Members of the Club

All the drama surrounding Europe’s debt crisis has prompted a great deal of discussion about which countries are fit for membership in the club –should Greece stay, should it go from the Eurozone., etc. But the economic crisis has both overshadowed and exacerbated problems of another sort in Europe - whether countries meet the minimum requirements of a democracy to belong to Europe.

Yesterday a referendum was held in Romania to try to oust center-right President Traian Basescu, organized by his rival, the center-left Prime Minister, Victor Ponta. It failed only because it was unable to attract 50% of the voters but 80% of those who did vote were in favor of recall, at least in part because of unhappiness of the dire economic situation in Romania which has seen tax increases, a currency losing value against the Euro, and a 2009 bailout by the IMF with heavy conditionality.

The political turmoil has in turn exacerbated the economic situation since the uncertainty over governance has frightened international and domestic investors in a country where investments depend on the backing of the state. More important, however, is the way in which politics are being conducted. The political machinations that have undermined the Constitutional Court, intimidated the judiciary, and led to emergency decrees to place the recall on the ballot, have called into question the rule of law in Romania.

In a scathing report by the EU published 10 days ago, the Commission noted:

"[T]his report is adopted at a time when important questions are raised with regard to respect for rule of law and the independence of the judiciary in Romania. Overall progress [in terms of judicial reform and anti-corruption] has to be assessed in the context of a wider social recognition of key principles such as the rule of law, and the independence of the judicial process as part of the checks and balances of a well-functioning democracy. A well functioning, independent judicial system, and respect for democratic institutions are indispensible for mutual trust within the European Union, and for gaining the confidence of citizens and investors.

The Commission considers that recent steps by the Romanian Government raise serious concerns about the respect of these fundamental principles. These steps took place in an overly polarised political system where mistrust between political entities and accusations are a common pattern; however this political context cannot explain the systematic nature of several actions. While certain actions may be partly explained by this political polarisation, they raised serious doubts about the commitment to the respect of the rule of law or the understanding of the meaning of the rule of law in a pluralist democratic system… The Commission is in particular extremely concerned by the indications of manipulations and pressure which affect institutions, members of the judiciary, and eventually have a serious impact on society as a whole. [T]he current controversies pose a serious threat to the progress achieved so far and raise serious questions as to the future of the reforms already launched."

Romania is the second country (after Hungary) where alarm bells have gone off about a recent entrant's commitment to democratic principles that in theory are part of the admission price to the EU club.  Calls for increased monitoring and report writing by Brussels only serve to highlight the fact that as with EMU, the EU lacks any real mechanisms for persuading countries to follow the rules of a club to which they were admitted prematurely in the first place.

How Bad is Youth Unemployment in Southern Europe?

Youth unemployment in Europe has captured worldwide headlines during the crisis, with new highs being reported almost weekly.  The current figures paint a daunting picture in the south of Europe: in May, 52.1% of young people in Greece and Spain were out of work, with Portugal (36.4%) and Italy (36.2%) not too far behind.

This week, Steven Hill published a piece in the FT where he argues that these figures are simply not true and that such numbers are inflated because they include everyone not in the workforce, even those who are in training programs or in school (this is traditionally why youth unemployment figures are higher than the overall total.) He prefers to use the ‘youth unemployment ratio’, which is

# of unemployed youth____

total population aged 15-24

Using this measure, the numbers look quite different: Spain’s youth unemployment is 19% compared with 13% for Greece.  These figures are a little older than May so there may have some deterioration recently but the point is, that using the ratio, the situation doesn’t seem as dire.

Does it matter?  To a certain point, yes.  It gives us a better picture of life on the ground in the countries hardest hit by the crisis.  This helps explain in part why there is not the sort of social unrest that one might expect with over half the population out of work.  Southern European unemployment rates for decades have been hard to interpret.  In the 1980s, well before the boom years, Spanish unemployment was in the double digits but no-one really thought 16-18% represented reality because of the thriving underground economy.  In the last few months, a number of Spanish politicians have remarked to me that if total unemployment were really around 25%, there would be social chaos.

But from another perspective, it seems more of an academic debate.  Hill notes that the German youth unemployment ratio is 4.5%.  So, Spain’s level is still more than four times higher than Germany’s.  Plus, surely some young people in the South are in training programs and universities because there simply are no jobs – the classroom rather than the café as the refuge for the discouraged worker.

While much of the current debate centers on getting through the short term manifestations of the crisis – the bond yield roller coaster, for example, an important question is what the long-term implications of the crisis are for Europe’s struggling countries.  Young qualified workers are leaving. In the first half of 2012, Catalonia saw net out migration for the first time ever and was the Spanish region that lost the largest population – over 37,000 inhabitants.  The International Federation of Catalan Organizations estimates that the majority of those leaving are young, college educated people who in many cases are going abroad. Reducing unemployment by having young workers flee the country is not something many politicians would see as a win.

There are likely to be long-term demographic implications as well. Italy, Greece and Spain already have some of the lowest birthrates in the world.  Recessions typically have the effect of lowering the birthrate as couples delay childbearing until their economic situation improves.  Historically, this has not usually altered total fertility, just postponed it. But there is some reason to think that the protracted economic crisis may have far more serious consequences for the crisis of fertility in Southern Europe.

That is because these are also countries where the age at first birth is exceedingly high.  Spain, for example, has the highest age in the world at 29, with Italy close behind at 28.  Postponing childbearing under such circumstances is likely to reduce it further as women begin to push up against their biological clocks, in spite of advances in fertility treatment.

Lower birthrates  will mean rapidly aging populations and a higher dependency ratio.  Without large numbers of new immigrants, there will be fewer people of working age to pay for the elderly, which will in turn put greater pressures on the state and lower benefits.

So, while the common measure of unemployment may overstate the actual numbers of young people who are out of work, the job situation in Southern Europe is likely to have long-term consequences that lock the region into a vicious cycle. 

Europe of the Regions

The latest economic news out of Southern Europe with Spain’s borrowing costs hitting unsustainable levels and Monti’s fears that Sicily may be on the brink highlights an interesting angle on the euro crisis.  This is the role the regions and their financial woes play in the current crisis.  Some of the fears roiling Spanish markets today seem to stem from the fact that Valencia, the home of the world’s best paella, has applied for a bailout from the government in Madrid.  Valencia is not just the country’s most indebted region but it has become a poster child for wild excesses that left tax payers holding the bag for regional spending sprees that created little in the way of long term growth.

In Italy last week, Mario Monti expressed ‘serious concerns’ about Sicily's unsustainable debt level. There, the problem is more long term, related to corruption and extreme mismanagement of funds, if on a somewhat smaller scale compared to Spain’s most indebted regions. Even if the chances of a default there are relatively low, the case of Spain shows Monti is right to be concerned if markets overreact and drive Italian bond yields up.

As Europe has decentralized more powers to its regions, it has become harder for some governments to maintain control over their finances.  This is particularly true in Spain where regional autonomy is a powerful political force and the regions account for a third of the public sector deficit.

If part of the solution to the crisis is ‘more Europe’ as Angela Merkel has stated, that might also have to entail a little ‘less regions.’ While financially necessary, that will be a very tall order politically.

Down but Not Out

Yesterday, I was in New Haven having lunch with Juan Linz, the greatest social scientist Spain has produced, and other friends when the results from the regional elections in Andalusia started coming in.   It had been a given on the part of not just political commentators but also the pollsters that the conservative Partido Popular would win an historic victory in the region - likely with a comfortable absolute majority - and send the Socialists, the PSOE, into opposition for the first time ever.  Imagine how stunned we were, then, when with 50% of the vote counted, our smart phones lit up with the news that the PSOE looked on its way to winning the election. 

In the end, the PP, who came to power nationally in November, did manage to get its historic victory in the south. By the slimmest of margins – 40.7% to 39.5%, they beat the PSOE and increased their seats in the regional parliament by 3 for a total of 50.  In contrast, the Socialists suffered a large loss of 9 seats to end up with 47. The only other party to clear the hurdle to enter parliament was the former communists, the IU, who doubled their seats to 12.  With 55 being the magic number to govern in a majority, the hoped for victory turned into a bitter defeat for the Populares, given that the probability of the PSOE and the IU not forming a coalition is, according to another guest at lunch who is also a prominent political scientist in Spain, ‘precisely zero.’

 As the noted political journalist Iñaki Gablando explains in a terrific video blog, José Antonio Griñán, the head of the PSOE in Andalusia and current President of the region, won the triple crown in this election. By opting to call the elections off cycle from the national elections, he ensured that the PP’s electoral tsunami did not hit the south with its full force as it surely would have had the elections taken place last November.  Griñán will maintain the PSOE’s hold on the Presidency and deny the PP’s ‘reconquista’ of ‘infidel’ Andalusia.  And, finally, his own position within the party, which had been very weak, has been strengthened.

In part, these results may show how little room for maneuver exists for governments in this crisis. While Prime Minister Mariano Rajoy claims that the results – more than 425,000 fewer votes than the PP won in Andalusia in November and a 5 percentage point drop – will not change his intention to implement austerity measures, this may signal the support the Spanish are willing to give for a program of adjustment is more limited than imagined. 

They also raise the question of whether the corruption in the PSOE in the south will ever be addressed.  Even many people who are not committed PP supporters hoped the Socialists would be turned out, both because some alternance in power is healthy for a democracy and to force the PSOE to clean up its act.  Popular disgust at the ERE scandal, where Socialists in the region were accused of cronyism and the fraudulent channeling of more than half a billion Euros in retirement payments, was not enough to keep the PSOE from returning to power, though the perceived corruption of many of the party’s regional leaders accounts for some of the decline. However, the question now is whether the addition of IU to the regional government will provide some sort of transparency or if Griñán will heed the message delivered at polls and attempt to reform the party.

Fade to Grey

Last week, I was in Sevilla, the capital of Spain’s southern region, Andalucia, where a political earthquake is expected in March.  Recent polls suggest that the conservative Popular Party will win an absolute majority in the regional elections with 45% and hand the governing Socialists, the PSOE, a massive loss in the part of the country that has always been considered their stronghold and where they have governed continuously since 1982. This is on top of the PP’s big win nationally in November.

The mood among PSOE members in the south is rather grim. One former elected official told me he thought the party could disappear.  While such a fear is unwarranted – this is not a replay of the utter collapse of the governing UCD in 1983 – there are good reasons to be concerned about the state of the party.

The party is hemorrhaging members.  The latest party census shows that they have fewer than 220,000 members, about a fifth of what the PP has, a very different situation from Northern Europe where social democratic parties dwarf others in size as in Sweden or are roughly equivalent to their main conservative opponents as in Germany. Half of the PSOE’s members are between 46 and 65 years old while merely about six and a half percent are under thirty, suggesting that it is neither renewing itself generationally nor appealing to young people.

And while across Europe, the governing parties seen as responsible for the economic crisis have been thrown out of office, it is interesting that in Spain at least, the distribution of votes shows that the masses of unemployed Spaniards were just as likely to vote for the PP as everyone else.  Of course, maybe it's not surprising that the left, in this case the PSOE, did not get a slight bump as one would normally expect from those most affected by the crisis and cuts in social spending.  This is part of the prevailing 'throw the bums out' mentality everywhere on the continent.

Still, I think the implications of the crisis are somewhat different for social democrats in Southern Europe than in the North.  For the parties in the South, the road ahead, and back to power, is likely to be more difficult. The PSOE, the PS, and PASOK were formed after the democratic transitions of the late 1970s and do not have a history of being mass, class-based parties in the way, say, that the German SPD does.  Especially in Spain and Greece, where they came to power quickly, they have been electoral and patronage machines with few roots in civil society.  In Portugal, the PS's weak social ties are explained by slightly different factors but they nonetheless are a fact.

It is noteworthy in the Spanish data presented above that students are the one group where support for the conservative PP was well below average.  Students, of course, form one of the sectors hit hardest by both the crisis and potential cuts, given a high youth unemployment rate, rising university fees and a strongly dualistic labor market. But the PSOE did not pick up their votes either; indeed, students were also less likely on average to vote for the Socialists. Their votes went disproportionately to the communists and the recently formed UPD, a sort of liberal party. This rather highlights one of the problems the left in the south may face in terms of their social base. For reasons related to patterns of party formation and organization stemming from their transitions, the left in the South has a double task. In contrast to northern European socialists who must convince their members and supporters about the viability of a left program in an age of austerity, those in the South have the added complication of figuring out who their base is. 

Higher Education and the Crisis

Yesterday, on the way into town from the airport in Seville, where I am giving a series of talks, my university host and I were talking about the state of higher education and the economic crisis.  He was bracing for another round of pay cuts he and his colleagues fear are in the works on top of the 5-10% they took as the slowdown in the economy started.

Higher education in Southern Europe is an area ripe for reform.  University systems in the region tend to be inefficient, highly politicized and bureaucratic.  At the same time, the differences between the north and the south in terms of the relationship between unemployment and underemployment, and educational attainment are illuminating. A recent study by Gallup shows that at the highest levels of education, the same lower levels of unemployment characterize the citizens of both Northern and Southern Europe - about 5% - in both regions. It is at the lower levels of educational attainment (that describes a larger percentage of southern Europeans) where the big gaps exist.  Here, although those with lower educational levels have higher unemployment rates in both the north and south, unemployment rates of this group are roughly twice as high in the south as the north. The report concludes that in Southern Europe “there is an oversupply of labor for low-skill jobs, and a shortage of highly skilled workers …that limits their potential growth.”

This is related to the S&P’s conclusions in its latest round of downgrading the debt of many European countries that “problems are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called ‘periphery’.” Reforming and investing in better higher education would be one way to help close the gap by raising the skill level and productivity in Southern Europe.

How likely is reform to happen? As Rahm Emanuel so famously said, ‘never waste a good crisis’ and some see in the current one a silver lining. In some ways, it may provide opportunities for reform that did not exist previously.  This month, Science published an article on the state of Greek higher education. It describes the precarious state of universities in a country where few institutions are internationally competitive. The crisis has caused the reduction in salaries by 20% and budgets halved.  However, it also has led to the passage of a new law restructuring the system, which is plagued by highly politicized university administrations that have always blocked reforms.  While university rectors have gone to the Supreme Court to block the law, it has wide backing in Parliament and a new law governing research is expected to have an easy passage next month.

It is also possible that just as we hear that ‘more Europe’ is the solution to Europe’s financial woes, ‘more Europe’ may become part of the debate about investments in the area of higher education and research. A very recent paper by Jo Ritzen and Luc Soete for the EU think tank, Notre Europe, notes that European institutions have existed along side national ones for a while now to help promote research and that they had already begun to overshadow them before the crisis hit.  The authors view the crisis as a way to further the process and move more authority to European funding institutions. One change they call for is the transfer of public funding in basic and applied research from the national research councils of the member states to the European Research Council. They view the national organization of research as inefficient and stifling of innovation.  

Whether member states would willingly cede their funds to a European agency remains to be seen. I think it is clear, however, that with the crisis in many countries, scientific research will need to rely more heavily on European funds; Greece, for example, is already almost entirely dependent on European structural funds for its research budget. So, whether we or national governments who have strongly held the view that higher education is their, not Europe’s domain, see this shift as a good or bad thing, I think there is likely to be some momentum toward more Europe and more coordination in research investments.

We Have Lift-off

At least that was the hope for yesterday’s speech by Ed Miliband, the head of the British Labour Party.  It was hyped for days as his re-launch by the media, who see his poor standing in the polls and rumors in the party as evidence that his days as leader are numbered.

Many of the post-mortems on the speech are obsessing about whether it was a strong enough performance to get his leadership back on track.  For what it’s worth, the consensus in the press is no, not really. That seems, though, at this point – 16 months into his leadership and three years before the next election- to somewhat miss the point: Labour is marginally ahead of the Conservatives even if Miliband’s own popularity is currently low and they should be doing better, the party does not jettison its leaders easily and it’s not clear who else in the party would gain enough support to replace him.

More to the point, this was an attempt to re-launch the Labour Party and more boldly, the politics of the Left in general.  The speech buries New Labour. By focusing on the fact that the days of Labour victories during boom times are over, Miliband laid out a program (admittedly shorter on specifics than one might hope) for a new progressive politics in harsh times.  He acknowledged that a Labour government in 2015 would need to make cuts but his is a rejection of the austerity sweeping Europe. He argues that the deep cuts that the Chancellor has imposed to lower the deficit (and that most of the other European countries with debt crises are doing) have not grown the economy but simply made the problem worse.

Miliband’s argued for a fairer distribution of economic rewards and a combination of higher taxes at the top as well as cuts. Some of his main points; “First, reforming our economy so we have long-term wealth creation with rewards fairly shared. Second, acting against vested interests that squeeze the living standards of families. And third, making choices that favour the hard-working majority.”

Will it work? Hard to say.  Many of the points in the speech such as the emphasis on the famous ‘squeezed middle’ or attacks on crony capitalism are ones that he’s been pushing for some time but his thunder on them has been stolen as the coalition has embraced them as their own.  It’s unclear whether the still strong Blair wing of the party will support what they see as attacks on business. He still needs to provide some specifics of actual policies that will lead to the job creation he envisions or how you encourage companies to ignore the short term interests of their shareholders.  In this respect, it was not nearly as strong a speech as the one recently delivered by Obama in Kansas. And who wins the British election in three years time will have more to do with whether the economy is recovering at that point.  But, it is the beginning of a conversation in Europe about both the limits of austerity and the old politics of the Left.  For that reason, it’s worth listening to.