Europe: Transformation-Oriented Rather Than Restoration-Oriented Adjustment

In the European crisis, not only the facts that bring about uncertainty and insecurity swirl in a whirlwind: so do the ideas and the perception of what is actually going on. Hegemonic thinking has been surpassed by other approaches and interpretations that dive underneath the apparent in an attempt to understand the rationale of the way of functioning that led to the fall, and come up with effective solutions. The challenge lies in knowing how to integrate such diversity of contributions into a whole that works, that successfully addresses the emergency and is, at the same time, capable of sowing the seeds that may cause a new Europe to germinate. The basic choice is whether to establish restoration-oriented adjustment or a transformation-oriented adjustment. What does each one of them consist in? What do they aim at? What might their consequences be?
In the European crisis, not only the facts that bring about uncertainty and insecurity swirl in a whirlwind: so do the ideas and the perception of what is actually going on. The thing is that before, in the pre-crisis scene, thinking was prone to accompany the apparent systemic stability with a dangerous inclination toward the homogenization of approaches and interpretations, biasing perceptions and muzzling alarms. Analysis lost depth, quests narrowed, and automatic piloting began to prevail, something that–we know well–is not the best steer when a storm unleashes. Today, hegemonic thinking has been surpassed by other approaches and interpretations that dive underneath the apparent in an attempt to understand the rationale of the way of functioning that led to the fall, and come up with effective solutions. Room has been made for both the development of a renewed strategic thinking and, with that, the possibility of adopting more effective measures to cope with the emergency and address new referential utopias that may guide better the systemic course.

The conception that each one has of social, economic and political processes is influenced by his/her interests, needs and emotions. The “reality” that each one perceives is not the same for all, even when certain views are imposed over others by the dissemination or imposition force their advocates may exert. It is true that the capacity to impose a point of view may also be underpinned by the impeccability of certain argumentations and demonstrations; yet this is not what generally happens. There are no few examples of ineffective solutions that grew out of imposition rather than from a clear perception, rigorous analysis or the ability to devise and implement appropriate responses. The imposition of a hegemonic viewpoint involves rejecting the contributions of the remaining viewpoints.

We begin the analysis with these reflections because it seems as though the ways out of the current European crisis (as it happens with other crises) were slipping toward a hegemonic approach, closing the doors to a very rich diversity of other contributions. When a crisis bursts, particularly when its outbreak surprises Greeks and Trojans, economic policy-making leaders and those who control resources base their decisions on the analytical tooling and intervention instruments they are familiar with, even when the same failed to prevent or avoid the outburst. Instead of implementing a transformation-oriented adjustment that is capable of removing the causes that led to the crisis, their background, their interests and their emotions take them to implement a severe adjustment aimed to restore the pre-crisis situation.

Today, a different type of firmness is required, one that involves facing different problem fronts simultaneously, receiving contributions from a variety of approaches and perspectives. The challenge lies in knowing how to integrate such diversity of contributions into a whole that works, that successfully addresses the emergency and is, at the same time, capable of sowing the seeds that may cause a new Europe to germinate. A Europe that is capable of fighting the huge social and inter-country inequality, enhancing competitiveness on the basis of the increased productivity of all its members, making headway while preserving the environment along a clear path of sustainable development.

Flaws of a Restoration-Oriented Adjustment

What happens in Europe may be interpreted in very different ways, yet the prevailing trend seems to focus more on effects than causes. Huge fiscal deficits and rampant indebtedness escalated into a situation where the “markets”, not the people, said “enough”. Governments mobilized with urgency to adjust the maladjustment reckoning that, by lowering the deficit and over-indebtedness, they will be able to return to the normalcy of a once again vibrant growth. The core of this policy is to fiercely cut back public spending in those items whose beneficiaries offer less relative resistance. In this direction, the continent might be heading toward a monumental strategic mistake.

The mistake of wanting to return

A first mistake of a restoration-oriented adjustment is to believe that, by going back to the pre-crisis “normalcy”, the circumstances and factors that led to the edge of the abyss would be cleared. If there was a dynamic that led to the crisis, any solution aspiring to be effective should aim at transforming that functional rationale. Otherwise, in the best-case scenario, the storm would only be weathered, while a new crisis would be incubating; in the worst-case scenario, the move would be contributing to deepening the crisis.

An improved management of the variables that set up the pre-crisis situation will not be good enough; that will help to a certain extent but will not be able to remove the destabilizing factors. The pre-crisis “normalcy” not only generated instability and huge financial costs but also much deeper systemic effects, including the following ones:

(a) It established an enduring process of economic concentration; a concentration that occurs among social groups (privileged minorities versus disadvantaged majorities) and also between wealthy countries and lagging countries (a few ones with renewed determination to recover lost ground and, most of them, running behind with little chances to catch up with the first ones). This inequality has devastating effects on sustainable development as it buttresses a vicious circle of savings concentration, financial speculation-oriented investment, unbridled rent seeking, aggregate supply being out of synch with the majorities’ purchase power, demand being biased toward irresponsible consumerism, generation of speculative bubbles, systemic chaos and tough global crisis.

(b) It enhanced productivities on the basis of sustained scientific, technological and corporate management development. Yet, these improvements were not evenly spread among all economic actors, particularly small and micro-producers, thus deepening the existing inequality. Neither did they avoid causing phenomenal environmental destruction that has hurt the entire planet.

(c) The crystallization of disproportionate privileges sterilized a huge amount of talent and social energy nested in vast majorities of the world population that today are excluded or marginalized. Instead of making progress by generating goods and services through work and productive innovation, today there is a disproportionate growth of financial rent seekers.

(d) As a result of the development of increasingly antagonist interests between social groups and countries, numberless conflicts multiplied and worsened, affecting systemic stability and collective security. This, in turn, ends up undermining democratic credibility and governance.

The mistake of cooling down the economy

A second strategic mistake is to drastically curb public spending and over-indebtedness in the middle of the crisis, as a result of which problems worsen by causing consumption, investment and growth to collapse. The focus is not placed on restructuring public spending with a view to encouraging growth but simply for the sake of reducing it. Rather than banking on a transformative adjustment that favors growth, the decision moves towards a tough restorative adjustment that shrinks the economy without changing its course and way of functioning, imposing serious social and institutional costs. The intended path prefigures greater turbulence.

The mistake of weakening social cohesion

It is at times of crisis when society should be most united. Coming out of the crisis toward sustainable development, calls for the cooperation of all social forces. This is certainly not attained when the type of adjustment policy in place hits unequally the different sectors, hurting more severely the bottom of the social pyramid, which is not only the one with the lowest standard of living but also the most defenseless. This situation weakens social cohesion and impacts negatively on governance, at a moment when society should mobilize and draw together to address the storm generated by the pre-crisis way of functioning

Adjusting in Order to Transform

The proposal to exit the European crisis should contemplate adjusting what has run amok but transforming in that effort the factors that sustained the pre-crisis dynamics and led to the abyss. To say it more clearly: yes, it is necessary to adjust public spending but not in the sense of reducing its magnitude by cutting down on items that are critical to attain sustainable development. Instead, it should be restructured in order to replace, to the largest possible extent, ineffective spending with growth-driven spending. Likewise, it is necessary to address the huge over-indebtedness without affecting production financing and capital formation at the base of the social pyramid and, instead of that, by reducing, through vigorous growth, the debt-to-GDP ratio. Managing complex processes involves having the skill and ductility to administer times and sequences properly.

The transformation-oriented adjustment should aim at drastically increasing the social and economic productivity of public spending and indebtedness. To make this possible in the context of this crisis, efforts should not be limited to the level of aggregate variables: they should also be focused within them, restructuring, but not necessarily bringing down the nominal level of public spending and indebtedness. The challenge consists in successfully reorienting those variables in order to energize the entire production system and, as transformation with growth is attained, organically bringing back public spending and indebtedness to healthy proportions. The backbone of the effort lies in energizing the production system, and transforming it so that it may grow as an organic whole, which involves enhancing the productivity and income of small-sized production units improving their integration with medium and large business units. This implies supporting all units simultaneously, yet placing much greater emphasis than in the pre-crisis past on the formation of financial and non-financial capital at the broad base of the production system. How can this be attained? : taking advantage of complementary efforts by actors operating at different levels.

The specificity of each situation will call for always unique solutions but some general guidelines, however, might serve as common denominators. They include, among others:

– At the macroeconomic level it will be indispensable to (i) reorient public spending with a view to providing the majority sectors with improved production and social infrastructure in order to secure a fuller social and productive mobilization; (ii) transform the prevailing tax regressive systems, (iii) ensure monetary stability and a credit policy that can channel a larger share of national savings toward small and medium-sized entrepreneurs and (iv) orient scientific and technological development so that it may also cater to the needs and potential of small and micro-production.

– At the mesoeconomic level (the value chain and production network field) it should give way to a double public and private involvement: the former by establishing rules that promote the creation of mutually beneficial relationships between economic actors with dissimilar negotiation power, and private intervention by practicing mesoeconomic responsibility, weighing the impact of its corporate decisions on other economic actors and the communities where they operate.

– At the microeconomic level it is necessary to reinforce or create, as the case may be, an effective support system that encourages capital formation at all levels of the production system and, most particularly, in small and medium-sized units: (i) economic capital formation through proper financing of equipment, facilities as well as technological and management innovation and (ii) non-financial capital formation by closing the knowledge and modern business engineering access gap, facilitating access to strategic partners, contacts, markets and information. In this field, there can, and should, converge the efforts of the public sector, the private sector, social organizations and civil society entities, each one within the scope of their competitive advantages, well coordinated and supported by a great national political accord.

Scale being a tough restriction for the development of small business units (it is to a large extent the reason why better opportunity thresholds cannot be accessed), enlarging it is essential. To that end, there are several modern business engineering tools available to articulate small scattered production into more effective medium-sized economic organizations. How can these new alternatives be put to good use? Among other mechanisms, we mention one that we have been encouraging for some time: the set-up of[ local developers of inclusive ventures->]

A Final Reflection

Europe is facing a huge challenge. It is clear that there are no universal recipes or magic solutions. The past teaches, yet the future is built with new ideas and proposals. Today the storm unleashed by a pre-crisis way of functioning fraught with mistakes and flaws is affecting the entire continent. The situation presents some common denominators but also profound differences across countries. Europe is not a homogeneous universe: rather than that, each country goes through processes with unique circumstances. It would be counterproductive to uniform answers and solutions. It is not easy to reconcile policies and measures at the regional level and, at the same time, adopt very diverse responses and chart paths according to each country’s conditions and possibilities. And yet, this is what the situation requires. It is worth insisting that management of complex processes calls for skill and ductility to properly administer times and sequences.

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