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  Economic Roots of the French Riots  
 

 

By: Dr.Dipak Basu
April 22, 2006
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iews expressed here are author’s own and not of this website. Full disclaimer is at the bottom.

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Riots in France by the North African immigrants in 2005 were described by the Anglo-American observers as the clash of civilization between Islam and the European civilization. However, the French themselves denied that explanation indicating the acute unemployment problem of the immigrants and the discriminations they suffer in the job market as the cause. Now the riots by the French students in 2006 in protest against the so-called “hire and fire” policy to be introduced by the French government for the private sector showed very clearly that the French riots, whether in 2005 or in 2006, have deep economic reasons. Persistent high unemployment and the campaign of the European conservatives, particularly the European Central Bank, supported by the Anglo-American politicians and economists against the social security system of Europe have provoked public anger in France. Protests of the French students are the open expression of that anger.

The “hire and fire” policy has other jargons to confuse the people. Exit policy or the flexible labour market, much advertised in India by no other than the Prime-Minister Man Mohan Singh, are the respectable names for the liberty of employers to sack people at will. This practice has become the hallmark of the Anglo-American economic system. Europe, particularly France, has so far refused to accept it, but under pressure from the European Central Bank, dominated by the economists influenced and trained by the Anglo-American universities, it is gradually accepting a policy, which explains wrongly the reason for the persistent high unemployment in Europe. The French protest is really against the gradual abolition of the European social model, which the Anglo-Americans think is responsible for the persistent high unemployment in Europe. However, a neutral analysis will show that it is the policy of the European Central Bank reflecting the neo-liberal philosophy of the Anglo-Americans that is really creating this dismal situation.

Relationship between the European conservatives and the Anglo-American establishment is very close just like it is in India. Kohler, currently the president of Germany was the Managing Director of the International Monetary Fund and the Chairman of the European Central Bank, thus implementing IMF policies on Europe through the European Monetary System, in which exchange rates and monetary policy of the European countries are aligned together. In the same way Montek Singh Aluwala, currently the Deputy Chairman of the Indian Planning Commission was the Chairman of the Evaluation Committee of the IMF thus implementing IMF policy on the Indian economy. French riots are nothing but protests of the ordinary young people against the ruthless heartless system which, the Anglo-Americans want Europe to follow by abandoning the European social model.

European Social Model:

The post Second World War prosperity of Europe is founded upon on the European Social Model, which is similar to the Fabian socialism in Britain implemented by the Labour government of Clement Attlee in Britain in 1945 but later diminished since 1979 by the Conservative Prime-Minister of Britain, Margaret Thatcher. European social model is based upon the principle of social justice and the motto that society will not abandon those who fail. It reflects what Swami Vivekananda said more than hundred years ago, “With pride say wretched Indians, poorest Indian, illiterate Indians are my brother”. However, Indian economic policy makers now rejects 80 percent of the population who live on less than $2 dollars a day, to receive praise from the Anglo-American establishments.

The principle of universal health care, education, pension, and proper social insurance against sickness, disability, unemployment, and policy to prevent unemployment, poverty and social exclusions are basic ingredient of the European social model. The guiding philosophy is that social justice can contribute to economic efficiency and progress. Anglo-American idea on the other hand put emphasis of a trade-off between economic efficiency and social justice by saying that an efficient economic system cannot afford a comprehensive social security system.

Europeans on the other hand think that social policy can reduce economic uncertainty, enhance the capacity of the people to adjust, acquire specialized skills so that they can pursue long term investment opportunities denied by the Anglo-American stock markets based upon cut-throat short term considerations. Anglo-American economic system rejects social considerations in preference for maximization of profit only. In the Anglo-American model human beings are considered as mere factors of production, who can be discarded if there is a need to get rid of them to enhance efficiency indicated by the valuation of the enterprise by the stock market. This excludes humanism from the arena of economic policy, whereas the European social model puts humanism as the guiding principle of the economic policy framework.

The idea in both Western Europe and in Japan, which has followed the European model, was to create the same system of comprehensive social protections for the people, as those were available in the Soviet Union and East European countries, so that people would not be attracted to the Soviet system. That requires a vast government machinery to create extensive public facilities and total security for the people from ‘cradle to grave,’ which are denounced by the Anglo-Americans as ‘totalitarianism’.

The golden age of the European social model was the period between 1945 and 1973 where high economic growth along with social justice was achieved in Europe, both Western and Eastern. Since 1973, inflation caused by the excessive supply of Dollar in the world economy by the U.S to finance the Vietnam War and extremely high price of petroleum have challenged the established view where governments of the European countries found it difficult to reconcile between social obligations and financial ability.

Britain has abandoned the Fabian socialism and started privatizations in 1980. However, in Western Europe, even after the demise of the Soviet system in the Eastern Europe, European social model has survived, mainly because of the popular support and high economic growth. In Japan as well the same model has survived even today, although the government debt in Japan has already reached 160 percent of the national income of Japan. There is no sign in Japan that it would ever abandon the social model that has created a very harmonious society despite of its long economic depressions. In Europe people are asking the question, if Japan can maintain this social model, why is it impossible for France and Germany to maintain it.

The threat to the European social model came in the wake of Maastricht Treaty of 1992 and the formation of the European Monetary Union, which restricts the ability of the European governments to finance its social obligations by setting restrictions on budget deficit and money supply. The budget deficit according to this system cannot go beyond 3 percent of the Gross Domestic Production (GDP) and the government debt cannot go beyond 60 percent of the GDP.

European Monetary System and its restrictive clauses and the underlying principles are based on the Anglo-American views that unemployment is needed to contain inflation without looking at the cause of the inflation. The active employment measures adopted in this system are to force unemployed to accept part-time employment, temporary employment, and low wages which freedom of the employers to adjust their labour force according to the business climate. These would certainly lead to erosion of social protections and withdrawal of established social entitlements but would create a flexible labour market.

Consequences of Flexible Labour Market in Britain and USA:

The results of this flexible labour market, where employment would be adjusted according to the condition of the market disregarding the consequences of this flexibility on the life of the individual worker and the members of his family, are visible from the recent experience of Britain. Britain exhibits one of the worse figures for poverty in the European Union and has an extremely unequal remuneration system. The pay-inequality due to gender discriminations is widest in Britain among the European countries. According to the Office of National Statistics of the UK-2004, poverty affected 20 percent of the British population. The corresponding rates of poverty in Holland are less than 1 percent and in Sweden and Germany it is less than 2 percent.

In Britain, the gap between the rich and the poor continued to grow right through. About 3 million children are still living below the poverty line in families with income of less than 60 percent of the medium. Men in average earn 42 percent more than the women in Britain. When it comes to social class, the differences are even more striking.
In USA, with flexible labour market, the rate of poverty is about 17 percent of the population, where at least 34 million people are homeless, and about 26 percent of the population are functionally illiterate, according to report of the Report of the Conference of American Mayors-2004.

The so-called success of the flexible labour market to create employment, often cited by the Anglo-American governments and their media, depends on the definition of employment where anyone in part-time employment or training is considered to be employed and is not counted as unemployed. The flexible labour market in the Anglo-American model includes lowering of legal minimum wages, unemployment benefits and employee’s right to protect his employment.

Economic Policy of the European Central Bank:

European Monetary System and the policy of European Central Bank, which is independent of the governments of European countries depends on the theory that inflation is determined by demand and by controlling demand the Bank can control inflation. It defies the reality that inflation can be caused by external reasons like increase in the international price of petroleum, increased cost of refugee relief, budget deficit policy and monetary policy of the U.S, and the lack f supplies caused by adverse weather and so on. European Central Bank believes that government budget deficit causes inflation and it must be contained. Money supply must be restricted with high interest rate. However, high interest rate can raise the exchange rate thereby making the export items more expensive in foreign markets and as a result export oriented industries would suffer causing unemployment. High exchange rate also makes foreign goods less expensive in the home market and cause unemployment in the industries competing imported products. High exchange rate of Euro is certainly one of cause of unemployment by making European products uncompetitive both in the home and foreign markets.

While high interest rate prohibits private investments by making business loans more expensive, restrictions on budget deficits prohibits public investments, still very important for most European countries. Restrictions on budget deficits restrict government’s ability to work against the adverse business cycles to protect industries and employment. As a result restriction budget deficits cause permanent unemployment by destroying industries and commercial activities, which could have survived with appropriate subsidies from the government. It also curtail social benefits for the poor and unemployed, thus aggravate social inequality.

Restricted budget deficits and control on money supply in Europe have caused so far high unemployment, but have not created “supply-side” incentives as the Anglo-American economic theory may suggest. European Central Bank has followed a policy of high interest rate when the interest rate in USA went down to 2-3 percent and in Japan to zero percent, making a very high exchange rate for Euro.

Britain on the other hand came out of the European Monetary System in 1992, reduced interest rate and devalued Pound to stimulate the economy and reduce unemployment. USA since the days of President Reagan has followed the policy of high budget deficit and since the days of President Bush-Clinton a policy of low interest rate. The resultant low unemployment rates in Britain and USA are thus the result of this economic policy of high budget deficit and low interest rate but have little to do with the flexible labour market policy, which they want to sell to Europe and the rest of the world. In India Man Mohan Singh is propagating for this flexible labour market since 1991 in the name of “exit policy”.

The reason for the persistency of the neo-liberal Anglo-American policy option lies in economic interests and power. The very significant and growing power of financial capital, interested almost exclusively on price stability (including high exchange rate), explains much of the deflationary bias of economic policy during the last decade in Europe, which has witnessed high and persistent unemployment. Even after the monetary union has started and inflation had disappeared from Europe, when the threat of economic depression is growing, the policy-package of the European Central Bank remains unaltered. That leads to the continuous subordination of the EU (European Union) economic policy to the powerful financial and entrepreneurial interests in Europe who are aligned to the Anglo-American financial and business interests.

The financial considerations take into account some narrow yardsticks of foreign exchange reserve, budget deficits, and public-debt to GDP ratio etc but ignore problems of real life and welfare of the population and their social problems, solutions of which should be the purpose of any economic policy. Financial considerations ignore the living conditions, type of works available and the conditions of these works in preference for ‘efficiency’.

These exclude any considerations for the mal-distributions of income, wealth, opportunities, welfare and empowerment of the population. It generates some negative consequences for the production structure of the poorer areas where activities of a subsidiary character, dependent on less advanced technology and less skilled labourers are developed. These so-called backward areas whether in Europe or in India are unable to compete and would lose important parts of their previous productive structure. Regional imbalances in Europe is growing where the nation would have to compete against each other to promote incentives for the private sector in terms of reduced wages and reduced rights of the workers and their living conditions, which are commonly branded together as flexible labour market.

Results of the neo-liberal policy of the European Central Bank on Europe so far:

Due to the conservative economic policy since 1974 economic growth, in terms of rate of growth of the Gross Domestic Production (GDP), in the European Union went down from 6 percent in 1974 to 3.5 percent in 1980, 3 percent in 1994 and about 2 percent in 2000. Rate of inflation went down too, from 14 percent in 1974 to 13 percent in 1980, 3.2 percent in 1994 and about 1 percent in 2000. Unemployment rate among the active labour force was 4 percent in 1974, about 6 percent in 1980, 11 percent in 1994 and about 10 percent in 2000. Thus, the independent Central Bank of Europe has stabilized the prices at the expense of economic growth and employment.

Distribution of income went in favour of the richer section of the population and against the working people. Share of wages in the GDP in the European Union (EU) was 74 percent in 1974, 75.6 percent in 1980, 70 percent in 1994 and 68 percent in 2000.
However, the European establishment has refused to learn from these experiences. In the Treaty of Maastricht, according to the condition of the monetary union Central Bank of Europe became complete independent of any political or public control. The policy of the European Central Bank has not allowed the EU countries, except Britain, which came out of the system in 1994, to pursue independent economic policy beneficial for their people.

Most countries in the EU rather than having public investment programme to reduce unemployment are constrained by the restrictions imposed on public budget reinforced by tax reductions for the richer section and for the corporate sector, reductions in public expenditures. These have reduced employment opportunities in the public sector, a very important part of the EU economy, severely. The European Central Bank is only interested to stabilize price disregarding every other aspects of the economy. In India, those who are advocating for the independent Reserve Bank of India should learn from these experiences.

The argument of the Anglo-American and the European Central Bank, that these neo-liberal policies can promote more employment by having an efficient labour market and creating incentives for the private sector, is misleading to say the least. The gap between
the growth rate of the economy and employment it generates is growing in Europe demonstrating the futility of these policies of the independent European Central Bank.
Share of part-time jobs in total employment rose from 13 percent in 1985 to 18 percent in 2000. Out of 5 million additional jobs created in Europe (EU area) between 1994 and 2000, more than 3 millions were on part-time. At the same time, full-time employments declined. Temporary works as part of total employment in the EU area went up from 8.4 percent in 1985 to 15 percent in 2000. Many labourers are required by their employers to register as self-employed entrepreneurs in order to avoid the social security charges. Longer working hours with substantial unpaid or poorly paid overtime have become the norm in certain industries. A significant part of this informal labour is ‘by the piece’ work at home. Experience of India since the ‘Reform Programme’ was introduced in 1991 is very similar to that in Europe.

The total rate of unemployment in Europe is growing under this neo-liberal policy. During 1960’s decade the rate of unemployment was 2.2 percent of the labour force, in 1970’s decade it was 4 percent, and in 1990’s decade it became 10 percent. Today about 50 percent of the total number of unemployed in the EU area are long-term unemployed, i.e., unemployed for more than a year. About 30 percent of the unemployed have no jobs for more than 2 years. In most countries in the EU area eligibility criteria for unemployment benefits are now much harder than before. Amount of the benefits are also reduced according to the Anglo-American theory that such actions would provoke the unemployed to search for jobs or forcefully and they would be prepared to accept whatever is available.

There is no relationship between growth rate of the economy and the employment it generates. In Europe in 1990 the rate of growth f the GDP was 3 percent, employment grew by only 1.7 percent in 1990; in 1995 the GDP grew by 2.4 percent, employment grew by 0.6 percent; in 2000 the growth rate was 2.3 percent, employment grew by 1.4 percent only.

The neo-liberal policy has created increasing poverty in Europe. The percentage of population living below the poverty line is 21 in Greece and Ireland, 24 in Portugal, 20 in the UK and 14 for the EU area as a whole. The countries like Germany, France, Holland, and Scandinavia still have low level of poverty, as they have not yet accepted the abolition of the European social model. The poverty level in these countries would certainly grow if they accept the norms of the flexible labour market and reform the social protection system as they have now. The French protests are in response to these dire prospects in future.

Consequences for the New Members of the EU in Eastern Europe:

In Eastern Europe, since the abolition of the Soviet Union, neo-liberal policies are being used for both the new member states of the EU and for the non-member states under the guidance of the European Central Bank, IMF, World Bank and the European Bank for Reconstruction & Development since 1991. The result after 15 years is massive loss of employment and production. If we compare the employment, Gross Domestic Production and industrial production for some selected East European countries for the year 1989, when they were within the Soviet system and the year 2000, we can see very easily the loss they have to endure as a result of the neo-liberal Anglo-American economic policy.

In the Eastern Europe, Hungary, Poland, Slovakia, Czech Republic, Baltic States and Slovenia are considered to have successful transition from socialism to capitalism. However, the reality is very different. Gross domestic production (GDP) increased from 1989 to 2000 by 2 percent per year in Poland, .5 percent per year in Slovenia, .1 percent per year in Slovakia. In every other new EU countries in Eastern Europe, even in Hungary, Czech Republic and the Baltic States GDP declined. Reductions in GDP were 1 percent in Hungary, 5 percent in Czech, and 35 percent in the Baltic States for the ten years from 1989 to 2000. In the nonmember states of EU in Europe, GDP declined by 43 percent in Russia and by 60 percent in Ukraine for this period.

Industrial productions increased only in Hungary and Poland by 1.4 percent per year and 2.2 percent per year respectively for the ten years from 1989 to 2000. Everywhere else industrial productions declined massively. Reductions in industrial productions in Czech Republic, Slovenia and Slovakia are about 25 percent; in the Baltic States it was 60 percent for this period from 1989 to 2000. In Russia and Ukraine, it was reduced by about 50 percent for the same period.

Employments were reduced in everywhere even in the so-called successful countries. In Hungary total employment was reduced by 27 percent, in Poland by 7 percent, in Czech Republic by 10 percent, in the Baltic States, Slovakia and Slovenia by about 20 percent for the period from 1989 to 2000. In Russia and in Ukraine the reduction in total employment was about 15 percent for this period.

The application of the neo-liberal economic policies could not improve the living conditions of the people of Eastern Europe but instead introduced miseries of unemployment so far unknown to them before 1990. Now the people in the Western Europe fear that they too have to suffer in the same way if they have to reject the European social model and accept the Anglo-American neo-liberal policies forced upon them by the European Central Bank, who is responsible for the economic stagnation and persistent high unemployment in Europe during the last decade.

European Alternatives:

A number of European economists, Jorg Huffschmid of Bremen University in Germany, Jacques Mazier of Paris University in France, Miren Etxezarreta of Barcelona University in Spain and John Grahl of London University in Britain, recently have put forward an alternative economic policy framework to achieve full employment and economic growth in Europe.

They are calling for a flexible budget policy of the government and relaxed monetary policy to ease the unemployment problem. They called for a target exchange rate regime with regulations on financial flows instead of the flexible exchange rate and fully convertible Euro. They want to defend the European Social Model against the attacks of the Anglo-American neo-liberal policies.

French students are fighting today to defend that social model which guarantees right of the people for social protection, welfare and a level of income necessary to lead a dignified life where the living condition of the people as a whole rather than the financial sector of the economy alone should be the concern for the political process and the economic policy framework. They are calling into the question the Anglo-American idea that private affluence and individual consumerism are the only source of satisfaction. Achievements of other goods, many of them of a collective nature, are more important. As opposed to the present trend towards privatization of social services, they advocate a fully restructured and modernized social service system. A fair and equitable distribution of income and wealth and the reductions of inequality should be an integral part of the welfare system.

Implications for India and the Developing Countries:

Developing countries including India are under pressure since 1991 to accept the neo-liberal policies in exchange for loans from the IMF and the World Bank. In India, privatization has already destroyed the Five-Year plans and privatizations of public assets have become the norm. Now the full convertibility of Rupee and the flexible labour market are about to be implemented. Full convertibility of Rupee demands very restricted government expenditures, reductions of public debts and very strict monetary policy for a stable price. These measures would reduce employment opportunity for the people. Flexible labour market would diminish any security of employments and part-time or short time jobs would be the norm.

India has very little social protection for the unemployed or retrenched workers. As a result, 90 percent of the population, who are either poor or in the lower middle-class would have increasing uncertainty and loss of health and educational provisions, which are at low level in any way making India as one of the lowest category of countries in the United Nations Human Development Index. However, there is no Jay Prakash Narayan today in India start public protest against this onslaught on people’s life. Even the so-called party of the masses Communist Party of India (Marxist) has surrendered to the breadcrumb of power.

France gave the world the slogan,” Liberty, Fraternity, Equality”, the principles of the French Revolution. It is the first in the world to abolish feudalism to establish a ‘Republic’. Now it is the French students who are challenging the views of the Anglo-American establishment that globalization, naked competition among the nations and the people can generate prosperity. The experience of the years since 1991 has proved these neo-liberal views are unrealistic and highly damaging for the people. However, in India and in the developing countries the political establishment is still insisting that neo-liberal policies have to be implemented no matter what would be the consequences for the people. French students are giving voice to the silent sufferers of the world.

References:

Cacheaux, J.le, Labor Markets, Social Protection, Tax and Social Competition in the European Monetary Union, paper presented in the Conference on Europe One Labour Market, Brusssels, SALTSA, 2000

Fajertag, G and P.Pochet, Social Pacts in Europe, Brussels, ETUI, 2000

OECD, Employment Outlook, 2004, 2005

Scharf, F.W, Notes toward a theory of multilevel governing in Europe, MPIFG, Discussion Paper 00/5, Cologne, Max Plank Institute for the Study of Societies, 2000

U.N.Economic Commission for Europe, Economic Surveys, 2004, 2005

Vandenbroucke, F, Social Justice and Open Coordination in Europe, De Economist, Vol.150, no1, pp.83-93, 2002

Table 1:  East European countries: comparison of 1989 and 2000; 1989=100

New Member Countries      GDP            Industrial Production      Employment
Of EU
 

Hungary                              99.4                113.9                              72.9
Poland                               121.8                122.4                              92.9
Czech                                  95.3                   76.9                             90.2
Slovakia                             101.7                  76.4                             81.8
Slovenia                             105.3                  75.6                             80.2
Baltic States                         65.4                  40.7                             80.5

Non-Member States:

Russia                                  57.6                   49.7                             85.3
Ukraine                                39.3                   51.2                             86.5

Source: U.N. Economic Survey of Europe, 2004


Dr.Dipak Basu

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