 2010 up to 58.3% in 2013; 43.6% in 2017 – Spain: 24.5% in 2008; rapid increase up to 55.5% in 2013; 38.6% in 2017 – Italy: 21.2% pre-crisis; rapid increase up to 42.7% in 2014; 34.7% in 2017 – France: 19.0% pre-crisis; 24.9% in 2014; 22.3% in 2017 – Poland: 17.2% pre-crisis; 27.3 in 2013; 14.8% in 2017 – Hungary: 19.5% pre-crisis; 28.2% in 2012; 10.7% in 2017 – United Kingdom: 15.0% pre-crisis; 21.3% in 2011; 12.1% in 2017 What this means in human terms is 'the dashed dreams and aspirations of milli‐ ons of [...] Europeans [,...], families split apart, as those that can emigrate from their country in search of work,5 a 'brain drain' of young highly-skilled citizens,6 and Europeans going hungry and rootling through waste bins for food, as social welfare transfers have been cut back on account of government budget cuts.7 Transition from Communism and the Emergence of Populism in Eastern Central Europe This section aims to demonstrate that the consolidation of right-wing, nationalist governments in Poland and Hungary as well as the strong showing of the Alter‐ native für Deutschland have their roots in the social dislocation resulting from the rapid transition to capitalism after 1989. Poland As regards Poland, this paper submits that the repeat establishment of populistdominated governments results from the long-term after-effect of the abrupt tran‐ B. I. 5 Joseph Stiglitz, 'The Euro and its Threat to the Future of Europe' (Allen Lane 2016), 3 – 4. 6 See, e.g., Symeon Mavridis, 'Greece's Economic and Social Transformation 2008 – 2017', (2018) Social Sciences 7(9), 8. 7 Servaas Storm & C.W.M. Naastepad, 'Europe's Hunger Games: Income Distribution, Cost Competitiveness and Crisis', (2014) Cambridge Journal of Economics 39(3), 959 – 86. Christian Heitsch 199 sition from the centrally planned economy to a market economy. The govern‐ ment established after the 1989 'negotiated transition’ and subsequent semi-free elections faced a dire economic situation, characterised by very high foreign debt accumulated under the old regime, a large sector of state-owned and -funded heavy industry most of which probably would have been uncompetitive under market conditions, shortages in shops owing to food being hoarded by farmers, and large inflationary pressures on account of the planned ecoonmy’s supplyconstrained nature.8 To deal with this situation, the government adopted a 'shock therapy' programme of rapid transition to a market economy, named the Balcero‐ wicz plan after its author, Finance Minister Leszek Balcerowicz. It was based on Washington Consensus theory, and its elements were monetary and price stabi‐ lization, structural adjustment, as well as foreign economic assistance and reduc‐ tion of foreign debt.9 To initiate the stabilization process, the government in Ja‐ nuary of 1990 abolished almost all administrative price controls, except for utili‐ ties, rent in state housing, state rail and road transportation, alcohol, postal ser‐ vices and telecommunications. The degree of resulting inflation and concomitant decline of real wages turned out to be much higher than the government had anti‐ cipated – about 250% inflation in 1990 and a decline of real wages by between 25 and 32%.10 To help achieve positive real interest rates and thus encourage businesses and households to hold (some of) their savings in the national curren‐ cy, the government in collaboration with the central bank implemented a very re‐ strictive monetary policy by restricting domestic credit expansion. To reduce the budget deficit, the government imposed deep cuts in subsidies to state-owned en‐ terprises and repealed most tax exemptions for enterprises.11 At the same time, international trade was liberalised, by the abolition of export licenses, the setting of low customs tariffs, and by the removal of taxes and most restrictions on ex‐ ports. The government in addition imposed a unified exchange rate to establish a nominal anchor against inflation and to help restore confidence in the national currency.12 To cut the link between wage growth and inflation, the government implemented the so-called ‘tax-based incomes policy’ which involved a tax surcharge on wages growing above a certain norm, which was established over the year by Council of Ministers decree. The stabilization programme is conside‐ red a success in that within a decade it reduced inflation, brought down the bud‐ 8 Jeffrey Sachs, 'Shock Therapy in Poland: Perspectives of Five Years', The Tanner Lectures on Human Values, 1994. available from s/sachs95.pdf (accessed 17/07/2018), 272-3; Hartmut Lehmann, ‘The Polish Growth Mira‐ cle: Outcome of Persistent Reform Efforts’, IZA Policy Paper No. 40, April 2012, 8 et seq. 9 Lehmann, supra note 8, 13 et seq., Eric Garland, 'Reflections on the Balcerowicz Plan', (2015) Zeszyty Naukowe PWSZ w PłockuNauki Ekonomiczne 21, 228 et seq. 10 Lehmann, supra note 8, 14. 11 Ibid. 12 Id., 15. 'Shock Therapy' – Austerity – 'Populism' – Brexit 200 get deficit and through liberalisation of prices and trade made shortages disap‐ pear almost immediately.13 In fact, Poland is plausibly credited for having achie‐ ved a virtually continuous ‘growth miracle’ from the mid-1990 s to the present day.14 However, this success came at the cost of a large deactivation of labour, which ‘has remained a hallmark of contemporary socio-economic life’.15 To this day, there is a high level of entrenched structural unemployment and underem‐ ployment. The unemployment figures, peaking at about 18% just before Poland’s accession to the EU and at 10.3% on account of the Financial Crisis, may seem moderate in comparison, but reflect only a small part of the overall deactivation of labour. The activity rate, which includes all those over 15 years who neither are employed nor registered as unemployed, probably is more illustrative in this regard: Even now about 30% of the Polish workforce is economically inactive, in part due to the high level of forced or voluntary early retirement implemented to lessen the impact of shock therapy on social stability.16 Poland also has for a long time had the highest number in the EU of workers employed on temporary contracts – at one time over 28%, these days about 26% – with a concomitant lack of job security and pension contributions.17 In addition, at one time 19% of all economically active persons in Poland were self-employed, which appears to have been the fifth-highest figure in the EU.18 Another important element of the current socio-economic situation in Poland is the on-going farming crisis.19 Large farms of over 50ha of agricultural land make up only 1.7% of the total number of holdings, but 30% of agricultural land is concentrated in them.20 A quarter of the population still lives on antiquated small-holdings which are characterised by tiny size, fragmented scale, and by a low degree or the complete absence of mechanisation.21 Millions of former state farm workers continue to rely on small subsistence-style farming as some basic 13 Ibid. 14 Lehmann, supra note 8, 4 and passim; Marcin Piatkowski, 'Poland's New Golden Age: Shifting from Europe's Periphery to its Center', World Bank Policy Research Working Pa‐ per, 2015, available from (accessed 17 July 2018), passim. 15 Gavin Rae, ‘The Debt Crisis in Poland and its Impact on Society’, 2012, available from .pdf (accessed 17 July 2018), 5. 16 Id., 6, 12. 17 Id., 6; Eurostat data for 2017. 18 Rae, supra note 15, 6; the relevant Eurostat database does not have more recent entries for Poland. 19 Marek Wigier, ‘The Competitiveness of Polish Agriculture after Accession to the EU’, Economics of Agriculture 1/2014, 87. 20 Id., 100. 21 Stuart Shields, 'Neoliberalism Redux: Poland's Recombinant Populism and its Alternati‐ ves', (2015) Critical Sociology 41(4-5), 659, at 668. Christian Heitsch 201 social security.22 Many of the small-holders are unable to benefit from agricultu‐ ral subsidies, owing to a lack of information about procedures or to problems in proving a bona fide agricultural activity.23 After Poland’s accession to the EU, a large number of Poles made use of their free movement rights, with the result being split-up families. The number of Polish citizens staying abroad for more than two months per year increased from 1 m in 2003 to 2.3 m in 2007 – out of a population of about 39 million.24 Despite the socio-economic drawbacks of the rapid change to a market econ‐ omy, not one of the post-transition Polish governments opted to slow down the structural adjustment process. In fact, the Buzek government who came to power after the 1997 elections introduced a new set of structural adjustments, dubbed the ‘Balcerowicz Plan Mark II’. This consisted of four main components – wel‐ fare state retrenchment in the areas of pensions, health care, education and cash benefits; structural changes including privatisation of the remaining state enter‐ prises and restructuring of the energy and steel sector as well as a reduction of job security; reduction of direct taxes, and decentralisation of government.25 This second package of adjustments coincided with a reduction in the GDP growth ra‐ te, and helped cause a rise in social inequalities and increasing unemployment. It proved highly unpopular.26 The Solidarity Electoral Alliance (AWS) which had supported the Buzek package of structual adjustments, fell apart after the govern‐ ment’s collapse and did not manage to enter parliament at the 2001 elections. Subsequently, a centre-left coalition government dominated by the Democratic Left Alliance entered office. This government’s failure to deal with the adverse economic and social consequences of the second Balczerowicz plan, and its in‐ troduction of a new package of austerity measures led to the collapse of its elec‐ toral support in the 2005 elections – from more than 40 percent in 2001 to 11 percent in 2005.27 Ever since, ‘Poland has faced the unique situation of having two right-wing parties dominating politics[.]’28 These are the liberal-conservati‐ ve PO – Civic Platform – of fomer Polish Prime Minister and outgoing President of the European Council, Donald Tusk, and the nationalistic-conservative PiS 22 Rae, supra note 15, 28. 23 Wigier, supra note 19, 91. 24 Rae, supra note 15, 21. 25 Stanislaw Gomulka, 'The Polish model of transformation and growth', (1998) Economics of Transition 16(1), 163, 170. 26 Aleks Szczerbiak, 'The political context of EU accession in Poland', Royal Institute of In‐ ternational Affairs Briefing Paper, November 2002, available from https://www.chathamho (accessed 17 July 2018), 3. 27 Gavin Rae, ‘Two Rights Make a Wrong? The Remaking of Polish Politics after the 2007 Parliamentary Elections’, (2008) Debatte 16(1), 73, at 74; Shields, supra note 21, 665. 28 Rae, ibid. 'Shock Therapy' – Austerity – 'Populism' – Brexit 202 – ‘Law and Justice’ –, whose behind-the-scenes dominating figure continues to be Jarosław Kaczynski. The ‘shock therapy’transition to a market economy effectively was advertised as a means for Poland to ‘return to Europe’ within five years. The economic ad‐ visors who used this language may have meant that changing the economic sys‐ tem would take just five years, rather than that Poles’ living standards would catch up with those of Western Europeans within such a short time. However, the common belief among Polish citizens likely was that the rapid change of econo‐ mic system would bring about an equally rapid improvement of their living stan‐ dards.29 In addition, political representatives promoted and citizens favoured the ac‐ cession of Poland (and for that matter, of all other Eastern Central European ac‐ cession candidates) to the EU on the grounds of the ‘mass prosperity effects ex‐ pected from economic integration’ with the West European member states.30 In fact, however, ‘[t]he opening up of [Poland’s] economy to global capitalism has involved the mass-sale of state assets and the creation of a dependent form of capitalism; with disproportional levels of foreign ownership forming in the country’s financial and industrial sectors. A dual society has materialised; with a middle class, pre‐ dominantly employed in foreign companies based within the municipal oases of globalisation, contrasting with the huge pools of poverty and unemployment that blight the countryside and the former industrial heartlands.’31 And what G. Rae further observed in 2007, by and large holds true to this day: ‘The conservative reaction in Poland is built upon the frustrations and re‐ sentments of those excluded from the benefits of global integration. The conser‐ vatives offer no serious economic alternative [...]. However, what it has done is to direct part of the social anger felt towards the injustices born out of the transi‐ tion to further its own ideological project. […] it has achieved huge success due to the fact that it stood as the only developed political ideology […].'32 And in the view of many Poles, the government formed after 'Law and Justice' had – on a turnout of just 50.92% – decisively won the 2015 elections is the first one to deliver on its social spending pledges, unlike any predecessor government whose representatives frequently would promise to help the less well-off but in‐ variably would fail to act on such promises. By contrast, the Law and Justice ad‐ ministration implemented its prominent ‘500plus’ child subsidy policy and rever‐ 29 Sachs, supra note 8, 279. 30 Martin Brusis, ‘Democracies Adrift: How the European Crises Affect East-Central Euro‐ pe’, (2016) Problems of Post-Communism 63(5-6), 263, at 266. 31 Gavin Rae, Back to the Future: The Resurgence of Poland’s Conservative Right’, (2007) Debatte 15(2), 222, at 231. 32 Ibid.; see also Shields, supra note 21, 669. Christian Heitsch 203 sed the previous government’s measure which had increased the retirement age. The government’s opposition to the EU’s redistribution quotas for refugees also enjoys strong popular support.33 Specifically the anti-EU position resonates with long-held fears about the absence of the Polish state 1795 – 1980, and with the inter-war ideology emphasising a division between national rural people and the cosmopolitan urban elite.34 Hungary When considering the economic transition and the emergence of populism in Hungary, a similar picture emerges: an abrupt introduction of the market econ‐ omy, a high degree of socio-economic dislocation, the failure of an ostensibly centre-left government to change tack in terms of economic policy, the emer‐ gence of nationalism as the only developed alternative ideology, and the nationa‐ list government’s apparent success in improving economic performance and so‐ cial welfare. Attila Àgh concisely summarizes the impact the transition to the market econ‐ omy had on Hungarian society: ‘In a word, the deep and quick economic transformations of the transition from planned to market economy produced huge social contradictions, with high unemployment and large social exclusions. […] People felt that all these changes took place above them and that they had to pay a high price for marketization and democratization. […] Basically, people were disappointed with the whole period of the quarter-century and dissatisfied with a democracy that had brought impoverishment and insecurity for Hungarian society.’35 More specifically, rapid foreign trade liberalisation triggered a virtual avalan‐ che of corporate bankruptcies. Hungary experienced 898 corporate bankruptcies per each US$ billion of its GDP – compared to 129 and 139 for the Czech Repu‐ blic and Poland.36 Employment in Hungary decreased by 30 percent over the transformation period.37 The scope of privatisation in Hungary was wider than in II. 33 Aleks Szczerbiak, ‘Explaining the Popularity of Poland’s Law and Justice Government', 26 October 2017, available from he-popularity-of-polands-law-and-justice-government/ (accessed 17 July 2018). 34 Shields, supra n. 21 , 669. 35 Attila Àgh, ‘The Decline of Democracy in East-Central Europe’, Problems of Post-Com‐ munism, vol. 63, no. 5 – 6, 277, 279-80; see also Agnes Batory, 'Populists in Govern‐ ment? Hungary's "system of national cooperation"', (2016) Democratization, 283, at 291-2. 36 Marcin A. Piasecki, ‘Was Viktor Orbán’s Unorthodox Economic Policy the Right Answer to Hungary’s Economic Misfortunes?’ International Journal of Management and Econo‐ mics, No. 46, 2015, 41, 47. 37 Ibid. 'Shock Therapy' – Austerity – 'Populism' – Brexit 204 any other post-communist country, and an important characteristic of the privati‐ sation process in Hungary was the predominance of companies being sold to for‐ eign investors. Unlike the Czech Republic and Poland, Hungary also privatised its national oil company and its public utilities.38 To attract foreign direct invest‐ ment, Hungary provided tax incentives, which resulted in a tax burden for for‐ eign-owned companies of between 10 and 18 percent, whereas domestic small and medium enterprises faced a tax burden of between 53 and 58 percent. This configuration of the tax system arguably had a significant negative effect on the development of the domestically owned sector.39 From 2001 until 2010, Hungary had a coalition government of the Hungarian Socialist Party and the Alliance of Free Democrats. Having won re-election in 2005, this government implemented energetic measures to reduce the budget deficit; these arguably contributed to a subsequent reduction in Hungary’s GDP growth rate.40 Simultaneously, interna‐ tional rating agencies used Hungary’s increasing public debt and its worsening debt-to-GDP ratio to justify repeated downgrades of the country’s credit rating, which in turn created difficulties for the country to raise new debt in financial markets. In 2008, the Socialist-Liberal coalition government felt compelled to accept a US$ 25 billion loan from the IMF and World Bank, with a package of austerity measures being a condition for this loan.41 More specifically, Hungary was advised to reduce its government deficit to 3.4 percent of GDP in 2008 and to 2.9 percent in 2009. Attempts to comply with this advice worked pro-cyclical‐ ly and resulted in a serious contraction of the Hungarian economy.42 Viktor Orbán’s FIDESZ party won a two-thirds majority in parliament at the 2010 elections – on a 64% turnout, though43 – and almost immediately started implementing a variety of economic policy initiatives. They refused to follow the IMF’s recommendations to keep cutting public spending; policy disagreements with the IMF ultimately led to the expiry of the IMF Programme in 2011. In‐ stead, the government chose to increase government receipts by means of special revenues-based taxes aimed at corporations in selected sectors of the Hungarian economy. Smaller firms, which in practice meant domestically owned SMEs, 38 Id., at 49. 39 Ibid. 40 Id., at 44. 41 Id., at 46. 42 J. A. Cordero, 'The IMF Standby Agreements and the Economic Downturn in Eastern Europe: The Cases of Hungary, Latvia and Ukraine', 2009, available from ocuments/publications/imf-2009-09.pdf (accessed 17 July 2018), 8 et seq.; for the Socialist Party embracing austerity, see also Batory, supra note 35, 286-7. 43 BBC News, 'Hungary's right-wing opposition claims election win', 12 April 2010, avail‐ able from (accessed 17 July 2018). Christian Heitsch 205 were exempt from these taxes.44 Another set of initiatives taken forward by the FIDESZ government aimed to improve the competitiveness of the Hungarian economy. Notably, instead of attempting to lower the unit costs of labour, the Hungarian government renationalised power generation with a view to reducing energy costs and obtained lower prices for natural gas by extending a contract with Russia for the supply of this energy source.45 The government also imple‐ mented strategic industrial policy by signing partnership agreements primarily with German manufacturing corporations already present in the country, thus successfully promoting export-oriented investment in high value-added sectors: Since 2015, prominent German manufacturers either expanded their operations in Hungary or decided to relocate some of their production facilities to that coun‐ try.46 To address the low level of labour participation, the Fidesz government intro‐ duced a flat personal income tax to provide an incentive to take up work. Simul‐ taneously, the government cut social benefits to make work more attractive than dependence on social transfers. Further, the government amended the labour law to make it more flexible, in the hope employers would be persuaded to create jobs, and embarked on a public works programme to generate – poorly paid – job opportunities for the long-term unemployed.47 In 2012, the minimum wage was increased by 19 percent. This unorthodox economic policy, which its supporters have dubbed Orbáno‐ mics, and some of which sailed rather close to the wind in terms of its compatibi‐ lity with EU law,48 arguably helped bring about a recovery of real GDP growth, stabilisation of the budget deficit and the ratio of debt to GDP, foreign invest‐ ment in the manufacturing sector, and some improvement in the labour participa‐ tion rate.49 The FIDESZ ideology is built on a 'politics of historical memory', which culti‐ vates old grievances relating to the territorial losses brought about by the 1920 44 Piasecki, supra note 36, at 50-1; for the Fidesz government's economic and social policy initiatives, see also Juliet Johnson & Andrew Barnes, 'Financial nationalism and its inter‐ national enablers: The Hungarian experience', (2015) Review of International Political Economy 22(3), 535, 544 et seq.; Dorottya Szikra, 'Democracy and welfare in harde ti‐ mes: The social policy of the Orbán Government in Hungary between 2010 and 2014', 2014 Journal of European Social Policy 24(5), 486, 490 et seq. 45 Piasecki, supra note 36, at 53. 46 Id., at 53-4. 47 For the Hungarian government’s measures to address the low level of labour participation, see id., at 54. 48 See, e.g., European Commission, 'State aid: Commission finds Hungarian advertisment tax in breach of EU rules', 4 November 2016, available from se_IP-16-3606_en.htm (accessed 17 July 2018). 49 For the results of the Hungarian government’s policies, see Piasecki, supra note 36, 59-66. 'Shock Therapy' – Austerity – 'Populism' – Brexit 206 Treaty of Trianon,50 proclaims a tradition of national resistance against foreign dictates which allegedly ranges from the 1848/9 struggle against Austria all the way to the present government's opposition against the EU's policy on refugees, and makes reference in the constitution to the crown of St. Stephen. Further buil‐ ding blocks of the FIDESZ ideology are national-social populism and anti-EU agitation. Similar to what happened in Poland it has become the only developed ideological alternative to mainstream liberalism.51 ‘Shock Therapy on Steroids’ and Emerging Populism in (East) Germany Initially, the electoral success of the nativist Alternative für Deutschland (AfD) was primarily an East German phenomenon. Any attempt to explain this success therefore needs to consider the reunification shock East Germany experienced af‐ ter 1989. The transformation strategy for East Germany after 1989 can for the following reasons best be characterised as ‘shock therapy on steroids’.52 Firstly, immedia‐ tely after the fall of the Berlin Wall and the opening of the border both prices and trade were liberalised simultaneously, in accordance with the standard strategy of abrupt transition.53 Secondly, what turned ‘ordinary’ shock therapy into ‘shock therapy on steroids’ was the decision to set the exchange rate between the East and West German currencies at 1:1. This contrasts with the approach of Poland and Hungary, which devaluated their currencies to mitigate the impact of trade liberalisation, and in one stroke of the pen rendered uncompetitive virtually all of East German industry. Thirdly, in the late 1980 s, West German corporations had been running their manufacturing at less than full capacity. They in addition were able to benefit from short supply lines to the East German market, and their pro‐ ducts were well-known to prospective East German customers, since West Ger‐ man TV had been available in most of the former German Democratic Republic. Thus, the East German market literally was swamped with West German pro‐ ducts, a development which helped accelerate the deindustrialisation of the for‐ mer German Democratic Republic. In fact, East Germany during the first two years after reunification lost 73 percent of its industrial output,54 and experienced III. 50 Hungary Today, 'Hungary Marks National Cohesion Day in Remembrance of the Tragic Losses Brought on by Trianon', 6 April 2015, onal-cohesion-day-remembrance-tragic-losses-brought-trianon-44361/ (accessed 17 July 2017). 51 Agh, supra note 35, 281, 282; Batory, supra note 35, 290-1. 52 For those reasons, see Paul Windolf, ‘The Transformation of the East German Economy’, Polish Sociological Review, 1996, 333, 333 et seq. 53 For the standard strategy, see Sachs, supra note 8, 271 et seq. 54 Windolf, supra note 52, at 334. Christian Heitsch 207 a decrease in employment of about 40 percent within a short time.55 The experi‐ ence of losing their jobs likely was particularly traumatic for East German workers, since social functions such as provision of housing, medical and cultu‐ ral services and childcare had been an integral part of East German combines; this arrangement had helped create among East German workers a strong sense of loyalty to their place of work.56 Internal relocation to former West Germany particularly of young, highly skilled people resumed after the turn of the milleni‐ um. This so-called second wave of relocation primarily involved young women, and led to a surplus of males in particular in rural areas of East Germany, with concomitant effects on the latters’ social integration and with adverse demogra‐ phic consequences for the East German regions affected.57 Until the mid-2000 s, problems of transition from state-subsidized vocational education and training (VET) into employment resulted in youth underemployment rates of between 40 and 50 percent in East Germany – this relates to the percentage of the youth workforce unemployed or in measures of active labour market policy. As many as 20 percent of fresh graduates of external VET ended up without job for more than one year from graduation. The principal cause of these transition problems was the strong emphasis put on subsidised external – extra-company – VET, which led to a frequent mismatch between the skills the graduates had acquired and those needed at prospective workplaces.58 In recent years, the employment prospects of VET graduates have improved. However, about a quarter of them still cannot manage to find a job in the field they were trained for, and frequently have to put up with unskilled jobs and virtually non-existent prospects for career development.59 The overall unemployment rate in the Eastern regions continues to be twice as high as in the West, with many long-term unemployed.60 In former times, the socio-economic interests of displaced or precariously em‐ ployed workers in the East German regions would have been matters for the centre-left Sozialdemokratische Partei Deutschlands (SPD) to address. However, under the leadership of former chancellor Gerhard Schröder, the SPD in a coali‐ tion with the Green Party enacted the so-called 'Hartz Reforms', also known as 'Agenda 2010', i.e. drastic cuts to social welfare payments, reduction of pay‐ ments from the public pensions system with simultaneous promotion of volunta‐ ry private retirement insurance, and widespread deregulation of the labour mar‐ 55 Thomas Ketzmerick, ‘The Transformation of the East German Labour Market: From short-term Responses to long-term Consequences’, (2016) Historical Social Research 41(3), 229, at 232. 56 Id., at 231. 57 Id., at 241-2. 58 Id., at 246. 59 Id., at 247. 60 Id., at 247-8. 'Shock Therapy' – Austerity – 'Populism' – Brexit 208 ket. Thus, the SPD effectively ceased to provide an ideological alternative and became ever less distinguishable from its principal centrist competitor, the CDU. This development did much to demoralise a significant segment of the SPD's electorate. Subsequently, the SPD lost part of its original 'electoral coalition', na‐ mely blue-collar voters and disadvantaged groups – not just to abstention or to left-wing competitors such as the newly formed Left Party and the Greens, but also to the CDU and FDP, and since 2013 to the AfD. The SPD's simultaneous attempt to attract increased numbers of centrist and middle class voters turned out to be unsuccessful, so much so that the party since 2009 has been the hardly 'visible' junior-partner in a 'grand coalition' with Angela Merkel's centre-right CDU.61 The strong showing of the AfD in the 2017 Federal parliamentary elec‐ tions is primarily due to that party's success in exploiting anti-immigrant resent‐ ments among voters with lower education levels and in a more insecure econo‐ mic position62 in the aftermath of Angela Merkel's announcement in 2015 to open Germany's borders to refugees from the Middle East. Austerity and Emerging Populism in the Eurozone This section endeavours to explain how flawed policies of imposing on countries of the Eurozone periphery fiscal austerity and structural reforms meant to increa‐ se cost competitiveness have created socio-economic conditions similar to those, which – as has been shown– have helped lead in Eastern Europe to the entrench‐ ment of right-wing nationalist governments. It is submitted that these policies de‐ rived from a flawed diagnosis of what the root causes of the Eurozone crises had been. A banking crisis turned into a fiscal crisis According to the prevailing narrative, the first of two root causes for the Eurozo‐ ne crisis was fiscal indiscipline, even profligacy in Southern Europe, where bud‐ get deficits and government debt allegedly had increased excessively even before the crisis.63 If fiscal wastefulness had been the problem, then – so the narrative continues – budgetary discipline would have to be the solution, to restore both C. I. 61 Jörg Michael Dostal, 'The Crisis of German Social Democracy Revisited', (2017) The Po‐ litical Quarterly 88(2) 230 et seq. 62 Dennis Spies, Achim Goerres & Staffan Kumlin, 'The Electoral Supporter Base of the Al‐ ternative for Germany', (2018) Swiss Political Science Review 24(3), 246, 258 et seq. 63 See, e.g., Wolfgang Schäuble, 'Why austerity is only cure for the Eurozone' (sic!)', Finan‐ cial Times, 5 September 2011, Christian Heitsch 209 fiscal sustainability and investor confidence. It is recognised that 'the necessary comprehensive fiscal adjustment is weighing on near-term economic growth' but it is hoped that 'its successful implementation will contribute to the sustainability of public finances and thereby to the lowering of sovereign risk premia. In an en‐ vironment of enhanced confidence in fiscal balances, private sector activity should also be fostered, supporting private investment and medium-term growth.'64 This view is based on the controversial doctrine of 'expansionary fis‐ cal contraction'65 which holds that in the absence of significant liquidity cons‐ traints, 'when spending cuts are perceived as permanent, economic actors antici‐ pate a permanent increase in their lifetime disposable income, due to the reduc‐ tion in the tax burden.'66 This – so the argument continues – leads them to consu‐ me or invest more today, because they 'perceive that previously expected large tax increases will not be necessary in the future'.67 These 'positive 'wealth-expec‐ tation effects' should be stronger when fiscal consolidation occurs in 'bad times' namely with a high and rapidly growing debt/GDP ratio'.68 For empirical evi‐ dence, supporters of the expansionary fiscal contraction doctrine point primarily to the fiscal adjustments in Ireland and in Australia in the mid to late 1980 s which they characterise as 'unambiguously expansionary[.]'69 However even the‐ se supposedly strongest examples appear to be questionable to say the least.70 In fact, Ireland likely benefited not so much from 'wealth expectation effects' trig‐ gered by the budget cut than from an almost simultaneous stimulus through EEC funding as well as from an equally simultaneous large increase of the average in‐ dustrial wage.71 In the case of Australia, any expansionary effects of the budget 4 4 f e a b dc0 (accessed 17 July 2018); Jean-Claude Trichet, 'Lessons from the Crisis: Speech by Jean-Claude Trichet, President of the ECB, at the European American Press Club', Paris, 3 December 2010, a.pdf (accessed 17 July 2018); Hans-Werner Sinn, 'Reining In Europe's Debtor Nations', Project Syndicate, 23 April 2010, ions?barr ie r=accesspaylog (accessed 17 July 2018); Ludger Schuknecht, Philippe Moutot, Philipp Rother & Jürgen Stark, 'The Stability and Growth Pact: Crisis and Re‐ form' ECB Occasional Paper Series no. 129, bocp129.pdf (accessed 17 July 2018), 10 – 11; Georgios P. Kouretas, 'The Greek Crisis: Causes and Implications' Panoeconomicus, 2010, no. 4, 391, at 394 et seq. 64 Mario Draghi & Vitor de Constâncio, 'Introductory statement to the press conference', Barcelona, 3 May 2012, n.html (accessed 17 July 2018). 65 European Central Bank, 'Monthly Bulletin', June 2010, 83 et seq. 66 Alberto Alesina & Silvia Ardagna, 'Tales of Fiscal Adjustment', Economic Policy 13, 27 (1998), 489 – 545, also available at (accessed 17 July 2018), quotation from p. 5. 67 Ibid. 68 Ibid. 69 Id., at 32. 70 Mark Blyth, 'Austerity: The History of a Dangerous Idea' (OUP 2015), 206 et seq. 71 Stephen Kinsella, 'Is Ireland Really the Role Model for Austerity?' (2012) Cambridge Journal of Economics 36(1), 223 – 235. 'Shock Therapy' – Austerity – 'Populism' – Brexit 210 cut likely were at best rather transitory, since the country soon 'entered the worst recession in its post-war history.'72 Returning to the causes of the Eurozone crisis, the 'fiscal profligacy' claim would appear to lack sufficient support from the data.73 In the eight years before the crisis, government debt expressed in percent of GDP decreased in fact by 7 percentage points in Italy, by 8 percentage points in Ireland, and by no less than 24 percentage points in Spain. True, during the same period government in‐ debtedness did rise by 4 percentage points in Greece, but this compares rather favourably to the concurrent increase by 5 percentage points in Germany and France. More importantly perhaps, there is evidence that the key factors explai‐ ning the development of the Greek government's debt were the growing cost of financing the existing stock of debt and insufficient tax revenues,74 with the latter admittedly largely due to the Tax Office's inability to tackle widespread evasi‐ on.75 For the most part, the stock of the Greek government's debt had been gathe‐ red in the period 1980 – 1993. The 'snowball effect', that is the increase of debt resulting from the difference between the nominal GDP growth rate and the inte‐ rest rate the state pays for its standing debt, accounts for two thirds of the overall growth of Greek government debt between 1980 and 2007.76 Admittedly, Greek data relating to government debt and deficit were revised upward on several oc‐ casions, most notoriously in 2009.77 Whereas the 2009 revisions almost certainly were based on data which complied with rules and practices meant to increase the reliability of the figures, some of the judgment calls and estimates made ap‐ pear to have been contestable. Further, the procedures, which led to those revisi‐ ons, quite arguably were against Greek law as it then stood:78 The then head of the Greek Statistics Authority implemented the revisions without obtaining the requisite approval of the authority's then-existing board. In addition, the 2009 re‐ visions occurred at an awkward point in time, when financial markets already were in turmoil over the banking crisis, and re-enforced the signal to investors that Greek fiscal data might still be unreliable. Thus, there is an arguable case 72 J. Quiggin, 'Expansionary Austerity: Some Shoddy Scholarship', 25 October 2011, avail‐ able from rship. (accessed 17 July 2018). 73 Servaas Storm & C.W.M. Naastepad, 'Myths, Mix-ups and Mishandlings: Understanding the Eurozone Crisis', (2016) International Journal of Political Economy 45, at 46, table 1. 74 Ilias Bantekas & Renaud Vivien, 'On the Odiousness of Greek Debt', (2016) European Law Journal 22(4), 539, 553 et seq. 75 For tax evasion being widespread, see e. g., Yanis Varoufakis, 'Adults in the Room', 2017, 49, 172 et seq. 76 Bantekas & Vivien (n. 74), 554-5. 77 European Commission, 'Report on Greek Government Deficit and Debt Statistics', 8 Janu‐ ary 2010, COM(2010) 1 final, 12 et seq. 78 Bantekas & Vivien (n. 74), 558-9. Christian Heitsch 211 that the then head of the Greek Statistics Authority acted unlawfully and not in the country's best interest.79 What did rise significantly across the Eurozone periphery was private debt, in particular that of households (mortgages and personal loans) and of financial cor‐ porations.80 In fact, the growth of private sector debt dwarfed the changes in sovereign debt. The strong GDP growth periphery countries experienced from the introduction of the Euro until the onset of the Financial Crisis is primarily due to this expansion in private debt, which was encouraged by the decline of real interest rates in periphery countries, which occurred after the start of EMU. Effectively, the availability of easy credit created debt-fuelled consumption, con‐ struction and property bubbles in the periphery countries. What also happened was the emergence of periphery government bonds as one of the preferred types of collateral for repurchase ('repo') transactions.81 When rating agencies started downgrading periphery bonds, this development helped exacerbate the banking crisis, which had been triggered by European banks' exposure to the U.S. subprime mortgage crisis. In order to explain why this was the case, a few words about how repos work are in order. Repos are a means for financial institutions to raise short-term market funding without giving up the returns on the assets used to raise such funding. In a repo transaction the lender agrees to buy an asset, the 'collateral', from the borrower and sell the asset back to the borrower at a pre-agreed price (usually less than the market value of the asset) at a pre-agreed future date.82 Any returns on the collateral continue to accrue to the borrower. The lender takes a fee (the repo interest payment) and has the legal right to sell the asset, should the borrower renege on the promise of re‐ purchase. Should the market value of the collateral decline before the day of re‐ purchase, the lender has the right to make a 'margin call', i.e. to require the borro‐ wer to provide more collateral to compensate the shortfall in value. Conversely, if the collateral increases in price, the lender returns the difference back to the borrower, allowing the latter to raise further funding. The Financial Collateral Directive83 abolished the power of the Member States to regulate national repo markets, created a unified legal framework enabling market-based cross-border 79 For the subsequent prosecution of the authority's former head, see Reuters, 'Former Greek statistics chief found guilty of breach of duty', 1 August 2017, available from https://www. (accessed 17 July 2018). 80 Storm & Naastepad, supra note 73, table 1 and text on p. 50-1. 81 Blyth, supra note 70 , 84 et seq. 82 For an explanation of how repo transactions work, see D. Gabor & Cornel Ban, 'Banking on Bonds: The New Links Between States and Markets', JCMS 2016, vol. 54, no. 3, 617, at 619 et seq. 83 Directive 2002/47 0 f the European Parliament and of the Council of 6 July 2002 on finan‐ cial collateral arrangements, OJ L168/43. 'Shock Therapy' – Austerity – 'Populism' – Brexit 212 use of collateral, and refrained from EU-level regulatory oversight. Owing to the enduringly slightly higher yield of periphery government bonds compared to that of core sovereign debt, the former became one of the preferred types of collateral in the developing EU-wide repo market. When rating agencies started downgra‐ ding periphery sovereign debt, the ability of European banks to fund themselves in this manner effectively disappeared.84 Add to this the exposure of European banks to the U.S. subprime mortgage crisis, the simultaneous exposure to other Eurozone periphery assets rapidly devaluating in the incipient downturn, as well as the fact that the combined balance sheets of top banks domiciled in Eurozone core countries were equivalent to multiples of their home state's GDP, and it be‐ comes clear that at the root of the Eurozone's troubles lies a crisis of the banks which had become too big to bail.85 To help alleviate this banking crisis, the 'Greek bailouts' were arranged in a manner that permitted the bulk of the 'rescue money' to go towards rolling over Greece's existing debt and towards recapitali‐ sing distressed banks.86 Less than five percent of the 'rescue loans' went to the Greek state's fiscal budget. As a result of imposed austerity since 2010, the Greek economy has shrunk by about a quarter, unemployment remains above 20 percent and twice that for young people, and the IMF recently assessed the Greek debt as 'highly unsustainable.'87 Both centrist and left-wing governments effectively were blackmailed into implementing the imposed austerity program‐ mes faithfully, with the 2015 imposition of the third bailout over the Greek peop‐ le's resounding 'No' vote88 being particularly egregious. It remains to be seen which way Greek voters will turn in the next parliamentary elections scheduled for 2019. The recent re-emergence of the Macedonia naming dispute as a focal point for nationalist agitation89 would seem to give cause for concern. As regards Ireland, the increase in government debt, which led to the 2010 bailout of the country, in turn was caused by the government's issuance of a blan‐ ket guarantee of the Irish banking sector, following the bursting of the Irish pro‐ 84 Blyth, supra note 81, 86. 85 Ibid. 86 Jörg Rocholl & Axel Stahmer, 'Where did the Greek bailout money go?', ESMT White Paper No. WP-16-02, 2016, available from (accessed 17 July 2018), 11 et seq. 87 Viktoria Dendrinou, 'IMF Assesses Greek Debt as 'Highly Unsustainable'', Wall Street Journal, 27 January 2017, available at bt-as-highly-unsustainable-1485541474 (accessed 17 July 2018). 88 See Varoufakis, supra note 75, 449 et seq. 89 See, e.g., BBC News, 'Greece Macedonia: Name dispute draws mass protest in Athens', 6 February 2018, available at https:/ / (accessed 17 July 2018); Casper Hughes, 'Greek riot police fire tear gas at protesters as Macedonia name protest turns violent', The Independent, 9 September 2018, available at e-thessaloniki-a8530086.html (accessed 31 October 2018). Christian Heitsch 213 perty bubble and the freezing of the interbank market after the Lehman bankrupt‐ cy.90 The root cause of investors' concerns about Spain's fiscal situation was the collapse in that nation's GDP after the bursting of its housing bubble – with con‐ struction and related activities at one point having generated about a quarter of both Spanish GDP and employment.91 With a view to restoring investors' confi‐ dence, Spanish governments both of the centre-left and the centre-right cut wel‐ fare spending to reduce the budget deficit, simultaneously exacerbating the social crisis.92 The problems of Portugal, which the 2010 Economic Assistance Pro‐ gramme was meant to address, were due to deindustrialisation, a large non-tra‐ dable service sector and demographics.93 Italy consists of a high-tech, export-ori‐ ented, technologically competitive North and a South dominated by agriculture and marginally productive SMEs, effectively held together by a system which transferred resources from the North to pay for the South, with the resulting pu‐ blic debt having been kept under control by rather frequent currency devaluati‐ ons. The introduction of the Euro removed devaluation as an option, but the si‐ multaneous decrease of interest rates helped paper over the structural fault-lines. Italy's structural problems are worsened by demographics.94 Austerity is concep‐ tually unable to address any of these issues. Nevertheless, all Italian governments – starting with the 'technocratic' government of Mario Monti 2011 and including both centre-left and centre-right governments – have continuously pursued a course of fiscal consolidation. Unsurprisingly this helped bring about the longest and deepest recession in Italian history,95 and the recent establishment of a rightwing nationalist government.96 90 For the bursting of the property bubble in Ireland and the subsequent government guaran‐ tee of the banking sector see Stephen Kinsella & K.P.V. O'Sullivan, 'An Institutional Ar‐ chitecture for Meta-Risk Regulation in Irish Banking: Lessons from Anglo Irish Bank's Minsky Moment', 2011, available at 888340 (accessed 17 July 2018), 5-6; Kinsella, supra note 71, 224. 91 See Francisco Carballo Cruz, 'Causes and Consequences of the Spanish Economic Cri‐ sis: Why the Recovery Is Taken (sic!) So Long', (2011) Panoeconomicus 309 et seq., 314. 92 Vicente Navarro, 'The Social Crisis of the Eurozone: the Case of Spain', (2013) Interna‐ tional Journal of Health Services 48(3), 189, at 191. 93 Blyth, supra note 70, 68-9; 'Portugal: The uncertainty society', The Economist, 3 March 2012, available at (accessed 17 July 2018). 94 Blyth, supra note 70 , 69 et seq. 95 Thomas Fazi, 'Italy's Organic Crisis', American Affairs, May 2018, available at https://ame (accessed 17 July 2018). 96 Stephanie Kirchgaessner, 'Italy: populist government sworn in as political deadlock ends', The Guardian, 31 May 2018, available at may/31/italys-populist-leaders-strike-deal-resurrect-coalition (accessed 17 July 2018). 'Shock Therapy' – Austerity – 'Populism' – Brexit 214 Cost competitiveness vs. technological competitiveness According to the prevailing narrative, the second root cause of the Eurozone cri‐ sis is the periphery's alleged lack of cost-competitiveness – to be addressed by the structural changes imposed on the periphery nations as conditions of the bailout programmes. As M. Draghi put it, 'a useful way to measure excessive im‐ balances is to look at unit labour costs, as these reflect developments in both pro‐ ductivity and labour costs.'97 Or in the words of H.-W. Sinn, '[t]he countries in the southern and western periphery lost their competitiveness simply by becom‐ ing too expensive.'98 This loss of price competitiveness – so the narrative conti‐ nues – has resulted in growing current account deficits, rising foreign indebted‐ ness and reduced fiscal policy room for Eurozone periphery countries. When the crisis started, these countries lacked the resilience to absorb the shock. To reba‐ lance their current accounts, Greece, Portugal and Spain should cut their unit labour costs by 25 – 35 percent, France by 15 – 25 percent, and Italy by 5 – 15 percent.99 The policy of monitoring unit labour costs and as appropriate encoura‐ ging their reduction has become part of the Euro Plus Pact.100 According to a re‐ cent legislative proposal, all EU member states soon will be eligible for pay‐ ments from various EU funds as a reward for structural changes aiming to reduce unit labour costs.101 The diagnosis that at the root of the Eurozone crisis were inappropriately high unit labour costs in periphery countries, which triggered current account imba‐ lances, is flawed for the following reasons.102 Firstly, most goods and services imported into Eurozone member states are 'noncompeting' imports used as inte‐ rim inputs in manufacturing or for consumption – thus imports depend almost completely on domestic demand.103 The export performance of Eurozone mem‐ ber states is overwhelmingly determined by income growth within the relevant II. 97 Mario Draghi, 'Competitiveness of the euro area and within the euro area', Speech by Mario Draghi, President of the ECB at the colloquium 'Les défis de la compétitivité', Pa‐ ris, 13 March 2012, available from p120313.en.html (accessed 17 July 2018). 98 Hans-Werner Sinn, 'Austerity, Growth and Inflation: Remarks on the Eurozone's Unresol‐ ved Competitiveness Problem', The World Economy, 2014, vol 37, no. 1, 1, at 3. 99 Id., 3-4. 100 Annex I to the Conclusions of the European Council (24/25 March 2011) – EUCO 10/1/11 REV 1. 101 Proposal for a Regulation of the European Parliament and of the Council amending Re‐ gulation (EU) No. 1303/2013 as regards support to structural reforms in Member States, COM(2017) 826 final. 102 Storm & Naastepad, supra note 73, 58-9. 103 See, e.g. Matthieu Brussière et al., 'Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008-09, NBER Working Paper 17712, 2011, available at (accessed 17 July 2018), 5 et seq., 18 et seq. Christian Heitsch 215 export markets. Eurozone countries trading with fast-growing markets had rapid export growths, whereas countries trading with slowly growing markets had much lower export growth.104 Eurozone current account imbalances are not af‐ fected in a statistically significant manner by changes in unit costs of labour. In sum, nominal wage costs do not matter very much for competitiveness. What re‐ ally matters instead, is non-price or technological competitiveness. In Schumpe‐ ter's words, what counts is 'the competition from the new commodity, the new technology, the new source of supply, the new type of organisation.''105 The im‐ portance of technological competitiveness and high-tech productive capabilities for export performance has been demonstrated many times.106 Most of the peri‐ phery's export structure is similar in terms of technological complexity to that of China. This is where the real problems of the peripheral countries lie – their lack of competitiveness compared to e.g. Germany is not the result of too high unit costs of labour, but rather of the fact that they are locked into lower and middle levels of technology. No amount of reducing wages and lowering unit costs of labour is going to change that. Imposition of structural changes for the benefit of multinationals Some of the structural changes the Troika imposed on Greece appear to have be‐ en tailor-made to benefit core-based big corporations, including chain stores, and to place at a disadvantage Greek-owned small firms.107 For instance, in 2014 the Troika forced Greece to modify its definition of 'fresh milk' to extend allowable shelf life. This enabled Dutch and other central European milk producers to in‐ crease sales by having their products – transported long-distance over several days by refrigerated truck – appear to be as fresh as the local Greek product. Si‐ milarly, the Troika demanded that Greece abolish its regulations concerning the size of bread loaves. Previously, bread could only be sold in specified sizes – 0.5, 1, 1.5 and 2 kilos. There is evidence that this kind of regulations actually increa‐ ses competition in that it permits comparison shopping The Troika nevertheless III. 104 Alistair Dieppe et al., 'Competitiveness and External Imbalances within the Euro Area', ECB Occasional Working Paper No. 39, December 2012, 24 et seq. 105 Joseph Alois Schumpeter, 'Capitalism, Socialism and Democracy', 1943, 84. 106 See, e.g., Arnelyn Abdin, Marife Bacate, Jesus Felipe & Utsav Kumar, 'Product Com‐ pexity and Economic Development', Levy Economics Institute Working Paper No. 618, September 2010, 8 et seq.; Mariana Mazzucato & Carlota Perez, 'Innovation as Growth Policy: the challenge for Europe', SPRU Working Paper 2014-13, July 2014, 3 et seq., 6 et seq.; Servaas Storm & C.W.M. Naastepad, 'Europe's Hunger Games: Income Distri‐ bution, Cost Competitiveness and Crisis', Cambridge Journal of Economics 2014, advan‐ ce access manuscript, 13 et seq. 107 The following examples are from Stiglitz, supra note 5, 217 et seq. 'Shock Therapy' – Austerity – 'Populism' – Brexit 216 insisted that stores should be able to sell any size of loaf – possibly to the benefit of foreign industrial producers offering e.g. imperial-pound sized packages. The Troika also demanded the repeal of the Greek law on pharmacies which had pro‐ vided that each pharmacy had to be owned by a trained pharmacist, no phar‐ macist could own more than one pharmacy and that over-the-counter medicati‐ ons were not to be sold outside of pharmacies. The effects of this law had been on one hand possibly higher prices for non-prescription medications, on the other hand the existence of a pharmacy even in the most remote mountain village, where it had played an essential role in the provision of health-care. Repealing this law almost certainly helped open up to multinational chains the Greek mar‐ ket for over-the-counter medicine – to the detriment of locally owned phar‐ macies. To provide one final example, the Troika required Greece to legislate for regular Sunday opening of all retail outlets. This almost certainly worked to the detriment of locally owned corner stores with low profit margins which cannot afford to hire sufficient staff to operate shifts.108 Austerity, Populism and the Brexit vote This section aims to demonstrate that anger about austerity helped bring about the outcome of the Brexit referendum. The referendum resulted in a narrow over‐ all majority of 51.9 percent in favour of the UK's withdrawal from the EU. In regional terms, there were majorities for remaining in Northern Ireland and Scot‐ land. By contrast, Wales and England – with the exception of some university towns, Welsh coastal regions, and parts of London and its commuter-belt – deli‐ vered majorities for leaving, particularly so in areas suffering from long-term economic decline.109 This outcome reflects a long-running split in the British establishment, a wor‐ sening representation crisis for the traditional party system, a growing crisis of authority for the political elite, and a long-term legitimacy crisis of the state.110 Since the 1950 s, entry into and continued membership of the EU has proved controversial in British politics, dividing imperial nostalgists, (English) nationa‐ lists, Atlanticists, Europeanists and globalists in different ways at different times. A growing disconnect between the traditional political party system (of Conser‐ D. 108 'Memorandum of Understanding annotated by Yanis Varoufakis', available at https://www ted-by-yanis-varoufakis/ (accessed 17 July 2018), 2, 38-9. 109 BBC News, 'EU referendum: The results in maps and charts'. 24 June 2016, available at (accessed 17 July 2018). 110 This section benefits from Bob Jessop, 'The Organic Crisis of the British State: Putting Brexit in its Place', (2017) Globalizations 14(1), 133, 134 –.137. Christian Heitsch 217 vatives, Labour and Liberal Democrats) and the voters was reflected most recent‐ ly in support for the in essence social-democratic Scottish National Party and the right-wing anti-EU United Kingdom Independence Party (UKIP). Rather wellfounded allegations of corruption, such as the 2009 House of Commons expen‐ ses scandal111 and several 'cash-for-access' affairs,112 led to a significant loss of respect for the elite. The failure of the post-1979 shift from a manufacturing-ba‐ sed to a financialised economy to deliver nationwide prosperity helped create a more substantial legitimacy crisis of the state. These factors led David Cameron, Prime Minister and leader of the Conserva‐ tive Party, to errors of judgment, in an attempt to appease the europhobic wing of his party and to counter popular support for UKIP. He in 2013 made a promise to renegotiate the EU Treaties and have an in/out-referendum on the outcome of those negotiations. This happened during the coalition with the Europhile Liberal Democrats who were dead-set against having any referendum on the UK's EU membership. When the Conservatives in 2015 unexpectedly won a narrow par‐ liamentary majority, Cameron felt compelled to deliver on his promises. He al‐ most certainly failed to consider the complete lack of any inclination among the EU-27as it were to unpack the EU Treaties once again – shortly after the lengthy treaty amendment process leading from the unexpected defeat of the Constitutio‐ nal Treaty to the adoption, in the shape of the Lisbon Treaty, of its scaled-back version. The negotiations, which took place in 2015/6, quite unsurprisingly resul‐ ted only in largely symbolic concessions to the United Kingdom. This outcome did not play any significant role during the referendum campaign. Cameron's fi‐ nal miscalculation was that a campaign focussing on the prospect of economic disruption after a withdrawal from the EU would accomplish victory, similar to what had happened in the 2014 referendum about Scottish independence: In that referendum, a campaign strategy dubbed 'Project Fear' had obtained a 55-percent majority against independence. By contrast, during the EU referendum cam‐ paign, the 'remain' campaign, which had the support of all parties except of cour‐ se that of UKIP, lost control of public opinion. This was due primarily to the de‐ cades-long hostility to the EU of the right-wing press (tabloids like the Daily Mail and its associated network of commuter-addressed – free – Metro sheets, 111 See, e.g., Andrew Grice, 'Review of the year 2009: Expenses scandal', The Independent, 23 December 2009, available at rew-grice/review-of-the-year-2009-expenses-scandal-1847865.html (accessed 17 July 2018). 112 See, e.g., Reuters, 'Cash for access scandal hits Britain's parliament', 7 June 2013, avail‐ able at 0 602 (accessed 17 July 2018); Patrick Wintour, 'Jack Straw and Malcom Rifkind face 'cash for access' allegations', The Guardian, 22 February 2015, available at https://www.t -4-dispatches-telegraph (accessed 17 July 2018). 'Shock Therapy' – Austerity – 'Populism' – Brexit 218 the Sun, and the Daily Express; broadsheets like the Daily Telegraph and the Murdoch-owned Times); these media accounted for 82% of hard-copy and online readers. Another factor in swinging public opinion was the publicity given to fast-talking protagonists of the Leave camp – UKIP leader Nigel Farage and amateur historian, one-time 'Daily Telegraph' columnist and former mayor of London Boris Johnson. The wider context of the Brexit vote is the shift – starting with the election of Margaret Thatcher in 1979 – from a manufacturing-based to a financialized economy. The policies of the Thatcher and Major governments brought about the rapid deindustrialisation of the Midlands, Yorkshire and Wales. Most well-paid jobs in manufacturing disappeared. What remains is a service sector of low-paid, precarious jobs with very limited prospects for career progression. Where po‐ ckets of industry survived, they became the objects of uncoordinated take-overs by foreign corporations. At the same time, the City of London was promoted as the leading centre for international finance. To compensate for the widespread stagnation of wages, the promotion of home ownership funded by easy access to credit became government policy, initially under the slogan of a 'property-ow‐ ning democracy'. All this has led to significant differences in wealth and econo‐ mic prospects – not just between, on one hand, the former industrial areas and, on the other hand, London and its adjoining commuter belt, but also within indi‐ vidual towns and cities. When Labour, after its rebranding under Tony Blair as post-ideological New Labour, returned to power in 1997, they retained most of these Thatcherite policies. In particular, they too did little if anything to address the long-term structural problems of the areas suffering from the disappearance of industry. During their whole time in office, Labour almost certainly took for granted the continued support of voters in these areas, in the belief that these vo‐ ters had nowhere else to turn – they would never in any significant numbers vote Conservative, since they would continue to blame that party for laying the cause of their hometowns’ economic decline. First in the 2014 European Parliamentary Elections and subsequently in the Brexit referendum, many of these disappointed Labour voters instead opted for UKIP and its anti-EU position. The measures of the New Labour government to bail out the banks after the financial crisis led to a large increase in government debt and turned a financial into a fiscal crisis. The Conservative Party and the right-wing media exploited this development. After the establishment of the Conservative-Liberal Democrat coalition in 2010, the increased government debt was the excuse to introduce 'en‐ during austerity'. This was a programme of cutbacks to social welfare transfers and public services. It included the following measures: Christian Heitsch 219 – Unrealistically low caps on in-work benefits, – A reduction of transfers to the disabled and long-term ill in combination with recurring and manifestly unfit-for-purpose assessments of the claimants' ca‐ pability to work; – Workfare for the unemployed; – The setting of targets for sanctioning benefit claimants; – The creeping privatisation and disestablishment of the National Health Serice; – The reduction of central government grants to local authorities, leading to cuts in locally administered social services; – The commodification and the creation of an artificial ‘market’ of higher edu‐ cation, with graduates leaving university typically owing more than £27,000 in tuition loans. Until the election of left-winger J. Corbyn as Labour leader in 2015, Labour completely failed even to attempt to develop an alternative to austerity – despite a high level of popular discontent about the government's policies. On several prominent occasions during the 2010 – 2015 Parliament, Labour MPs in fact we‐ re whipped into abstaining on austerity measures or into voting with the govern‐ ment.113 This was the wider context underlying the outcome of the Brexit vote. Voters of lower education and in a more vulnerable economic position decisively voted for Leave,114 after the Leave campaign had made a point of exploiting the‐ se voters’ concerns about immigration.115 Possible ways forward This section starts from the realization that the social crisis is the root cause of the EU's emerging crisis of legitimacy reflected in the Brexit vote and the increa‐ sing support for anti-EU parties. To address this crisis of legitimacy, the EU should use the current negotiations about the Multiannual Financial Framework E. 113 See, e.g., Jon Stone, 'Welfare bill: These are the 184 Labour MPs who didn't vote against the Tories' cuts', The Independent, 21 July 2015, available at uk/news/uk/politics/these-are-the-184-labour-mps-who-didn-t-vote-against-the-tories-wel fare-bill-10404831.html (accessed 17 July 2018); Hugh Muir & Shiv Malik, 'Labour abstention on workfare bill prompts party infighting', The Guardian, 21 May 2013, avail‐ able at l-byrne (accessed 17 July 2018). 114 Sara B. Hobolt, 'The Brexit vote: a divided nation, a divided continent', (2016) Journal of European Public Policy 23(9), 1259 et seq. 115 See, e.g., European Law Monitor, 'The misrepresentations and misleading statements ma‐ de by Vote Leave on Turkey being fast tracked for full EU membership', available at s-on-turkey-and-migration.html (accessed 17 July 2018). 'Shock Therapy' – Austerity – 'Populism' – Brexit 220 2021 – 2027116 to implement on the legal basis of article 175(3) TFEU an 'Emer‐ gency Social Solidarity Programme';117 this would guarantee access to nutrition and basic energy needs for all Europeans, by means of a European Food Stamp Programme and a European Minimum Energy Programme. For the remainder of the current Multiannual Financial Framework period, this programme could be funded by the European Commission, using the interest accumulated within the European system of central banks from imbalances of the 'TARGET2' system for internal accounting of monetary flows between the central banks, which compri‐ se the European System of Central Banks.118 Due to the Eurozone crisis and con‐ trary to the intentions and prognostications of the Eurozone's designers, there these days are significant imbalances within this system which provide an indi‐ rect financial benefit to the surplus countries – which it is submitted has no mo‐ ral or rational basis. The interest collected from the deficit countries' central banks should be channelled to an account that would fund the proposed Emer‐ gency Social Solidarity Programme. Given that it is ultimately the very cohesion of the EU which is at stake, per‐ haps there is a role for the Union judiciary to help alleviate the social crisis by reanimating the EU Fundamental Rights Charter's social rights. Recall for a mo‐ ment the famous previous episode in the development of what then was the Eu‐ ropean Economic Community, when an activist Court of Justice in an era of poli‐ tical gridlock among the Member States helped take forward the process of Eu‐ ropean integration119 by establishing the seminal principles of supremacy and di‐ rect effect.120 The proposition is that the present social crisis whose likely effects on the Union's cohesion appear to be underestimated in the Union's political do‐ main121 would justify a similar form of judicial intervention. There are indicati‐ 116 117 As proposed by Yanis Varoufakis, Steve Holland & John Kenneth Galbraith, 'A Mo‐ dest Proposal for Resolving the Eurozone Crisis, Version 4.0', July 2013, available from zone-crisis-version-4-0-final1.pdf (accessed 17 July 2018), 2-39. 118 As proposed in id., 10. 119 Anil Awesti, 'The Myth of Eurosclerosis: European Integration in the 1970s', L'Europe en Formation 2009/3 (no 353-354), 39, at 48-49. 120 See, e. g., ECJ, Judgment of 5 February 1963 – Case 26/62, van Gend en Loos; Judgment of 15 July 1964 – Case 6/64, Costa ./. E.N.E.L.; Judgment of 4 December 1974 – Case 41/74, van Duyn ./. Home Office. 121 See, e.g., European Commission, 'Reflection Paper on the Social Dimension of Europe', COM(2017) 206 of 26 April 2017, which, while recognising the various manifestations of the social crisis, in essence fails to acknowledge the threat they pose to the Union's cohesion. Christian Heitsch 221 ons in recent case law that the Court might be willing to activate fundamental rights to enhance the Union's social cohesion:122 – The willingness of the Court to consider in Kamberaj the right to social assis‐ tance;123 – The arguments made by two Advocates General124 for re-evaluating, in view of the Lisbon Treaty having given equal legal rank to fundamental rights and fundamental freedoms, the controversial Viking125 ruling. Viking notoriously had established the principle that fundamental freedoms effectively prevail over conflicting fundamental rights; – The willingness, after some apparent initial hesitation,126 of the Court to con‐ sider requests for preliminary rulings on the compatibility with fundamental rights of austerity measures – Associacao Sindical dos Juizes Portugueses;127 and, most significant, – The recognition – against the opinion of the Advocate General – of the Com‐ mission's and the ECB's noncontractual liability for sufficiently serious breaches of Fundamental Rights caused by Memoranda of Understanding concluded under the Treaty on the European Stability Mechanism – Ledra Advertising.128 True, in Sotiropoulou,129 the General Court dismissed the plaintiffs' claim that re‐ peated cuts to their pensions mandated by the Memoranda of Understanding im‐ posed on Greece violated their fundamental right to human dignity. It is submit‐ ted, though, that the General Court's legal analysis was seriously flawed in that it did not consider when reviewing the proportionality of the pension cuts that hu‐ man dignity is among the foundational values of the Union (article 2 TEU).130 The seven-line paragraph in Sotiropoulou which in essence rather unthinkingly copy-pasted the relevant sections of the Ledra judgment – which had been about the right to enjoyment of property – ought not to be the final word of the Union's 122 For a discussion of these indications, see C. Barnard, 'The Charter, the Court – and the Crisis', University of Cambridge Legal Studies Research Paper Series, Paper No 18/2013, August 2013. 123 Case C-571/10 Kamberaj v. IPES [2012], para. 80. 124 Opinion of AG Cruz Villalon, case C-515/08 Santos Palhota [2010], paras. 51 et seq.; Opinion of AG Trstenjak, case C-271/08 Comm. v. Germany (occupational pensions) [2010], paras. 75 et seq., 183 et seq. 125 ECJ, Judgment of 11 December 2007 – Case C-438/05 Viking [2007]. 126 CJEU, Order of 7 March 2013 – Case C-128/12 Sindicato dos Bancários do Norte v. BPN; Order of 14 December 2011 – Case C-434/11 Corpul National al Politistilor. 127 CJEU, Judgment of 27 February 2018 – Case C-64/16 Associacao dos Juizes Portugue‐ ses, paras 29 et seq. 128 Joined cases C-8/15 P to C-10/15 P Ledra Advertising et al. v. Comm. & ECB [2016], paras. 55 et seq. 129 General Court, Judgment of 3 May 2017 – Case T-531/14 Sotiropoulou et al. v. Council and Comm. [2017], paras 75 et seq. 130 Id., para 90. 'Shock Therapy' – Austerity – 'Populism' – Brexit 222 judiciary on whether a monthly pension of less than €700 is conducive to a life in human dignity. Conclusions This paper has shown that the emergence of nationalistic-populist governments in Eastern Central European EU Member States, nationalistic stirrings in some Eurozone states and the Brexit vote have a common root cause. This is the longterm social crisis, which has become entrenched across much of the European Union. In Eastern Central Europe, the social crisis constitutes the after-effect of the large-scale deactivation of labour brought about by the 'shock therapy' transi‐ tion from a planned to a market economy. Centre-left parties when in govern‐ ment failed to address the resulting widespread social dislocation – in fact, these parties themselves embraced welfare state retrenchment and austerity. Nationa‐ listic-populist parties ended up as the only developed ideological alternative to mainstream liberalism. As the paper further explained, to the extent the social crisis is affecting peri‐ phery states of the Eurozone, it has its cause in the imposition or voluntary im‐ plementation of austerity and of structural reforms ostensibly aiming to reduce unit labour costs. These policies effectively are a flawed cure based on a diagno‐ sis which itself is flawed in several respects. Firstly, rather than being triggered by the periphery states' alleged fiscal profligacy, the Eurozone crisis had one of its roots in the bursting of debt-fuelled consumption, construction and property bubbles, with the bubbles having been brought about by the post-EMU decline in periphery real interest rates. The second actual root cause for the Eurozone crisis was the effective seizure of the repo market for commercial banks' short-term funding – periphery sovereign bonds had become the preferred collateral for repo transactions, and once the downgrades of periphery sovereign debt started, the ability of commercial banks to fund themselves through this type of transactions effectively ended. Almost 95% of the loans provided through the as such quite mislabelled 'Greek bailouts' went towards rolling over existing Greek sovereign debt and towards recapitalising distressed banks. The austerity programmes im‐ posed as conditions for these 'bailouts' helped bring about a deep and lengthy re‐ cession in Greece, with nationalist stirrings over the Macedonia name dispute be‐ coming ever more visible. The cause of the sovereign debt problems affecting Ireland and Spain was the bursting of those countries' construction and property bubbles. Italy and Portugal suffer from a combination of unfavourable demogra‐ phics and structural issues, which no amount of austerity is capable of addres‐ sing. The consistent pursuance of austerity in Italy has resulted in that country's Christian Heitsch 223 longest and deepest recession ever, and in the recent establishment of a rightwing nationalist government. Secondly, it is not differences in cost competitiveness, which lie at the root of the Eurozone's structural imbalance, but rather entrenched differences in techno‐ logical competitiveness. Thus, structural reforms aiming to reduce unit costs of labour are conceptually incapable of addressing the truly problematic structural imbalance. Thirdly, some of the structural reforms imposed on Greece appear to have been openly biased towards multinationals and to the detriment of locally owned small businesses. As the paper has further explained, the underlying cause of the Brexit vote was a high degree of fundamental distrust in the political system. The underlying reasons for this were the failure of the UK's financialized economy to deliver wi‐ despread prosperity, the Labour Party's unwillingness – until recently – to change the country's economic policy, and discontent with the Conservative govern‐ ment's programme of 'enduring austerity'. This was the wider context underlying the outcome of the Brexit vote. Voters of lower education and in a more vulnera‐ ble economic position decisively voted for Leave, after the Leave campaign had ruthlessly exploited these voters’ concerns about immigration. As a short-term means to address the EU's social crisis’ which places at risk the Union's very cohesion, the EU should on the basis of article 175(3) TFEU urgently create a European Emergency Social Solidarity Programme designed to guarantee to all Europeans access to nutrition and basic energy needs. Since it is the very cohesion of the EU which is at stake, there also is a role for the judiciary to help alleviate the social crisis by activating the EU Fundamental Rights Char‐ ter's social rights. Recent case-law indicates that the judiciary is willing to take on this role – which would be a welcome development. 'Shock Therapy' – Austerity – 'Populism' – Brexit 224

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The EU’s vulnerability to crises is not a novelty, but disintegrative trends have reached a new quality. The financial and fiscal crisis shook the Union, which had just been consolidated by the Lisbon Treaty, to its foundations. The refugee crisis becomes a heavy test of European solidarity. For the first time, a member state, the United Kingdom, wants to leave the Union and in doing so, as at least the Brexiteers argue, regain its sovereignty. Even the member states themselves are not spared from moments of disintegration. One might think of the secessionist movements in Catalonia or Scotland etc. Against this background, the SIPE Congress in Hamburg has brought together high-ranking experts from all over Europe in order to explore the tension between integration and disintegration, as well as Europe’s prospects of being “united in diversity”. The discussions paint a differentiated overall panorama of the constantly challenged integration project. With contributions by Francisco Balaguer Callejón, Roland Bieber, Jernej Letnar Černič, Jenö Czuczai, Daria de Pretis, Ian Forrester, Ece Göztepe, Ana Maria Guerra Martins, Christian Heitsch, Stefan Herms, Ann-Kathrin Kaufhold, Panos Kazakos, Markus Kotzur, Clifford Larsen, Friedrich-Joachim Mehmel, Eleftheria Neframi, Dimitrios Parashu, Argelia Queralt Jiménez, Andrea Romano, Tilman Repgen, Sebastian Scholz, Christian Starck


Die Krisenanfälligkeit der EU ist kein Novum, doch haben desintegrative Strömungen eine neue Qualität erreicht. Die Finanz- und Fiskalkrise erschütterte die eben erst durch den Lissabonner Vertrag konsolidierte Union in ihren Grundfesten. Die Flüchtlingskrise wird zur schweren Belastungsprobe für die europäische Solidarität. Mit dem Vereinigten Königreich will erstmals ein Mitgliedstaat den Integrationsverbund verlassen und, so die Brexit-Advokaten, seine Souveränität zurückgewinnen. Auch die Mitgliedstaaten selbst bleiben von Desintegrationsmomenten nicht verschont, man denke etwa an die Sezessionsbestrebungen in Katalonien oder Schottland. Vor diesem Hintergrund hat die Hamburger Jahrestagung der SIPE hochrangige Expertinnen und Experten aus ganz Europa versammelt, um im Spannungsfeld von Integration und Desintegration auszuloten, welche Zukunftschancen Europas „Einheit in Vielfalt“ hat. Die Diskussionen zeichnen ein differenziertes Gesamtpanorama des immer neu herausgeforderten Integrationsprojekts. Mit Beiträgen von Francisco Balaguer Callejón, Roland Bieber, Jernej Letnar Černič, Jenö Czuczai, Daria de Pretis, Ian Forrester, Ece Göztepe, Ana Maria Guerra Martins, Christian Heitsch, Stefan Herms, Ann-Kathrin Kaufhold, Panos Kazakos, Markus Kotzur, Clifford Larsen, Friedrich-Joachim Mehmel, Eleftheria Neframi, Dimitrios Parashu, Argelia Queralt Jiménez, Andrea Romano, Tilman Repgen, Sebastian Scholz, Christian Starck