Oct 31st, 2013 | Category: European Seminar Nafplio 2013, Interviews

Interview with Vivien A. Schmidt, Professor at Boston University

In your view, why has the Eurozone not been able to exit the crisis? What are the principal problems of the approach that has been adopted so far?

If we focus primarily on the governing rules as opposed to the macroeconomic policies, I see the EU as essentially engaged in a “one size” governing by the rules and ruling by the numbers.  And unfortunately the rules are not working or, rather, the rules are not the right rules and the numbers are also problematic. Essentially, I see Eurozone leaders who are obsessed with rules. From the Stability and Growth Pact in the past, to the six-pack, the two-pack, the Fiscal Pact, you never know how many more pacts of growth, stability and re-stabilization we are going to get, but I don’t see this as the answer to Eurozone’s problems.

One of the most significant aspects of the crisis is the feeling that Europe is losing its legitimacy among the European people. At your presentation at ELIAMEP’s seminar you talked about the consequences of the way that the crisis has been handled on the so-called democratic deficit. Could you tell us a bit more about this correlation?

Yes. Here, I think one needs to recognize that there are three different ways of talking about legitimacy. Ordinarily, people talk about input versus output legitimacy. Input is citizen representation and political participation, output is policy ideas that yield results, and there is a trade-off between them. In this context, if you do not have much input politics, but at least you have good output policy, the action is still legitimate even if the people haven’t been involved. Alternatively, if you have significant involvement by the citizens and the output policies are not very good, it’s also not a problem. Those are trade-offs that we generally accept.

When you go to throughput processes, which is the governing by the rules, ruling by the numbers, EU institutional actors assume that this is also legitimate, with the same kind of trade-off here that there is between input and output legitimacy. If they are accountable, if they deal with the rules with efficacy, if they are open and accessible to interest groups, all of that is great but that doesn’t make up for a lack of citizen input or for bad policy results. In contrast, if you have bad throughput, bad processes, this can throw input and output into question by seeming to skew input politics or taint output results.

So this is the first stage of the answer. It’s a two-part answer because you find input-output-throughput in any national polity. But if you look at the EU, the EU is essentially a split level democracy, fragmented between an EU level that is mainly about throughput processes and output results and a national level that’s about input politics. And in the EU, the problem for the citizens, which is your question, is that the citizens end up with something I call ‘politics without policy’.  There is still the politics of the left and right at the national level, even as most policy decisions, the ones that are key to the Euro-zone crisis, are being taken at the EU level.

So you have national input, with citizens protesting, citizens voting.  But they don’t change the policies because the policies are at the EU level and at the EU level it’s always about the processes, about governing by the rules and ruling by the numbers, and it’s about output results. If the results had been fine, if the EU after these four years of recession and pain and austerity for some countries, and one could say at the end “hey, look, everyone is growing” then the output results would justify no policy input at the national level and no political input at the EU level. The problem of course is that the results are not good.  It’s all well and good for the people at the EU level to say wait just another two years and everything will be fine. But what if in two years things are not fine? This of course it would take us to a different discussion about whether this particular policy mix can work. I don’t think it has or will. But that’s another discussion.

How about the way technocracy has worked? It is not only the aspect of legitimacy that has been undermined; politics on a national level have also suffered from a loss of credibility. Don’t you agree?

Yes, absolutely. It’s this problem of politics without policy at the national level. But let me get back to the EU level on the technocracy because that’s important and I haven’t really focused on it yet. Each of the EU institutional actors thinks that they have legitimacy but in a different way and they follow different rules. Take the European Central Bank (ECB). The ECB for the longest time felt that as long as they maintain credibility–so we are talking about throughout processes essentially–they are going to be credible, they are going to be independent, they are fine. They also assumed that as a non-majoritarian institution, just like institutions at the national level, whether it’s Central Banks or Courts of Justice, being independent makes you legitimate in an input way. Actually they misunderstand non-majoritarian institutions because at the national level non-majoritarian institutions exist in the shadow of politics, appointed by Governments and their brief is given by Governments and can be taken away by them. The problem with the EU level is there is not that same shadow of input politics.

The ECB is the most independent of independent Central Banks so that the ECB starts out focused on the throughput. But unlike some of the other institutions, they recognize that because they have such thin input credibility, or just legitimacy, they also need to focus on output. So what we have seen is that whereas Duisenberg, the first ECB President, and then Trichet, the second ECB President, were saying that it’s all about credibility, as soon as the crisis hit, especially the Greek crisis in May 2010, all of a sudden they abandoned, or let’s call it re-interpreted, the throughput rules in order to get better output results. That’s why you get the bail-out, because technically on throughput grounds the ECB is not allowed to bail out any country, the ECB is not allowed to buy the debt of any country. What does it do? It buys debt on the secondary markets; so the ECB says, fine, we bent the throughput rules a little bit. But where we get the major bending and the major movement from throughput to output is when Mario Draghi said in July 2012, in view of the threat of contagion of the crisis “wait a minute, this is about whatever it takes”. And this means that the ECB moves from what is essentially one size fits none throughput rules (monetary policy that targets inflation fighting), to ‘whatever it takes’ output results. ECB inflation-fighting monetary policy was supposed to produce convergence. Instead it produced divergence. It led to greater deficits for some countries and surpluses for others. Because of this, other policies needed to be introduced, to produce better output results.

That’s one way of thinking about technocracy. But the European Council is ‘one-size fits one’ governing rules and you know who the one I’m talking about is–Germany. Here, EU leaders who are nationally electedsee themselves s therefore indirectly representative of their citizens and therefore legitimate. But what happens is they are only legitimate to the extent they are agreeing to rules that affect their own citizens. The minute they say ok we are going to impose this on Greece, that on Ireland, that on Portugal, this is no longer legitimate on an input level. That’s one issue. The other thing is that they think of the Council as a representative forum and therefore input legitimate. But in fact what goes on in the Council is about hard bargaining, it’s about power politics. And that’s where of course we find the ‘one size fits one’ that is Germany, because it’s the most powerful, because it’s perceived as the most powerful.

The Commission on the other hand is ‘one size fits all’ with only numerical targets, that is, a very restrictive regime.  And the European Parliament has no size at all: in other policy areas it is a partner in the community method, but with regard to the Eurozone crisis the European Parliament really has very little say, because Eurozone governance is characterized by excessive inter-governmentalism. The one time the EP did have a say, with the Six-pack, it gave away potential power of oversight over the European Commission, by agreeing that the Commission should be more independent. In that way what you got is a technocracy that, to come back to your question, reduces the national say, whether in terms of input, throughput or even output, to a very minimal level.

So what are the prerequisites for change in the approach followed so far and how politically feasible is it?

The prerequisites for change are about politics and ideas. By politics I mean that you have to get other leaders elected. If you look at who is in power across the EU, they are mainly center-right governments, and the Commission is headed by a center-right politician, a former Prime Minister of Portugal. The Council is also center-right or has been; now you may have Hollande but he is simply following the same policies.

So one of the problems is politics, the other is ideas. Because in recent years, actually since the 1990s, there hasn’t been an alternative to a kind of ordo-liberal, neo-liberal approach. By ordo-liberal I mean neo-liberal with rules; it is a German idea, of macroeconomic and monetary policy that is rule-based and stability-focused, and gives priority to sound finances, low debt, no deficits or low deficits, and inflation fighting that migrated from the Bundesbank to the ECB when we got the European monetary policy. Neo-liberalism you get in the ‘structural reforms’. Neo-liberalism comes in with Margaret Thatcher and Ronald Reagan in the US, and this is about the roll-back of the state, cutting welfare, cutting government spending because you want to limit the state and allow room for the markets. However, in the 1990s the Social democrats, trying to figure out how to come to power, accepted the neo-liberal principles but instead rolled out the state in order to enhance the markets. But they remain highly neo-liberal. The crisis is largely due to both, since you don’t raise taxes but you continue to spend at the same time that you have an ordo-liberal policy that, for the ECB, as already mentioned, is a policy of ‘one size fits none’. So I guess that is the answer to the first question, about what the serious problems are, and what do we have to change:  we have to change the politics and the ideology.

But you asked me where are we going to find a new ideology and how politically feasible is this? Well, that’s a good question. One of the problems here is path dependency (from a historical institutional approach). What we’ve got is the institutionalization of these ideas in the various pacts and elsewhere, and it is almost impossible to change them because of the decision rules at the EU level that require unanimity. Unanimity is hard enough to get when instituting the rules, but then to get unanimity to reverse thos rules, this is almost impossible. This means that we are stuck with these rules. Institutionalized ideas. You could say that maybe there could be a re-interpretation, a different kind of political orientation, but for that you need the opposition, and here I’m talking about Social democrats, to come up with new ideas that resonate with the public and which the public sees as actually feasible. We haven’t seen that yet. We see centerl right politicians being elected over and over again because they appear to have a feasible policy. Actually, as we’ve seen the policy is not working. So it may be that you will see the social democrats come up with some new policy ideas. But in the interim, we have the rise of the extremes, on left, on the right and in the center–Beppe Grillo is a case in point. So given that, what’s the way out?

It seems to me that there has to be a change of ideas, with the ideology focusing more on the core principles of social justice and fairness, rather than across-the-board cutting; I am thinking about how to cut in order to ensure fairness, fight against rising inequalities, a whole range of issues focused more on social solidarity rather than on the kind of economic solidarity that has been the focus of the EU up until now.  This is not to say that there shouldn’t be structural reforms, but when we talk about structural reforms we should talk about doing it in such and such a way rather than across the board-cuts that make everyone hurt.  This does not reform the system; we need structural reform that is truly reform. But with certain ideas in mind, that would involve social justice.  Rather than saying that we are going to cut the welfare state because that’s the problem, reform should focus on rebalancing the welfare state so that it is more just for all parts of the population, so that it is not only insiders that get big pensions and outsiders that have almost nothing at all–outsiders meaning immigrants, youth and women generally. Try to rebalance the welfare state so that everyone gets a fair share. There’s language that one could develop. Beyond that there has to be a set of basic principles. For this social democrats will need to rethink a lot, including to rethink the fact that in the 1990s they bought hook, line and sinker the kind of neo-liberal argument which works for neo-liberals. It does not work for social democrats. But the German social democrats go back to Schroeder, so maybe we are talking about a new generation of leaders. So you can see, I’m clutching at straws here as I keep going.

So tell me how do you think things will play out with this new generation of leaders in the near future?

At the end of my talk which is not in the paper I wrote, I said i have two scenarios. This is from a piece that I did for the German Marshall Fund a year ago. These scenarios also pick up a bit my discussion on neo-liberalism in a book that’s coming out with Cambridge University Press entitled “Resilient Liberalism in Europe’s Political Economy”, where we have a number of authors contributing on different aspects of it. But in this German Marshall Fund piece I give two alternatives: EUtopia, which is positive muddling through, and dystopEU, which is negative muddling through. You see that I have no paradigm shift. The positive muddling through is everything that everyone has talked about; as real economic solidarity, which would be euro bonds or mutualizing of debt, obviously a banking union, a European Monetary Fund for countries in trouble, and making the structural funds realy work.  Additionally, give the EU its own resources, have some kind of redistribution even if small, like unemployment insurance across Europe, where everyone puts money in and then gets it out when there’s unemployment; even possibly a looser monetary union, although of course we would have to figure out how that might work, one in which if a country needs to get out in order to deflate the currency rather than deflating wages, that’s possible. So a country like Greece, maybe Spain, maybe even Italy would already be sheltered, would be able to be sheltered from the markets’ pressure to exit.

The problem now is that in order to resolve this crisis, Southern Europe simply has to reduce its wages and prices to what I think are levels that are unsustainable politically. And it’s a slow pain; it’s a drip, drip, drip of pain for Southern Europe because people are losing income and of course there is also no growth as a result, and this can go on for years. So maybe in EUtopia, if one could rethink the monetary union in a way that makes it possible for easier exit but also re-entering then things would go well.

But the next part of this requires an increase in democracy with closer ties between the European Parliament and the national Parliaments, EU elections for the Commission President via the European Parliament so as to politicize the debate. So you can have a left-right debate in each country as the campaign goes on. And the social democrats and the centre right and the extreme right and the extreme left would be able to debate their ideas, so that it would become a Europe-wide debate about what kinds of policies do we want. And then if a centre right majority is elected and you get a centre right Commission President, that is fine. That then has much greater input legitimacy than if it’s simply an intergovernmental decision by a European Council that follows throughput rules of ‘one size fits one’. This is the positive scenario, EUtopia.

DystopiEU is negative modeling through. You don’t have any serious mechanisms, maybe there is a banking union but you certainly don’t get mutualization of debt, none of that. On the legitimacy side, yes maybe you get European parliamentary elections but you basically get the extremes of the right and the left and in the center, the Beppe Grillo phenomenon. Rather than politicizing to legitimize, you politicize to de-legitimize the EU. So there are scenarios where you have the rise of various fascist governments–we already have an authoritarian government in Hungary.  And then, at the end of this dystopiEU, European member state leaders panic and say that the only way to legitimize this is to have the election of the Council president. But who is going to be the candidate? My candidate? David Beckham! Name recognition. And that’s of course the problem if you have the election of a Council president by universal suffrage when you are in the midst of a crisis and there is a tremendous rise of euro-skepticism, not much of a European demos, not much European identity. The risk is that you get serious populism just as in France in 1848. Who ran? This is Marx’s famous lines: The first time tragedy, the second time farce. The first time tragedy was Napoleon’s election, the second time farce was Louis Napoleon, emperor in 1848, because that was the first time France had ever had universal suffrage for its elections. So similarly for the EU’s  universal suffrage for the first time, for Council president? David Beckham or some other football star of the moment who has not a clue about politics or anything. I think that’s really the danger of dystopiEU.

So what I’m hoping for is EUtopia. But for that we need better leadership because unfortunately, for the moment the Eurozone crisis response looks much more like a muddling through in a very negative way. Let’s hope that I’m wrong and that we will get enlightened leaders and that the elections for the European Parliament next year will actually be productive at the very least for the political debate, even if we don’t end up with a very good outcome in terms of who is elected. I think the predictions right now are that you might get 40-45% of euro-skeptics but perhaps that could be a wakeup call to EU leaders. At the same time, it creates even more of a crisis of governability in the EU, especially if national governments bring in new governments that are more euro-skeptic and less willing to compromise. As the crisis goes on I think you are likely to see more governments turn to the extremes of the right or left with therefore less credibility and less pro-European sentiment. Of course the whole issue for Europe, for all the member states and their citizens is that they have to go forward together. If they separate then it’s bad for everybody.

So, should I conclude that you are not very optimistic about the European project?

Well as an American I’m always an optimist. As a European, because I feel myself very much European, with my European heritage and I’m in Europe all the time, I’m probably more pessimistic. However, things can change quickly; I really think that this is a question of fixing the economics and then fixing the politics and then I think things will follow from there. The danger is doing the politics before the economics. And yet, how do you get the economics changed if you don’t change the politics since, as I was saying, this is a question of ideology?

That was my next question. Can we change the economics without changing the politics?

I think the one thing that you can say is that this is not so black and white. If you look at the crisis, there has been a lot of muddling through, and we have seen change. We have seen the ECB go from a very strict, “this is all about throughput, credibility, stick to those rules”, to well, actually, we want good output results. We have also seen the Council and Commission agree to moderate the deficit reduction rules as we speak, with Olli Rehn saying that now that we have succeeded for the first two years in deficit reduction, we can therefore be a bit better about growth. The truth is that the first two years are about the failure of these policies, not success. Yes, deficits have gone down, but so has growth. But however they may want to explain what has happened, at least there has been a shift. The shift is that EU institutional actors have agreed to slowing the pace of deficit reduction and while opening up what counts for the deficit. The caveat is that for Olli Rehn, if you have been a good pupil, if you are Italy, and you are now exiting the excessive deficit procedure you can invest in growth because you’ve got your deficit down sufficiently. If you haven’t as yet, then you don’t get a pass–but these are the countries that really need to invest in education, training, renewables, infrastructure, all of that to jump-start their economies. Maybe next year we will see a bigger shift. Fingers crossed.