In Europe, the seemingly endless debate on how to tackle the financial crisis—which is in its fifth year—continues. But as time moves on, the need for a frank discussion of the prognosis is needed. How is Europe to survive the crisis? Some commentators found relief when European authorities relaxed the fiscal targets of six countries, adding that they finally came to their senses about the harmful nature of draconian austerity. However, the sudden turnaround may be yet another short break until the next storm of bad news hits us. OK, there’s less austerity, but then what? Is this change in policy due to the need for allocating more funds to ailing financial institutions, or is it a sign of a change in tactics in how Europe deals with its crises?
Europe is no longer fighting contagion risk by isolating and maintaining a financial crisis within a member state as the impact is felt across the continent. The days where individual member states of the EU proclaimed that they were not as bad as the last victim of the financial crisis are past. What is becoming apparent is that even though we solve the financial or banking crisis, Europe still faces a deeper and even harder-to-tackle social crisis. Of course, any progress on the financial crisis would help solve the social one, but it would not suffice. Business will not resume as usual, even though it would be possible to spark some growth. Something like a Gestalt-switch from the bank balance sheets to social reality in tackling the crisis is needed.
In his Theory of Justice, John Rawls argued that a rational agent would never undergo a social contract that allowed for inequality unless it benefited those who are the worst off. The opposite is happening. Recently in Paris, the OECD expressed that its main worries regarded rising inequality, and according to its studies the “current economic crisis further widens the gap between rich and poor,” with the sole exception of Iceland. Images of riots in Sweden, once a paradigm of social equality, are a wake-up call as to how serious the situation is getting. They portray the divide between the haves and the have-nots; of mostly angry young men sensing grave injustice over their lack of opportunities in countries of plenty. Eurostat shows that unemployment is still on the rise, and has yet to peak in many of the hardest hit countries. Youth unemployment numbers are especially shocking, with the average at well over 20% and four nations suffering from youth unemployment numbers over 40%. And recent news of bank bonuses and banks assisting in tax evasion—in the midst of the tax payer bank bail-out—act as jet fuel on tensions arising from down in southern Europe up into the Nordic heartland.
The main question for Europe is: how do we get everyone out of the crisis? One rarely hears a politician argue that to survive a crisis it is pivotal to focus on how to get the people most sensitive to the economic shocks through it. Former US president, George W. Bush, once worked by a good motto, albeit applying it to educational reform: “No child left behind.” It points to the right direction—the need for social inclusion. When facing difficult decisions on budgets, the measures implemented need to be viewed from the standpoint of the most vulnerable in our societies.
All austerity is not bad, but it is rather how it is implemented, which is the key point. This does not mean that it is possible to shelter the welfare system completely, rather trying to minimize cuts by focusing first on progressive taxation and trimming expenditure in maintenance, investment and administration. This is the path that was taken in Iceland in tackling the mountainous 14% deficit that resulted from the 2008 economic meltdown, and it succeeded, not merely halving it in a matter of four years—but closing the gap entirely without bringing the economy to a standstill. In 2011–2013, Iceland saw more growth than most European countries and one of the best unemployment figures at around 5% in May 2013. By relying on principles of fairness in burden sharing through taxation, low-income groups were sheltered and the most vulnerable groups were not left behind as the OECD and others have confirmed.
European politicians should therefore be vehemently fighting for the financial transaction tax, as it is a good example of where more revenue can come from financial institutions to minimize budget suffering. The seemingly tough stance on tax avoidance of multinational corporations and tax havens is welcome, but the problem is a reminder of how wrong-headed the burden sharing in our societies has become.
What is particularly worrying is that the track record on solving the financial crisis is such that the prospects of a quick resolution of the social crisis are bleak. However politicians can start off by setting the tone differently. The technocrats preaching orthodox measures are not the way forward and it is possible to give people hope without selling out to the populist cause. And the public desperately needs to sense that there is light at the end of the tunnel.
Huginn F. Þorsteinsson is a former policy advisor to Iceland’s former Minister of Finance, Steingrímur J. Sigfússon and currently a philosopher and Adjunct Professor at the University of Akureyri