OPINION
Why
the eurozone needs a new economic policy
With
global growth slowing, Europe needs to boost recovery and come up
with long-term strategies.
By MARIA JOÃO
RODRIGUES 2/14/16, 6:00 AM CET
Europe is full of
breakaway sentiment. French and Spanish voters are fed up with the
old elites. Border checks are cropping up across the eastern and
northern parts of Schengen. The Italians are fed up with the euro,
and British, Polish and Hungarian governments are playing the “Reform
the EU, strengthen sovereignty” game. The Germans are becoming
increasingly anxious about migration and public safety. To many
member countries, the EU is either part of the problem or unable to
provide solutions.
Their anger would be
less intense if the economy were in better shape. And “We will
manage” would sound a whole lot more convincing if ordinary people
had brighter economic prospects of their own.
But Europe’s
economic crisis has been long and job growth is precarious. Average
households struggle to meet basic social needs like housing,
childcare, healthcare or education.
Lots of effort has
rightly been invested in defining and implementing structural
reforms. But Europe’s longer-term growth potential has been eroded
by years of underinvestment.
As Jean
Pisani-Ferry, head of France Stratégie, put it recently, “failure
to restore growth, bring inflation back on track and address major
labor market imbalances and inequality in the distribution of income
is making a joke of traditional parties’ pretence to economic
competence.”
We’re now feeling
the full effects of conservative policy responses to the eurozone
crisis.
Abrupt fiscal
consolidation in 2010-2012 brought a double-dip recession. Mild
recovery came only when austerity was eased and the European Central
Bank launched unconventional measures. Still, fixed investment in the
EU has fallen from the 21.4 percent GDP average in 2001-2010 to 19.5
percent GDP in 2015.
* * *
Lots of effort has
rightly been invested in defining and implementing structural
reforms. But Europe’s longer-term growth potential has been eroded
by years of underinvestment. In turn, as the ECB has shown, low
domestic demand is the main reason for small and medium-sized
enterprises’ reluctance to invest.
More social
democratic policies are needed now to prevent a ruinous back-slide to
nationalism. But there is a tragic lack of in-depth political
discussion on economic policy at the European level. The eurozone is
extremely interdependent and national governments have almost no
macroeconomic tools left. Yet finance ministers rarely speak about
the economic policy of the eurozone as a whole. Keeping Stability and
Growth Pact rules is very important for mutual trust, but what if the
current policy mix actually hinders growth?
The Commission has
rightly deepened the analysis of the eurozone’s overall budgetary
position and of its high current account surplus. It tabled its
recommendation on the euro area’s economic policy in November, and
the European Parliament has debated it with Presidents Juncker and
Dijsselbloem. The Parliament report on 2016 economic policy
priorities should be finalized in February, well before the spring
summit.
Yet the Council’s
preparatory bodies work much faster, without public scrutiny, and
they push the discussion back to questions of national fiscal
discipline and structural reforms. The Eurogroup and Ecofin approved
the euro area recommendation in January without much debate, let
alone real coordination among countries.
Padoan stressed that
the current crisis was a good opportunity to deepen European
integration
Heads of the
Bundesbank and Banque de France have recently joined the ranks of
those advocating the creation of a eurozone treasury, reinforcing
control over national budgets. But would such a treasury only enforce
rules or actually steer the eurozone toward balanced growth? The
latter requires deeper coordination, with clarity on which countries
need to consolidate budgets more and which should consolidate less,
or even expand, in the interest of the whole.
Eurozone economic
policy should be more than the sum of its 19 national parts. The euro
area as a whole generates a massive excess of savings over
investment: At 3.7 percent GDP, or nearly €400 billion, its
current account surplus represents the biggest imbalance in the
world. We export all this money instead of consuming or investing it
at home.
It may sound
paradoxical, but a reduced current account surplus would make the
vast majority of eurozone citizens better off.
If global growth is
slowing down, how can we adapt? How do we strengthen domestic demand
and boost investment for stronger recovery and solid long-term
growth?
Even if all eurozone
governments do their structural reforms homework and maintain fiscal
responsibility, we won’t solve this problem. Real coordination
would require clearer division of tasks: If the eurozone periphery
must keep prices down and budgets tighter according to the rules,
then high-surplus countries in the core should provide a demand
boost. Otherwise, the eurozone will continue to stagnate, with
inflation much below the ECB target, and bitter social anxieties
continue to brew.
For proper
recovering, the eurozone needs faster wage increases, greater public
and private investment and above 2 percent inflation in high-surplus
countries. Peripheral countries need to continue reforming and try to
strengthen investment.
* * *
A demand stimulus
led by high-surplus countries would initially create new jobs mainly
in these countries, but the rest of the eurozone also stands to
benefit, thanks to higher overall inflation and less pressure on the
euro to appreciate. The periphery would not need to undergo deflation
in its effort to regain competitiveness. And there would be less need
for the ECB to flood the market with €60 billion every month.
It may sound
paradoxical, but a reduced current account surplus would make the
vast majority of eurozone citizens better off. It would mean higher
investment in productive capacity and public goods, supporting reform
efforts, and higher wages for some.
Conversely,
continuing to blindly rack up excess savings and lend them to the
rest of the world will only keep Europe in stagnation and expose the
continent to the growing risk that these savings will lose value.
This is what
eurozone policymakers should be talking about. Deeper coordination
doesn’t mean letting national governments off the hook. It means
keeping the big picture in mind and finally get our act together.
Maria João
Rodrigues is vice-president of the Socialists & Democrats Group
in the European Parliament and the Parliament’s rapporteur on the
2016 Annual Growth Survey.
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