The EU has outlawed Keynesianism. Why?

17 Mar

No! No! No!

Not long ago in British politics, Leftist antipathy to Europe was the norm. Prominent Labour figures were convinced that the European project was an anti-democratic, anti-socialist, free-market stitch-up. Gaitskell said membership would mean “the end of a thousand years of history”. Wilson mocked the marginal advantage of “selling washing machines in Dusseldorf”. And why did the Attlee government refuse at the outset even to mull it over? “The Durham miners won’t wear it.”

Today Labour has decided not to make the EU a political issue. Far better to make lazy attacks on health reforms and take opportunistic stances on spending cuts. Not one leading Labour member has spoken out against EU politics: no-one in the shadow cabinet, and no big beast from New Labour. There are no Foots, no Benns, no Barbara Castles.

And yet the EU is more anti-democratic and ideological than it has ever been. Its newly-drafted fiscal pact is a case in point. The pact states that eurozone members should not under any circumstances have a budget deficit higher than 3% of GDP. There will be “automatic consequences” if this is breached. Budgetary measures put forward by the Commission – the unelected European Commission – must be accepted by the nation state (point 5).

It is Hooverite; there is no other word for it. As if this isn’t enough, the pact decrees that “1a. The budgetary position of the general government shall be balanced or in surplus” (Article 3). This is the default position. It is as if the Keynesian revolution never happened. The pact specifies this means a democratically-elected euro state cannot have a structural deficit higher than 0.5% – or, if the state is judged to be financially prudent enough, the EU will allow 1%. How generous.

This is the pact that David Cameron tried to veto last December. Of the 27 EU countries, only the Czech Republic and Britain refused to sign it. Cameron said he didn’t like it because the interests of British banks were threatened. Mr Cameron missed the pact’s far greater implications: it essentially outlaws Keyenesianism.

For 30 years or so, from Attlee’s post-war government to the middle of the Callaghan administration, this was the doctrine that dominated British economic policy. Keynesianism cast aside the straitjacket imposed by balanced budgets, saying that the government should spend in a downturn and save in the good times.

The EU has abandoned it. Take the example of the Dutch. After two quarters of negative growth, the Dutch are currently in recession. The Keynesian response would be to boost spending. Slash taxes to get consumers spending, or even better, let the government step in where businesses won’t, to create jobs in the short term. One problem. The Dutch government is forecast to have a deficit of 4.5% in 2013. On Keynesian terms this is predictable and necessary. On Eurofanatic terms this is unacceptable.

The Dutch are hardly profligate by Mediterranean standards. While Gordon Brown and much of Europe threw cash in every direction, the Dutch ran a balanced budget in 2005, 2006, 2007 and 2008. A Keynesian response to recession is entirely sensible.

Dutch politician Geert Wilders, a nationalist Muslim-basher who keeps the minority government in power, calls planned cuts “numbers fetishism”. He is right. A 3% limit is entirely arbitrary. What will the European Commission do if he stops the Dutch government from cutting spending? Will the Commission, as decreed in the fiscal pact, trash the plans of a democratically-elected state and drive through cuts against the will of the people?

This has been the EU’s attitude to the profligate periphery. It has acted with disdain towards the idea Greeks should consent to cuts through a referendum. It has wept not one tear when an entirely unelected Cabinet was imposed on an Italian nation. So long as cuts get through, the mandate of the people does not matter.

What is worse is when this attitude is directed towards thrifty polities. The Dutch need no fiscal discipline. Mr Wilders should – like that cocky Dutchman Erasmus did to the Catholic church – stand up to the hubris, the dogmatism, the autocracy and the ever-increasing powers of the European Union.

And the British left should join him. It was not so long ago that Tony Benn stood up to the anti-democratic centralism that is linked by necessity to a single currency. He was convinced that the powers of national Parliaments would be sidelined. How right he was.

You can find his speech addressed to Mrs T at 7:45. I have re-printed it below.

Is the Prime Minister aware that what we are really discussing is not economic management, but the whole future of relations between this country and Europe? This issue is not best expressed in 19th-century patriotic language or in emotive language about which design is on the currency.

The real question is whether, when the British people vote in a general election, they will be able to change the policies of the previous Government. It is already a fact, as the House knows full well, that whatever Government are in power, our agricultural policy is controlled from Brussels, our trade policy is controlled from Brussels and our industrial policy is controlled from Brussels.

If we go into EMU, our financial policy will also be controlled. It is a democratic argument, not a nationalistic argument.


5 Responses to “The EU has outlawed Keynesianism. Why?”

  1. David Tuckwell March 17, 2012 at 2:50 PM #

    Hey Luke, it’s a well written and well researched article. Thanks for pointing out that the EU pact won’t allow for structural deficits > 0.5%. As you rightly argue, this is not good.

    However, I feel it might be a bit rushed to conclude that the EU is “anti-democratic and more fundamentally free-market than it has ever been”.

    The EU has just finished their first technical reading of the planned financial transaction tax (

    This is an anti-free market proposal. It is also quite a democratic proposal in that it restricts the flow of capital and in so doing frees elected governments to implement legislation without having to worry about flight of capital.

    I may well be wrong however. I’m in no way an expert on the EU.

    • Luke Smolinski March 17, 2012 at 3:53 PM #

      I’m not arguing the EU doesn’t do lefty or democratic things. It does; most of the EU projects in the past 60 years have been broadly lefty – the financial tax is one example of this. I’m arguing in terms of economic policy: and I stand by my assertion that the EU has never been so Hooverite. If the Dutch wanted to spend their way out of recession, they couldn’t. Keynesianism is now against EU rules.

    • Luke Smolinski October 29, 2012 at 4:27 PM #

      I have changed “fundamentally free-market” to “ideological”. The former is not quite right and it doesn’t read well.

  2. studentbumtosupermum April 8, 2012 at 10:33 PM #

    Hi do you think that membership of the EU needs to be brought back to the forefront of uk politics or is it just a given now that we are part of it and now we just must scrutinise how it operates? just wondering thanks

    • Luke Smolinski April 22, 2012 at 8:07 AM #

      I think in the next few years it will be brought radically back to the forefront of UK politics. I don’t think the EU has handled the eurocrisis well; I doubt the EU will continue in the shape it is now. The question of UK membership will then resurface. It cannot be avoided.

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