I just finished editing a collective volume, in English and in French, on possible ways to reform Europe. Here is the blog post that presents it:
What Reforms for Europe?
From May 22 to May 25, Europeans will vote to elect the 751 Members of the European Parliament. These elections will take place in a context of strong mistrust for European institutions. While the crisis of confidence is not specifically European, in the Old Continent it is coupled with the hardest crisis since the Great Depression, and with a political crisis that shows the incapacity of European institutions to reach decisions. The issues at stake in the next European elections, therefore, have multiple dimensions that require a multidisciplinary approach. The latest issue of the Debates and Policies Revue de l’OFCE series (published in French and in English), gathers European affairs specialists – economists, law scholars, political scientists – who starting from the debate within their own discipline, share their vision on the reforms that are needed to give new life to the European project. Our goal is to feed the public debate through short policy briefs containing specific policy recommendations. Our target are obviously the candidates to the European elections, but also unions, entrepreneurs, civil society at large and, above all, citizens interested by European issues.
In the context of the current crisis, the debate leading to the next European elections seems to be hostage of two opposing views. On one side a sort of self-complacency that borders denial about the crisis that is still choking the Eurozone and Europe at large. According to this view, the survival of the euro should be reason enough to be satisfied with the policies followed so far, and the European institutions evolved in the right direction in order to better face future challenges.
At the opposite, the eurosceptic view puts forward the fundamental flaws of the single currency, arguing that the only way out of the crisis would be a return to national currencies. The different contributions of this volume aim at going beyond these polar views. The crisis highlighted the shortcomings of EU institutions, and the inadequacy of economic policies centered on fiscal discipline alone. True, some reforms have been implemented; but they are not enough, when they do not go in the wrong direction altogether. We refuse nevertheless to conclude that no meaningful reform can be implemented, and that the European project has no future.
The debate on Europe’s future and on a better and more democratic Union needs to be revived. We need to discuss ways to implement more efficient governance, and public policies adapted to the challenges we face. The reader nevertheless will not find, in this volume, a coherent project; rather, we offer eclectic and sometimes even contradictory views on the direction Europe should take. This diversity witnesses the necessity of a public debate that we wish to go beyond academic circles and involves policy makers and citizens. Our ambition is to provide keys to interpret the current stakes of the European debate, and to form an opinion on the direction that our common project should take.
I recently wrote a paper with Jerome Creel and Paul Hubert, in which we try to assess the impact of the different fiscal rules that are being discussed for reforming the Eurozone governance. For our simulations we took into account the standard Keynesian positive effects of deficit spending: Government expenditure substitutes missing private demand, and hence supports economic activity. But we also embedded a negative effect of deficit and debt, that goes through increased interest rates (the famous spreads). High interest rates make it harder for the private sector to finance spending, and hence depress aggregate demand and growth. We assessed the performance of the rules in terms of average growth over the next 20 years.
A couple of years ago (February 2010), I thought I was being really heterodox, when I argued that Greece should be given 7-8 year to consolidate its public finances, because any sharp consolidation plan would push it into recession. The interview was in French, but more or less I said that
Not surprisingly, the deal reached last week failed to put the EMU economies back on track. I have always looked with suspicion, if not with outright fear, to policy agendas dictated by financial markets. But the fact that a simple attempt by the Greek Prime Minister to involve his fellow citizens in crucial decisions is creating a panic attack, shows how fragile the agreement was. With André Grjebine I wrote a piece for the French daily Liberation last week, in which we argued that all the crucial weaknesses of the Eurozone were not addressed.
- Address current account imbalances symmetrically, along the lines already outlined by Keynes before Bretton Woods.
- Focus more on quality of public spending, and not on quantitative targets. We mention the golden rule in its original meaning, i.e. the exclusion of public investment from numerical deficit targets. A study (working paper here) I made with some colleagues a while ago hinted that it worked for the UK.
- Finally, we insisted on debt monetization by the ECB, the only possible strategy to defuse speculation against sovereign debt of a currency union.