The Structural Paradigm Trap

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European solutions to the economic crisis: locked in to the orthodox policy

paradigm

MA Thesis in European Studies

Honours Program European Policy

Graduate School for Humanities

Universiteit van Amsterdam

Author: R. O. Köhler

Student number: 5656877

Main Supervisor: Dr. P. W. Zuidhof

Second Supervisor: Dr. P. Rodenburg

September 2014

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1. Introduction

When European countries decided to bail out their financial institutions and apply fiscal stimulus to the incredible sum of 4.5 trillion euros in 2008-2009, many regarded this as the return of Keynesianism to economic policy. Decades of ongoing deregulation had culminated in a financial meltdown of a size unseen since the Wall Street crash of 1929, which set in motion the Great Depression of the 1930s. The return of Keynes was short-lived, however. As interest rates on Greek government bonds spiked to double-digits in 2010, fiscal stimulus became deeply discredited in Europe and policymakers returned their focus on orthodox policy goals such as liberalisation, flexibilisation, privatisation and especially fiscal prudence. Despite the creation of a host of new policy mechanisms, surveillance programs, and supranational institutions, the crisis continues unabated in 2014, six years after its arrival in Europe.

In this thesis I analyse European crisis management through the policies that the European Union (EU) has pursued since the onset of the crisis in Europe in 2008 (the crisis originated in the US in 2007). Crises have the potential to lead to large policy changes; as a set of policies has proved to lead to a negative outcome, this can lead to the promotion of a different policy approach. In the EU, however, nothing of the sort appears to have happened. I argue that EU policy making has remained committed to a policy paradigm that can be characterised as neoliberal. In fact, this orthodox policy paradigm seems largely unaffected by the lack of results it has yielded. This thesis seeks to find an explanation for the absence of a new paradigm in Europe. Why is there no room for policy solutions from a different economic perspective in the EU, despite the apparent failure of current policy?

The 20th century has known two great protracted economic crises with worldwide impact, the Great Depression of the 1930s and stagflation of the 1970s. After several years of inability to turn the crisis around, these crises episodes led policymakers to discard the contemporary policy paradigm and make way for new views on policymaking. The 1930s did away with classical liberalism and ushered in Keynesianism. The 1970s did away with the contemporary version of Keynesianism and heralded policy grounded in monetarism, a policy doctrine that evolved into what is now often defined as neoliberalism. The current protracted crisis, however, does not appear to have led to new views on policy making in Europe, even though current policy is leading to worse results in Europe than during the crisis of the 1930s (see graph 1.1 for comparison). Whereas both the countries that chose to remain committed to

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gold and those who had left the gold standard (the Sterling bloc) were experiencing economic recoveries six years into the crisis in the era of the Great Depression, the EU today finds itself struggling to prevent the onset of a third recession and is still far from a return to the path of growth (with the Eurozone performing even worse than the EU as a whole).

Historically, European countries have been considered to uphold strong welfare regimes with solid notions of social solidarity, compared not just to emerging countries with high levels of poverty, but also to similarly developed nations, such as the United States (Hall 2012: 367). Yet, the general response to the financial crisis from Europe has been more staunchly neoliberal than that of other developed economies. As Mark Thatcher (2013: 181) notes: “Despite the crisis, EU regulation remains dominated by the objective of competition, with debates on how to achieve it (especially the degree of integration and institutional arrangements) rather than whether to seek other policy objectives, let alone alternative forms of market organization.”

The shift towards a neoliberal policy paradigm that occurred worldwide in the 1980s and 1990s did not leave EU countries unexposed. In fact, EU policy has long been associated

Graph 1.1 Comparing the Great Depression (1929-1938) and the current crisis (2007-2013) in Europe: Real GDP since the start of the respective crises.

Data source: Eurostat, GDP and main components – volumes, & Maddison, A. (2008), Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD, http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_02-2010.xls, Accessed on 04-06-2014.

The Gold Bloc comprises the group of countries (Belgium, France, Italy, Netherlands and Switzerland) that remained committed to the Gold standard until at least 1935. The Sterling Bloc (Denmark, Norway, Sweden and the UK) consists of the group of countries that left the Gold standard in 1931 (Crafts 2013).

90 95 100 105 110 115 120 125 0 1 2 3 4 5 6 7 8 9 Ye ar o f st ar t o f c risi s = 100 _{Gold Bloc} (1929-1938) Sterling Bloc (1929-1938) European Union-27 (2007-2013) Eurozone-17 (2007-2013) 2

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with neoliberalism (see for example Van Apeldoorn 2001, 2009, Bieler 2003, Buch-Hansen & Wigger 2011, Gill 2001, McNamara 1998, Parker 2012). It is nevertheless surprising that policy in Europe since the crisis has focused almost exclusively on the supply side economic policy instruction sheet that comes with neoliberalism, whereas the US chose to pursue (limited) fiscal expansion accompanied by aggressive monetary stimulus, and the crisis experience has led Japan to embark on ‘Abenomics’, a combination of fiscal stimulus and active monetary targeting of higher inflation. In comparison to the EU, Japan and the US have fared better (see graph 1.2).

It goes too far to argue that the neoliberal policy paradigm has altogether disappeared from these countries, but their different approaches to bring about an economic recovery do point to a degree of flexibility among policymakers, a general capability to change the policy instruction sheet based on recent experiences of policy failure. It seems paradoxical that Europe, with its greater role for the welfare state, completely refrains from utilising such a different approach in EU policy and instead continues to cling strongly to the neoliberal paradigm.

In 2014, the EU, and especially the Eurozone, is still trapped in a stagnating and by all means depressed economy. At the start of 2014, six years after the crisis first hit Europe, deflation looms, and average unemployment levels in the EU have risen from 7.2% in 2007

92 94 96 98 100 102 104 106 108 2007 2008 2009 2010 2011 2012 2013 2007 = 100 European Union-27 Eurozone-17 United States Japan

Graph 1.2 Comparing Europe to the US and Japan: Real GDP since the start of the crisis in 2007.

Data source: Eurostat, GDP and main components – volumes & OECD Statistics, Gross Domestic Product,

http://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE1, Accessed on 04-09-2014.

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to 10.8% in 2013 (see graph 1.3). Of the Eurozone countries, only Germany has escaped relatively unscathed from the tentacles of financial distress. Deepening EU integration in the past few decades, culminating in the creation of the common Euro currency, has led to a complex web of financial and economic connections so intricately linked that economic shocks in one country immediately lead to severe consequences for others. As effects of the financial crisis have led to EU-wide problems, EU-wide actions to solve these are deemed necessary. In other words, EU policy has become increasingly important, and its influence over the lives of EU citizens is now more evident than ever before.

Economic policy is grounded in a theory on the way the economy works. It is this theory that can be seen as “the instruction sheet for running the economy” (Blyth 2013b). In this way, there is a strong relationship between ideas and policymaking. The neoliberal economic doctrine that has shaped policymaking in most of the Western world since the 1980s is one of such economic theories. I have earlier alluded to Keynesianism and classical liberalism as two theories that provide a different kind of economic instruction sheet. These days, however, the neoliberal policy instruction sheet is what passes for conventional wisdom in much of the developed world. Conventional wisdom is therefore shaped by the hegemonic ideas of a certain era, in this case ideas on how to run the economy. There is, as such, a policy paradigm

2.4 3.7 1 2.1 3.1 2.6 1.5 7.2 ₇ 9 9.6 9.6 10.4 10.8 0 2 4 6 8 10 12 2007 2008 2009 2010 2011 2012 2013 % i n g iv en y ea r Inflation EU-27 Unemploment EU-27

Graph 1.3 Unemployment and inflation in Europe since 2007.

Data source: Eurostat, HICP - inflation rate,

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00118, Accessed on 04-09-2014.

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within which most policymakers operate and within which policy solutions to economic problems are sought. I argue that the predominating paradigm in Europe is still the neoliberal paradigm, despite the crisis. But what is neoliberalism exactly? There are many different perspectives on its exact meaning. Chapter 2 provides a brief overview of academic perspectives on the definition of neoliberalism and the way the EU can be seen as embodying a distinctive neoliberal mode of governance.

In terms of economic policy, times of severe crises have in the past been able to generate real paradigm shifts; a change of the policy instruction sheet on how to run the economy. The Great Depression of the 1930s and the stagflation of the 1970s have been examples of such episodes. This led Peter Hall (1993) to establish a theory on the way economic policy paradigms come about, or more specifically on the way paradigm shifts happen. Hall’s policy paradigm theory distinguishes first, second, and third order policy changes. First, policymakers alter the settings of existing policies in the face of negative economic outcomes. Second, if necessary, they introduce new instruments to make sure the original policy objectives are achieved. If the crisis persists despite these first and second order changes, an overhaul of the hierarchy of policy objectives can occur. Only such third order change would constitute real paradigm change. The theory captures the role of ideas on policy in a framework based on the notion that society, both policymakers and the general public, learns from experiences of the recent past. It suggests policy failure of the kind we have witnessed in the current ongoing crisis would lead to a paradigm shift, just as it did in the 1970s and 1930s.

Chapter 3 therefore analyses economic policy responses to the crisis in Europe, and measures them along Hall’s policy paradigm framework. Have policy responses to the crisis at the European level constituted first, second or third order changes? In the chapter I distinguish three different waves of crisis management since 2008. Firstly, a short-lived and, as we shall see, intentionally temporary Keynesian expansion of the state through active government intervention. Secondly, the curtailment of financial problems in the Eurozone periphery through measures of austerity and neoliberal reforms. And thirdly, the expansion of this to all EU countries through measures such as the Fiscal Compact. Of the three waves, only the first flirted with different ideas on the way the economy should be run. Since the end of 2009, however, the orthodox paradigm has been dominant and it continues to be so today.

In this thesis I argue that the policy paradigm in Europe has not shifted, despite ongoing failure to lead Europe to economic recovery. Instead, we have witnessed a deepening of neoliberal policymaking. What does this tell us about Hall’s policy paradigm theory?

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Chapter 4 analyses the validity of the theory by placing it in the larger academic debate on the role of ideas on policymaking. What is so different about the economic crisis in Europe that can explain why Hall’s theory does not currently apply? The chapter provides two alternative theories on the special circumstances of current EU policymaking. Firstly, the construction of truth and the specific nature of neoliberalism, highlighting the doctrine’s rhetorical prowess. Perhaps the particular quality of neoliberal theory is its inherent capability to deflect serious criticism. This does not, however, explain why there exists such a difference between the crisis management of the US and Japan, who have demonstrated a (somewhat) flexible approach towards different policy ideas, and the EU, which remains transfixed on the orthodox policy paradigm. Perhaps there are more structural causes specific to the EU. I argue that it may be the institutional and asymmetric structure of governance in the EU, between supranational market and national socio-economic legislation, that lies at the heart of this. Any different policy paradigm, away from neoliberalism, must by definition entail intervention in the market by government, in such a way that it actively seeks to correct markets or rein them in. For this to work in the EU, this would require either centralized and transnational taxation measures, or centralized and transnational capital transfers, so that such intervention can be funded. Institutional and widening wealth differences in Europe, however, render such developments increasingly unlikely. I propose that the reason a policy paradigm shift has not occurred in the EU, despite the protracted crisis, may therefore be that the EU’s political and institutional structure actively inhibits any such development, effectively locking in the neoliberal policy paradigm.

Having developed the theory in the previous chapter, Chapter 5 attempts to test this by looking at possible alternative causes for the resilience of the neoliberal paradigm. Different propositions by academics that do not focus on the intrinsic qualities of the orthodox neoliberal paradigm and the governance structure of the EU will be discussed. The chapter briefly analyses the fate of policy proposals that do relate to a different paradigm, but have failed to be seriously considered among the decisive European policymakers, such as Eurobonds, different monetary policy objectives, and a turn-around of the push to austerity and focus on budget consolidation. Lastly, the chapter highlights electoral developments and societal attitude changes towards the European project and what this means for the possibilities of a different paradigm. All in all, the chapter asks whether the main argument of this thesis, that the structural bias that is inherent in the asymmetric governance structure of the EU can explain the perseverance of the neoliberal paradigm despite prolonged failure to yield positive results, still holds in the face of happenings on the ground.

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Lastly, the conclusion recaps the arguments and findings of this thesis, and looks at what this could mean for the future of the EU. What are the perspectives if it is indeed caught in a structural paradigm trap? Can the trap be circumvented? And if it cannot, what does that say about the prospects for an integrated Europe in the foreseeable future?

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2. Neoliberalism and the EU

There are many different interpretations of the meaning of the term neoliberalism. While some associate neoliberalism with the so-called Washington Agenda, which guided policy recommendations to third-world countries in the 1990s, others focus more on the specific beliefs that shape the neoliberal policy instruction sheet. In this thesis I argue that the policy paradigm in which the EU operates is neoliberal, and has remained so despite its failure to bring about a recovery from the ongoing economic crisis. A brief preliminary discussion on what neoliberalism actually is, and how it manifests itself in the EU is therefore warranted.

Many interpretations of neoliberalism tend to view it as a specific standard set of policies. Steger & Roy (2010: 14-15) very concisely phrase these as: 1) deregulation of the economy, 2) liberalisation of trade and capital flows, and 3) privatisation of state-owned enterprises. But even though this thesis focuses on tangible policy developments, a wider understanding of the neoliberal paradigm may be necessary to be able to fully assess the instruction sheet from which EU policymaking operates.

Rather than looking at a specific set of policies, P.W. Zuidhof (2012) views neoliberalism as a form of discursive politics in which the metaphor of the market is consistently mobilised. “Neoliberalism”, he writes, “invites us to imagine virtually everything as a market, ranging from health care, universities to the military, pensions, personal relationships, families, ethics, aesthetics and the state and politics itself” (2012: 9). The discursive politics of neoliberalism therefore “rearticulate how we think of a certain area of life” (2012: 10).

David Harvey defines neoliberalism as “a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills” (2005: 2). The role of the state herein is to create and facilitate the institutional framework that allows these freedoms to flourish. For Harvey, neoliberalism in its true form originated in the 1970s, with the ascension of monetarist policies under the governments of Thatcher in the UK and Reagan in the US. These days, practically all countries adhere to some sort of neoliberal ideal, which has become hegemonic as a mode of discourse. While the appropriation of the term freedom is central to neoliberalism’s appeal, Harvey suggests that in reality, and above all, it is a political project tailored to elite class interests.

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Jamie Peck (2010) highlights the paradox that lies at the heart of neoliberal thinking. Neoliberal reason, he argues, is against the state and for free markets, or rather, for free market competition. However, for there to be unpolluted competition, there needs to be an authority keeping competition rules in place. The state thus becomes a necessary actor in order for the market to function at all, not least in those policy domains where there is no market yet and this needs to be actively constructed (EU examples would be the energy market, the carbon emissions market, or the telecommunications market).

The ambiguous role of the both necessary and undesirable presence of the state in shaping a market-based society marks the constant contradictory essence of neoliberal thought, and is the main reason why neoliberalism is characteristically endlessly “failing forward” (Peck 2010: 23). As the neoliberal ideal of as little state intervention as possible is one that can never be fully attained, because when it does it causes markets to fail, neoliberalism finds itself in constant movement forward. As Peck writes: “The neoliberal project is paradoxically defined by the very unattainability of its fundamental goal – frictionless market rule” (2010: 16). For this reason, Peck chooses not to speak of neoliberalism as a fixed form –ism, but rather of a constant process of neoliberalisation. “With time, rising costs of deregulatory overreach, public austerity, market failure, and social abandonment typically force neoliberals to engage with a range of unsavoury challenges of intervention, amelioration and reregulation” (Peck 2010: 23). Neoliberalisation is therefore a never-ending project, which “can only exist in messy hybrids” (Peck 2010: 7). Even though, as David Harvey claims, practically all countries nowadays pursue some sort of neoliberal ideal, the exact shape of the messy hybrids that currently exist is different everywhere and constantly subject to change.

Approaching neoliberalism from the perspective of a specific type of governance, the idea of the EU as a decidedly neoliberal political entity strengthens. In this approach neoliberalism is viewed as shaping governance by consistently seeking to govern through the

market. The EU’s raison d’être has become governing the internal market. Extending market

governance to a continuously wider set of socio-economic domains (examples are the domains of energy, public transport, and the financial sector), while governing this through a legislative framework that actively limits both state intervention and private power distortion, the EU arguably encompasses neoliberal governance in its strongest form. The 2000 Lisbon Strategy that aimed at making Europe “the most competitive and the most dynamic knowledge-based economy in the world” by 2010, re-enforced this policy paradigm, as it focused on innovation, modernising welfare systems, and flexibilisation, amongst others

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through the concept of flexicurity in the labour market (the belief that it is possible to combine labour flexibilisation with enhanced job security, two seemingly contradictive objectives) (Council 2000).

Owen Parker (2012) analyses the EU mode of governance from a Foucauldian perspective and places its origins in the German ordoliberal tradition, in which the free market is “adopted as organising and regulated principle of the state […] In other words, a state under the supervision of the market rather than a market supervised by the state” (74-75). In this perspective, there is definitively a role for the state in neoliberal governance, but “the state is to be constituted not in terms of its commitment to political rights for its citizenry, but instead in terms of its commitment to enable the competitive market within and possibly also beyond its territory” (Parker 2012: 75). In the EU recent examples of such governance can be found in the social objectives of the decade of the Lisbon Strategy, where the policy goals of increased flexibility in the labour market, so-called lifelong learning with the aim of increasing mobility and the promotion of an entrepreneurial mind-set in education strongly reverberate the perception of labour and workers no longer as human beings, but as human capital (a term invented by Chicago school economists). As Parker writes: “neo-liberals re-render the worker; (s)he is no longer merely an object in economic analyses, ‘but an active economic subject’ and the wage is reconceived as a return on capital” (2012: 77). Accordingly, these type of policies are labelled as modernisations of systems of social protection, so that they become compatible with the market objective of competitiveness.

The overarching goal of competitiveness is central to neoliberal governmentality and equally to EU governance. As we have seen, the Lisbon Strategy explicitly names it as the first and foremost objective of the past decade. Buch-Hansen and Wigger (2011: 92-93) argue that neoliberal ideas became hegemonic in Europe during the 1990s, during which the goal of competitiveness came to top the hierarchy of policy goals. According to Van Apeldoorn (2001: 86) competitiveness became “the unofficial key policy objective of the EU” from 1994 onwards. Competition was to be improved by liberalisation of markets (not least the financial market), which led the Commission to push for the privatisation of utility sectors such as energy, telecommunications, post and transport; areas often monopolised by state owned companies. Similarly, the Commission actively sought to bring down state-aid to national industries, amongst others by launching a ‘State Aid Scoreboard’ in 2001 (Buch-Hansen & Wigger 2001: 98).

Other neoliberal policy goals, consistent with that of competitiveness, also came to the forefront of European governance during the 1990s. Kathleen McNamara documented the

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way the monetarist paradigm of price stability dominated policy discourse and became official policy for the Economic and Monetary Union of Europe (EMU) with the ratification of the Maastricht treaty in 1992. Ensuring low inflation was to become the primary objective of monetary policy, to be conducted by the newly founded and independent European Central Bank (ECB). The objective of low unemployment was considered subject to this primary goal. Moreover, the fiscal constraints of a maximum fiscal deficit of 3% of GDP and public debt limit of 60% of GDP, introduced through the Stability and Growth Pact (SGP) to which all EMU members had to adhere, imposed a straitjacket on member states’ fiscal policy room for manoeuvre, effectively preventing macroeconomic policymaking that deviated from the neoliberal paradigm (such as Keynesian fiscal stimulation to offset recessions).

Stephen Gill (1998) terms this specific EU type of governance “disciplinary neo-liberalism”, where both monetary and fiscal policy have become “constitutionalized”. Limitations to policy room for manoeuvre, such as the SGP and the narrow monetary policy mandate awarded to the ECB, has progressively been enshrined in European directives and agreements. These judicial limitations effectively prevent potentially challenging views on the desired objectives of European policy from taking hold. According to Gill the “EMU need[s] to be interpreted within this general framework, where ‘appropriate policy’ is understood in terms of disciplinary neo-liberal discourse” (2001: 50). It thus entails a “locking in [of] political commitments to orthodox market-monetarist fiscal and monetary policies” (2001: 47).

Van Apeldoorn (2001, 2009) terms the European mode of governance ‘embedded neoliberalism’, in which the neoliberal policies of the EU are embedded in the national social welfare systems of member states. The creation of the internal market has led to the transfer of market-efficiency promoting policies to the supranational level, while policies “promoting social protection and solidarity have remained at the national level” (2009: 26). Due to the asymmetry of this governance structure, however, Van Apeldoorn is doubtful about the sustainability of the embeddedness of neoliberalism in Europe.

In sum, neoliberalism can be defined not solely by specific policy measures aiming at liberalisation, deregulation, privatisation and market-rule, but also by the underlying belief in the inherently socially beneficial outcome of market competition. Following this belief, neoliberal governance seeks to govern through the market, even if these markets do not yet exist. At the heart of this belief lies the contradictory nature of the role of the state, which both needs to retreat as well as intervene to safeguard the proper functioning of the market in all domains of society. Since the 1990s, it is this belief that has shaped EU governance. The

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goal of an enhanced supranational market through increased competitiveness has come to top the hierarchy of (economic) policy objectives, while the neoliberal policy paradigm has become increasingly constitutionalised. Today, I argue, it still is this paradigm through which EU policy is made.

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3. EU crisis management: steering clear of paradigm change

“Changing paradigms is not easy. Too many have invested too much in the wrong models. Like the Ptolemaic attempts to preserve earth-centric views of the universe, there will be heroic efforts to add complexities and refinements to the standard paradigm. The resulting models will be an improvement and policies based on them may do better, but they too are likely to fail. Nothing less than a paradigm shift will do” (Stiglitz 2010).

EU crisis management since 2008 has taken many different forms and shapes and has led to substantial changes in the way economic policy in Europe and amongst EU member states is conducted. Nevertheless, six years after the onset of the crisis in Europe, the continent still finds itself trapped in an economic slump, with low economic growth, unacceptably high unemployment, and continuous flirtation with deflation as its most outstanding features. Policy developments in Europe, I argue, do not reflect a change in the overall policy paradigm. Instead, they have sprung from refinements to the standard paradigm, as Joseph Stiglitz aptly described in the quote above. And despite these new policy measures, the crisis continues unabated. Policy changes may be, as Stiglitz warned in 2010, “an improvement” (perhaps only temporarily), but in the end, “nothing less than a paradigm shift will do.”

This chapter looks at the actual policy developments that have taken place at the European level as a response to the crisis since 2008, and schematically asks whether we should view them as “complexities and refinements to the standard paradigm”, or whether they exemplify the emergence of an actual paradigm shift.

Policy paradigms

Studying policy developments becomes interesting when substantive changes to overall policy occur, and especially when a new overarching paradigm takes hold. In terms of economic policy making, the largest of such changes in the twentieth century have generally taken place during the 1930s and 40s, when a Keynesian economic policy instruction sheet largely replaced the former classical liberal paradigm, and during the 1970s and 80s, when in turn a new monetarist and neoliberal paradigm prevailed over that very same Keynesianism.

Logically, these large paradigm changes were the result of long periods of economic crises in the 1930s and 70s. Crises, it is therefore safe to say, provide a strong basis for policy paradigm change, for obvious reasons. The mere existence of a crisis points to failures of

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existing policy, especially in the case of protracted crises. When both actors within the state as well as outside the state, in broader society, become aware of this and agree on this, change becomes likely; in other words, the sense that something simply needs to be done to alter the crisis situation prevails when actors agree on the fact that there is an identifiable crisis taking place (Widmaier et al 2007).

The above is important in the context of this thesis’ research question. EU crisis management has taken many forms and shapes, but has, I argue, not entailed a substantive shift in the overall policy paradigm. Quite the opposite, despite the existence of a protracted crisis, the pre-existing policy paradigm seems to dominate policy more than ever before. To understand how this can happen, the role of the construction of the idea of crises and its influence on the progression of policy should be considered an important element. But it is first necessary, as is the purpose of this chapter, to ask what a policy paradigm change actually entails and to what respect this has or has not occurred in Europe.

The usage of the concept of policy paradigms in this thesis is principally derived from Peter Hall’s seminal work on the role of ideas on change in policymaking (Hall 1993). Many scholars concerned with the role of ideas in policy and politics have utilised and reflected on Hall’s theory since (see for example Babb 2013, Blyth 2002, 2013, Campbell 1998, Jacobsen 1995, McNamara 1998, Pierson 2000, Widmaier et al 2007, Wigger & Buch Hansen 2014). The policy paradigm concept is very useful as a general framework, as it accepts and includes the premise that policy choices are embedded in a larger prevailing paradigm and that it is this paradigm which steers policy solutions in times of crisis, while at the same time it allows us to analyse policy change in a recognisable structure.

McBride and Merolli (2013: 302) describe the difference between the neoliberal and the Keynesian policy paradigm it superseded as follows. As they argue, the neoliberal paradigm champions:

1. Capital mobility; 2. Free trade;

3. A reduced role for state accomplished by privatization and deregulation, and spending and tax cuts;

4. Balanced budgets;

5. Acceptance of market-driven inequality; and 6. Flexibilization of labour markets.

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By contrast, a changed paradigm would “identify an alternate goal or set of goals” (McBride & Merolli: 302), which in the case of Keynesianism would be full employment rather than market-led growth. A Keynesian paradigm therefore stands for a different set of policy goals:

1. Controls on capital mobility; 2. Managed rather than free trade;

3. A stronger public sector through stricter regulation of market processes, and higher taxes and spending;

4. A more pragmatic view of budget deficits;

5. A return to policies of greater equality and social justice; and

6. Intervention in the labour market to establish social and employment protection.

Their view is largely based on Hall’s policy paradigm theory, in which policy change can be categorised along a three-order framework. Kuhn’s (1962) theory on the learning processes in scientific paradigms serves as the basis for this policy paradigm model, differentiating between first, second, and third order changes. The model is especially useful because Hall seeks to incorporate the process of so-called social learning (both within the state and in society) – the idea that new policy choices are always influenced by the experience of earlier policy – in a general theory on the relationship between ideas and policymaking. In the model, only third order change constitutes true paradigm change. Such change is, according to Hall, “marked by the radical changes in the overarching terms of policy discourse associated with a paradigm shift”, and entails a complete overhaul of the hierarchy of policy objectives (1993: 279-280). First and second order policy change on the other hand should not be seen as paradigm changers, but rather as adjustments within the pre-existing paradigm.

In Hall’s framework, first order change is simply a matter of policy change that logically follows from standard decision making practices, responding to the new challenges that arise; in other words, a change of policy settings. Second order change moves one step further by involving changes to the policy instruments that are developed and utilised in an attempt to better respond to the challenges at hand, when merely changing the settings is deemed insufficient (Hall 1993: 280). Third order change, however, does not simply follow as a next step, and entails a radical departure from the paradigm that structured earlier policy changes. Third order change consists of a complete overhaul of policy objectives, such as occurred as a result of the protracted economic crises of both the 1930s and the 1970s. I argue

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that the current protracted economic crisis in Europe, despite ample changes to policy settings and instruments, has failed to yield similar third order policy change.

EU crisis management

The European political response to the current economic crisis ever since its onset in 2008 has been varied. Hemerijck and Vandenbroucke (2012) distinguish three different waves of crisis management; they recognise a remarkable difference between the first wave, which they say “exemplified more or less Keynesian policy solutions to a rapid fall in global demand”, and the second and third wave, which entailed the redefinition of the crisis as one of “fiscal profligacy, requiring tough and prolonged public austerity” in the Eurozone periphery, quickly followed by a principal focus on consolidation of public finances in all EU member states (2012: 200-201).

This chapter analyses the three distinctive waves of crisis management in depth, by looking at all policy changes that have been made as a response the crisis at the EU level. The crisis measures are then classified along Hall’s three order policy paradigm framework. This way, we may be able to discern whether the policy paradigm theory holds when analysing the current economic crisis, or if we should look further to understand crisis management in Europe. Table 3.1 below provides an overview of EU policy changes since 2008 in this framework.

The first wave: Keynesian recovery (August 2008 – December 2009)

The first wave of EU crisis management is characterised by four major policy developments: financial institution bailouts, proposals for financial regulation reform, the construction of a European Economic Recovery Program, and ECB policy action.

Financial sector bailouts

Initially, Europe’s response to the crisis that emerged in August 2008 was chaotic and extremely uncoordinated. Faced with direct insolvency threats of large financial institutions, EU member states felt compelled to initiate large-scale bailout operations. The exact content of the national rescue packages differed, but all constituted the injection of substantial sums

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of public money into financial institutions struggling to finance their (private) debts. These rescue packages amounted to a total of €4.5 trillion (Wigger & Buch-Hansen 2014: 123-125). Even though the bailout packages were instituted nationally, it necessitated EU coordination and approval as it tended to conflict with supranational competition policy. Competition policy is considered one of the corner-stones of EU economic governance and the driving force behind the growth strategies stipulated in the 2000 Lisbon Strategy (to make the European economy “the most competitive and dynamic knowledge-based economy in the world”). State-aid to financial institutions in a deregulated financial market deviated markedly from the economic policy instruction sheet associated with such strong competition

First Order Second Order Third Order First wave (August 2008 – December 2009)

Financial sector bailouts - X -

European Economic

Recovery Plan - X -

Monetary Policy (incl.

LTROs) X - -

Second wave (December 2009 – September 2010)

Adjustment programs

(incl. ESFM & EFSF) - X -

Microfinance Facility - X -

LTROs) X - -

Third wave (September 2010 – present)

Stability and Growth Pact X - -

Macroeconomic

Imbalances Procedure - X -

Fiscal Compact X - -

European Stability

Mechanism X - -

European Banking Union - X -

Financial Transaction Tax - X -

LTROs) X - -

SMP & OMT - X -

Table 3.1 Policy changes during EU crisis management in Hall’s policy paradigm framework (arrows indicate potential towards third order policy change)

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policy. Yet, rescue packages were adopted nationally before the European Commission could even administer a verdict, and were subsequently (and often retrospectively) officially permitted by the Competition DG, due to the perceived exceptional circumstances and risks of serious disturbances in the economy of member states (Wigger & Buch-Hansen 2014: 124).

Following these developments, EU leaders soon turned their attention to financial regulation reform, which points to serious thinking about the effectiveness and apparent failures of existing policy. The initial leniency on state-aid in crisis policy as described above may not yet count as full-fledged third order policy change (a complete overhaul of the hierarchy of policy objectives), but is definitely characteristic of second order change, in which unorthodox instruments, such as direct state-aid, are used to confront the anomalies emerging within the existing policy paradigm, enhancing the functioning of the financial market and therefore the economy as a whole.

While the rapidness of developments caught the Commission by surprise, soon enough conditions were attached to state-aid in the financial sector, containing guidelines on the way financial institutions should be run, with the specific goal of getting them off state support as soon as possible. Highly illustrative, in this respect, was the implicit conclusion by the Commission that not too much competition was at the heart of the causes of failure in the financial sector, but too little competition. One of the conditions attached to state-aid was therefore the trimming down of core assets in order to relieve financial market concentration (Wigger & Buch-Hansen 2014: 124-125).

As soon as 2010 the Commission sought exit strategies from state-aid in financial markets (Commission 2011a: 106), not because the aid had been considered a failure, but precisely because it considered intervention by the state to have “achieved its objectives” (Commission 2011a: 205). Instead of leading to an overhaul of overall policy objectives, the apparent success of tinkering with the policy instruments deployed appears to have led to a renewed belief in the pre-existing policy paradigm. All of this, despite the substantial harm the bailouts did to the state of public finances of practically all EU member states, and its highly uncertain consequences to the real economy.

The policy reaction to bailouts in the financial sector cannot, however, be analysed without connecting this to financial regulation reform. As said, such reform became the primary focus of the European Commission as soon as the financial crisis struck Europe in 2008. While state-aid rescue measures could be considered second-order policy change,

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albeit temporary, overarching regulation reform could constitute a more definite and all-encompassing change in policy thinking.

Extensive research of the process and outcome of such financial regulation reform by Quaglia (2012), however, puts the prospect of such a policy development to rest. Revision of financial services regulation has focussed on the discussion on the role of regulation; on whether it should ‘shape’ or ‘make’ financial markets. Quaglia argues that through the institution of a EU-wide Deposit Guarantee Scheme and higher capital requirements, as well as enhanced financial supervision at the European level, it is market-shaping reform that has taken place. This reform, however, still “played out within the existing neoliberal paradigm” (Quaglia 2012: 530). Higher capital requirements for instance can be considered a change in policy setting (first order change), while enhanced supervision and guarantee schemes are new instruments within the paradigm (and therefore second order change). Nevertheless the overall hierarchy of goals, that of a competitive and free financial market in the EU, remained unchanged and practically unchallenged.

European Economic Recovery Plan

Similar to the general acceptance of state-aid in the financial sector, intervention in other sectors of the economy became part of initial crisis management in Europe. In fact, a European Economic Recovery Plan with the specific aim of boosting consumer demand was accepted by the European Council in December 2008. The fact that the belief that such Keynesian stimulus was necessary was widely shared is striking. The Commission’s Recovery Plan explicitly states that “[o]nly through a significant stimulus package can Europe counter the expected downward trend in demand” (Commission 2008: 7). Clearly, Europe’s policymakers realised that standard policy measures were not sufficient to counter the expected negative social and economic effects of the financial crisis. Total stimulus in Europe would eventually amount to more than €400 billion by 2009, far and above the initially planned sum of at least €200 billion, or approximately 1.5% of GDP (Council 2009).

An interesting aspect of the general acceptance of fiscal stimulus is that it was considered to be fully congruent with the Stability and Growth Pact revision of 2005, which allowed for “flexibility in bad times” (Commission 2008: 9). The prospect of member states exceeding the 3% public deficit threshold stipulated in the SGP was not considered detrimental to the health of their economies, but instead considered an acceptable feature of the program. Moreover, the Recovery Program clearly stated that stimulus should not just

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come from tax cuts, but focus on discretionary spending as this was considered to “have a stronger positive impact on demand in the short-run” (Commission 2008: 8). This seems to be as Keynesian as policy can get, and marks a clear departure from the standard neoliberal instruction sheet.

The focus on the short-run benefits, however, suggests that despite clear Keynesian characteristics of the Recovery Plan, it refrains from being a wholesale departure from neoliberal supply-side policy. In the medium term, the policy goals originally stipulated in the Lisbon Strategy still applied, and the transitory nature of enhanced government intervention in the market was consistently emphasised. In fact, the Plan sought to guide extra government spending towards the original goals of the EES and Lisbon Strategy, and considered enhanced flexibility, in particular in the labour market, especially helpful in mitigating the adverse impact of the economic crisis (Commission 2008: 9-11). It therefore became somewhat of a contradictory plan: on the one hand there was a legitimate recognition that demand should be boosted through stimulus packages, but on the other hand this should preferably be done within the framework of longer-term supply side policy reform. In other words, Keynesian stimulus became the ad-hoc policy instrument for achieving the longer term neoliberal policy goals of increased flexibilisation.

In reality, what we are seeing here is the outcome of a compromise between the wish of several national governments to intervene in order to protect their citizens from the negative social fallout of the crisis, exemplified by Nicolas Sarkozy and Gordon Brown’s strong desire for a fiscal boost, and the Commission’s attempt to steer and coordinate these different rescue attempts, so that the original EU policy goals were not pushed off the agenda altogether, and keep member states that were less keen on fiscal stimulus, Germany in particular, on board.1

Despite the recognition of the exceptional circumstances that warranted extra government expenditure aside from automatic stabilizers, and the room for manoeuvre the SGP allowed, the fact that most member states quickly exceeded the 3% deficit threshold soon led the Commission and the Council to focus attention on so-called exit strategies; how to bring back stimulus without damaging the economy. In an informal meeting in September 2009 the Council, however, pointed out that such exit strategies should be considered “only when economic recovery would be secured”. At the same time, in order to reach such a recovery “accelerating structural reform” based on the original Lisbon Strategy was still

1_{See for example: The Financial Times, December 8 2008, “Brown and Sarkozy seek fiscal boost”, Retrieved}

from http://www.ft.com.

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deemed imperative (Council 2009: 2). The opening of so-called Excessive Deficit Procedures for Greece, Spain, France, and Ireland as soon as April 2009 exemplified the resilience of the overarching policy paradigm. Stimulus was a fine policy instrument, especially to backstop large financial institutions, but was reined in as soon as it became clear it resulted in quickly deteriorating public finances.

Monetary Policy

While fiscal stimulus was a large part of the first wave of crisis response, monetary policy was also geared to stimulating the economy. The ECB repeatedly lowered the reference interest rate, from more than 4% at the start of the crisis in 2008 to 1% halfway 2009 (see graph 3.1). In addition, the maturity of short-term lending operations was extended (called Longer-term Refinancing Operations, LTROs), in order to ease liquidity constraints in the financial markets. The ECB was therefore actively involved in crisis management, but initially sought to do so solely by utilizing its standard policy instruments. Thus, ECB action did not go beyond Hall’s classification of first order policy change.

Overall, the immediate crisis response in Europe consisted of large-scale first and second order policy changes. Member states applied clear Keynesian stimulus programs that deviated from the orthodox policy instruction sheet. The Commission, however, managed to coordinate these programs so that they were incorporated in the pre-existing overall policy paradigm, and emphasised the temporary nature of the unorthodox policy measures. EU policy change in the first wave of crisis management therefore does not appear to have entailed a complete overhaul of the hierarchy policy objectives; instead, flexibilisation and increased competitiveness remained the medium- to long-term policy targets.

The second wave: curtailment of financial problems in the periphery (December 2009 – September 2010)

Hemerijck and Vandenbroucke identify the emergence of a new direction in EU crisis management at the very end of 2009. Pochet and Degryse (2012: 212) describe this new direction as a “sudden swing in the management of the crisis […] such that the 2010-2012 period came to be marked in virtually all member states by a succession of ‘structural’ reforms.” This swing in EU crisis management was kick-started by the Greek revelation in September 2009 that its budget deficit had in fact for many years been much larger than

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previous governments had claimed. The resultant rise in interest rates on Greek government bonds ensured extended focus on the fragility of public finances in the Eurozone. A renewed focus on bringing down public deficits was the immediate effect, even though we have already seen that a quick return to declining public expenditure had always been the intention, even during the first months of enthusiastic Keynesian stimulus.

The second wave is therefore dominated by the response to the Greek crisis, which resulted in one major policy development: the creation of the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF). While so-called Excessive Deficit Procedures (EDPs) in line with the pre-existing SGP were opened for an increasing number of member states, additional crisis management was soon deemed necessary for Greece, following the rise into double digits of the interest rate on its long-term government bonds in April 2010.

Adjustment Programs

As soon as early 2010, the policy option of fiscal stimulus in bad economic times was pushed aside in favour of restructuring government finances. A so-called Greek budgetary adjustment of at least 4% of its GDP in 2010 was considered appropriate by both the Commission and the Council in February of that year. While in the first wave of crisis management fiscal expansion in the Eurozone was regarded as fully congruent with SGP rules, this no longer seemed to apply now that the EMU’s vulnerabilities to capital flight had become apparent in the wake of Greece’s budget revelations. Instead, consolidating public finances became the primary focus of crisis management.

More important for the purposes of this thesis, is the fact that economic developments in Greece required the sudden creation of a new crisis management instrument, which would become the above-mentioned EFSM and EFSF. As Greece was on the verge of bankruptcy, the EU and especially fellow EMU countries became aware of the risks of contagion and instability this would entail. By 11 April 2010 the Eurogroup, the council of finance ministers of EMU member states, decided on a new rescue mechanism to supply Greece with the necessary funds to finance public expenditure, in conjunction with the IMF and the ECB (hereafter referred to as the troika). With the country fully at its mercy, the Council and Commission tied these loans to strong conditionality. At once, recommendations on socio-economic policies, whose implementation had previously remained the prerogative of

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national policymakers, had now turned into hard demands by Greece’s creditors. Non-compliance would mean bankruptcy.

The conditions attached to the initial €30 billion rescue package were outlined in the Adjustment Programme for Greece that the troika established in May 2010. The programme predictably focusses on public finance consolidation, demanding an enormous decrease in government expenditure of 7% of GDP in 2010 alone. Additionally, cuts in wages and pensions were included, with the specific goal of making the Greek economy more competitive. Aside from outright wage reductions, conditions on structural labour market reform focussed on increased flexibility, while a reduction of the state’s direct participation in domestic industries was deemed critical for medium-term recovery (Commission 2010a). By May 2010, it was definitively decided that the ESFS and the EFSM would be set up in order to provide emergency loans to member states who were in dire need of funding and prepared to accept an Adjustment Program designed by the troika. As we know now, the Greek Adjustment Program, firmly anchored in the orthodox neoliberal instruction sheet, would only be the first of its kind. For Greece, the possibility of policy changes outside the ruling paradigm had by now completely disappeared.

The Microfinance Facility and Monetary Policy

Two other policy developments occurred during the second wave of EU crisis management. Firstly, in March 2010, the European Ministers of Employment and Social Affairs agreed on the creation of a European Microfinance Facility, providing loans to people that had lost their jobs and wished to start up their own business. Despite a Commission (2010b) spring economic forecast that highlighted the importance of the recovery of overall demand in Europe, we see that actual policy changes remained largely restricted to supply-side policy measures and instruments such as the Microfinance Facility.

The second other policy development concerns monetary policy by the ECB, which remained committed to low interest rates. Some extra unorthodox measures were introduced by the ECB to help out banks in Greece, amongst which the acceptance of Greek government debt as high quality collateral regardless of their credit rating. Nevertheless, this did not deviate farther from pre-existing policy than mere tinkering with the standard settings of monetary policy (Commission 2010a: 23-24).

All things considered, the second wave of crisis management was defined by Greece’s sudden flirt with bankruptcy, which convinced EU leaders to redeploy primary policy focus

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on public finances. Euro commissioner Olli Rehn’s speech at the European Policy Centre in April 2010 is illustrative of this policy turn. In the speech, Rehn talks about increased European economic policy coordination, building on a strengthened SGP, stronger economic surveillance, and a permanent crisis resolution mechanism to succeed the ESFS and EFSM. The most interesting part of the speech is that it focusses on the SGP as a “solid set of rules”. The Pact’s flexibility in bad economic times is no longer mentioned; instead the opposite, the solidity of the pact’s parameters is highlighted. According to Rehn, “the main problem [with the SGP] is compliance.” Accordingly, so-called corrective arms of the Pact would need to be strengthened (Rehn 2010a).

The framing of the crisis as one of fiscal profligacy is striking, especially considering the fact that, apart from Greece, the countries with fastest growing public debt and deficit levels, such as Spain and Ireland, were precisely those countries that had always remained well within the SGP limits in the years before the crisis. By now, it was clear that the EU was swiftly moving towards another phase of crisis management. The economic problems of Greece and the fear of contagion to other member states pushed EU leaders and policy makers to renew focus on policies designed to curtail deterioration of public finances, not just for the countries in Europe’s periphery, but for all EMU and EU member states.

The third wave: expansion of fiscal surveillance programs (September 2010 – present)

The introduction of the “European Semester” in September 2010, in which national fiscal policy was to be streamlined along a European yearly time-path to facilitate supranational surveillance, heralded a range of new macro-economic legislative proposals by the Commission, and marks the beginning of the third wave of crisis management that deepened EU control on national macro-economic policy developments. The European Semester aims to “align the processes under the Stability and Growth Pact and the Broad Economic Policy Guidelines”, covering “fiscal discipline, macroeconomic stability, and policies to foster growth in line with the Europe 2020 strategy” (Rehn 2010b).

The Europe2020 strategy is a general EU strategy for a ten year period (from 2010 to 2020) succeeding the Lisbon Strategy of 2000. The new strategy identifies three priorities (smart, sustainable, and inclusive growth) and targets ambitious levels of employment, research and development, emission reductions, reduced school leavers, and reduced poverty. It is difficult to be opposed to these overall targets for 2020, but looking at the specific policy targets gives us better insight on the developments the Commission envisions for the next ten

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years. Interesting for this thesis, specifically, is the notion that the new agenda should concern “modernising” labour markets, and that the pursuit of budgetary consolidation is considered an “immediate priority” (2010c: 6).

The Six Pack

The introduction of the European Semester was to be complemented with new surveillance mechanisms on economic governance, including an enhanced SGP. These legislative proposals were first launched in September 2010 and came to be known as the Six Pack, as they were separated into six new legislative measures. Four of the six measures consisted of alterations to strengthen the SGP. Fiscal deficit and public debt levels would henceforth come under even more scrutiny and new tools allowed for greater enforcement of the Pact’s rules at EU level (Buti and Carnot 2012: 906-907). The two remaining measures consisted of an entirely new surveillance tool of economic governance: the Macroeconomic Imbalances Procedure (MIP). The rationale behind this procedure is the realisation that the current economic crisis throughout the EMU has deeper causes than just fiscal imprudence (Commission 2012a: 1).

By 2011, the Council officially agreed on the proposal. It entailed several important new elements, including increased power of the preventative arm of the SGP, with a central role for the Medium-Term Objective (MTO) of a balanced budget. Sanctions can now be put in place even before SGP limitations are breached, while the MTO restrains fiscal room for manoeuvre even within the original SGP limits. Only extreme circumstances may henceforth allow for deviance from SGP limitations.

Meanwhile, the MIP is a completely new European governance tool. It expands the scope of European policy control to a wide array of macroeconomic indicators not necessarily related to national fiscal policy and consists of a scoreboard containing ten macroeconomic indicators. These can be divided into external and internal imbalances, and have specific thresholds each that set off alerts when exceeded. External imbalance indicators range from current account balances (with a notable distinction between the deficit threshold of -4% of GDP, and surplus threshold of 6%), the international investment position, change in export market shares, change in nominal unit labour costs (upper threshold only), and changes in real effective exchange rates. Internal imbalance indicators entail the monitoring of the quantity of private sector debt, private sector credit flows, housing price index changes, general public debt (also present in the SGP of course), and ultimately the single social

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indicator: the unemployment rate (at a threshold of 10%) (Commission 2012b). Annual reports on the scoreboard, the so-called Alert Mechanism Reports, specify which flagged indicators necessitate further in-depth review. These reviews determine whether an imbalance is considered excessive or not, and if so, stipulate policy recommendations that member states need to comply with.

The choice of indicators in the MIP scoreboard signals the continuance of the pre-existing paradigm. Firstly, the indicator concerning change in Unit Labour Costs contains a positive threshold only; there is no negative threshold because “in the context of the MIP, the focus is on the detection of the harmful imbalances that may jeopardise the smooth functioning of the EMU, such as unsustainable increases in the cost of labour” (Commission 2012b: 15). In other words, wages are only considered an imbalance if they grow too much, not if they grow too little. The possibility of harmful imbalances in the case of disproportionate wage suppression is thus not considered, which is fully congruent with the orthodox policy paradigm, in which the goal of market efficiency trumps social solidarity.

The focus on competitiveness, with disregard for social effects, is also apparent in the asymmetry of the current account indicator thresholds. The surplus threshold is substantially higher (at 6% of GDP), than the deficit threshold (at 4% of GDP), according to the Commission because “unlike current account deficits, large and sustained current account surpluses do not raise the same concerns about the sustainability of external debt and financing capacities” (2012b). The MIP framework hereby implicitly favours orthodox supply-side intervention that aims to attract external demand above repairing a deficiency in internal demand.

It is equally important to look at the actual recommendations that breaches of the new pacts bring forth. The regulations stipulate that all Commission recommendations have to “be consistent with the broad economic policy guidelines and the employment guidelines” (Council 2011: 30). These broad economic policy guidelines (BEPG), which are outlined in aforementioned Europe2020 agenda, emphasise the necessity of budget consolidation with a “focus on the expenditure restraint”, and of wage moderation, which is named as an explicit goal (Council 2010: 31) At the same time, however, the BEPG calls out large current account surpluses as an imbalance to be corrected through “structural reforms”. Yet, as we see in the MIP indicator thresholds, dealing with large current account surpluses is not seen as a priority, unlike dealing with current account deficits.

The employment guidelines on their part also explicitly aim at the reform of labour markets and the “modernisation” of welfare systems. They promote the so-called flexicurity

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approach, in which labour market flexibilisation and lifelong learning are regarded as complementary objectives to achieving social security and reducing poverty, stating that they should be “mutually enforcing” (Council 2010: 49). The removal of perceived barriers to the labour market is thus seen as integral to the European employment strategy.

We find here clear neoliberal supply-side measures being advocated, alongside rhetoric of enhanced security and reduced poverty. Actual policy recommendations, however, focus solely on removing security for workers, as Pochet and Degryse (2012: 214) point out in their analysis of labour market reforms in Europe in the last few years. They conclude that “none of the reforms adopted or announced during the 2010-2012 period can be regarded, in any broad sense, as representing an improvement in social legislation”, and even note that the “very nature of the employment relationship is being called into question today”. Clauwaert and Schömann conclude that the Commission’s view that flexibilisation of labour markets should be the answer to the crisis in Europe has significantly decreased workers’ protection, and note that “the recurrent feature of these labour law reforms and flexibilisation is the explosive growth of inequalities and insecurity in most of the countries concerned” (2013: 122).

All in all, it is clear that belief in the usefulness of the orthodox neoliberal policy instruction sheet has far from disappeared with the introduction of the new surveillance mechanisms. Instead, they entail a deepening and strengthening of policy rules that are fully conform the pre-existing policy paradigm, akin to what Stephen Gill called “disciplinary neoliberalism” (2001: 47-48). Therefore, in Hall’s paradigm framework, the enhanced SGP cannot be regarded as anything more than first order change, being limited to stricter enforcement of pre-existing policy goals, while the MIP may be a new surveillance mechanism, thus constituting second order policy change, but is still structured well within the orthodox paradigm, aiming at the same pre-existing policy goals.

The Six Pack proposals were officially adopted by the Council in September 2011. By the end of that year, following Ireland’s appeal to the rescue funds of the ESFS and EFSM and Spain’s and Portugal’s approaching financing problems, EU political leaders (most notably Sarkozy and Merkel) had turned their complete focus on budget control, and proposed the Fiscal Compact: a new treaty strictly complementary to the Six Pack, which would tie public budgets to limited deficit thresholds and a balanced budget rule, and encouraged member states to enshrine these budgetary limits in their constitution. The Compact was signed by all EMU countries, as well as a few non-EMU countries, by February

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2012, and came into force in January 2013, signalling the complete domination of the orthodox policy paradigm, 5 years into the crisis.

European Stability Mechanism

While far-reaching proposals on European control over national fiscal policy were rolled out since the end of 2010, earlier plans to substitute the ESFS and EFSM with a more permanent European rescue mechanism were concluded in December 2010 with the agreement on the creation of the European Stability Mechanism (ESM), to be in effect as of 2013. The ESM is similar to its predecessors, but has access to a larger pool of finances, being able to approve rescue packages amounting up to 500 billion. Moreover, access to rescue packages is conditioned on the beneficiary ratifying the Fiscal Compact described above, and acceptance of an adjustment programme prescribed by the troika. All in all, therefore, the new ESM is very similar to the ESFS and EFSM and does not exceed first order policy change.

The European Banking Union

Unlike the development of policy proposals on fiscal intervention and subsequent focus on fiscal retreat, policy proposals on changes in regulating financial markets cannot so easily be divided in three waves of crisis management. As already alluded to in the discussion of the first wave, financial market reform was one of the earliest focus areas of crisis management, and real policy proposals were first introduced in 2010. The creation of European supervisory financial market authorities (the European Banking Authority, European Securities and Markets Authority, and the European Insurance and Pensions Authority) in January 2011 were the first results of these policy proposals.

The ultimate goal of financial market reform soon became the creation of a European Banking Union that sought to protect governments from the need to prop up failing banks with public finances. Shifting supervision on European banks to the European level (to be added to the tasks of the ECB) was deemed integral to this objective. Also, a European resolution mechanism was to be created, to be called the Single Resolution Mechanism. While, as Quaglia (2012) pointed out, and was already referred to in the section on the first wave of EU crisis management, financial regulation reform remained well “within the existing neoliberal paradigm”, the Single Resolution Mechanism could potentially entail a pooling of national financial risks and a form of centralisation of fiscal redistribution at the

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European level. The final agreement that was reached at the end of 2013, however, in reality ensured no such thing would happen for the foreseeable future. As the Council communication on the agreement states: “The single resolution fund would be financed by bank levies raised at national level. It would initially consist of national compartments that would be gradually merged over 10 years.” Moreover, the statement reads that “during the initial build-up phase of the fund, bridge financing will be available from national sources, backed by bank levies, or from the European Stability Mechanism, in accordance with agreed procedures.” (Council 2013: 1-2). Thus, the ESM and its requirement of ratification of the Fiscal Compact is also integrated in the Banking Union that the EU has finally agreed on. Once again, despite large changes in policy mechanisms, the overall policy objectives remain the same and strongly embedded in the orthodox paradigm.

The Financial Transaction Tax

An interesting policy development that is in stark contrast to measures such as the Fiscal Compact, the MIP, and the Banking Union is the proposal to create a European Financial Transaction Tax (FTT). In September 2011 the Commission first proposed such a tax as a response to plans of several member states to implement a similar tax nationally. The Commission feared that this would create disharmony in the European financial markets, debilitating the single European market. Achieving a Council agreement on such a European tax, however, soon proved to be impossible.

Rather than drop the plan altogether, the Commission, spurred on by some of the member states, went ahead and devised a legislative proposal to introduce the tax for the eleven member states that were favourable to it, amongst them most notably France (both under Sarkozy and Hollande’s presidency) and Germany. France had meanwhile gone ahead and already implemented such a tax nationally in August 2012. Clearly, potential disharmony between member states’ financial market legislation was not the Commission’s only objective of the proposed new policy. In fact, the final proposal put forward in February 2013 explicitly states that the tax’ purpose is not just to harmonise markets and avoid distortion of competition, but also to have “financial institutions […] make a fair and substantial contribution to covering the cost of the recent crisis”, and make sure policy is “providing disincentives for transactions which […] trigger over-investment in activities that are not welfare enhancing” (Commission 2013: 4).

The Structural Paradigm Trap - European solutions to the economic crisis: locked in to the orthodox policy paradigm