Filling the Empty Box of Growth
Last week a number of European public figures joined the ranks of those calling for renewed emphasis on growth. The most remarked was Mario Draghi during his audition before the European Parliament; but equally important was the joint statement of Mario Monti and Manuel Barroso. “Growth” seems to be the word of the month, a must in any European leader’s speech.
I will certainly not complain, about this, because both the reduction of unemployment and the sustainability of public finances in the eurozone simply cannot happen in stagnant economies. Nevertheless, once more, there are some reasons for being worried. At a close look, it seems as if the word were an empty box, simple lip service paid to public opinion in order to keep doing business as usual.
Let me explain what I mean: what the European leaders call for is not very different from the wishes expressed in the relatively unnoticed letter by David Cameron and 10 other Prime ministers (including Mario Monti) to the Heads of European institutions last February. Growth, according to this view, comes from liberalization (mostly of labour markets), renewed emphasis on the construction of the single market, increased incentives to private investment, accompanied and financed by a sharp reduction of public spending. In a sentence, structural reforms.
I must have missed an episode here: When did we not go for this? When did one of the two super Marios, or Manuel Barroso, or again David Cameron, plead for something different? No surprise that the German government reacted rather warmly to this “new” emphasis on growth. It does not question austerity, and fits seamlessly the Berlin view…
I must say for completeness that there is maybe something else on the floor. A European investment plan, somehow related to the European Investment Bank, that would be the subject of secret negotiations in European capitals. For the moment it is a ghost, whose size and financing sources are uncertain, so that an assessment is simply impossible (by the way, as a side note: what about public debate? What about the free choice of informed citizens? In a word, what about democracy?). At any rate, if we stick to the official discourse, we need to keep implementing fiscal consolidation, while putting in place the reforms that will magically free growth.
There are at least two criticisms to this position:
- First, there is surprisingly little evidence that structural reforms are effective overall (two survey papers showing how hard it is to prove the link between structural reforms and economic performance, can be found here and here). It is of course an extremely complex subject that goes beyond the scope of this post. Here it is just worth noticing that structural reforms are certainly more effective, via increased competitiveness, when implemented in a single country, that can thus gain market shares and grow through exports (Germany is a good case in point). It is very hard to imagine them as effective, if put in place in a cooperative and synchronized way, as currently suggested in the EMU.
- Second, the articulation between short and long term seems to be neglected by European leaders. Benefits of structural reforms, if any, would only appear in the medium-to-long term. To ensure public finances sustainability, and more importantly to address the increasingly painful social impact of the crisis, we need to have growth now. The most likely short term result of labor market reforms and reduced government spending is to decrease demand, and hence to further push the eurozone into a vicious circle of decreasing demand and depressed economy.
So how to fill the empty box? Where to find the growth we so desperately need to stop the European crisis? To have a chance of success, any strategy must go after a double objective: growth and rebalancing. And the keyword for both is coordination. Concerning macroeconomic policies, The necessary fiscal consolidation of peripheral countries should be spread over a much longer period, in order to minimize its contractionary impact. It is about time to acknowledge that imposing a balanced budget in 2013 was nonsensical and (or because) self defeating. More importantly, as I have already argued several times, this consolidation should be accompanied by expansion in core countries, in order to have at least a neutral aggregate stance of fiscal policy at the eurozone level. This coordinated but differentiated fiscal stance would also yield inflation differentials and contribute to rebalancing the core and the periphery without imposing deflation to the south.
In the medium term, the rebalancing could be further helped and made less painful by a European investment programme in human and physical capital, financed with eurobonds. Besides its economic impact (both on short term demand and on long term potential growth), this would be a formidable political signal: The first experiment in a truly European fiscal policy. It is a about time that this project came out of the secret rooms of governments (if it is there), and after public discussion became one of the milestone of a new European policy.
Finally, structural reforms should not be pursued per se and generalized, but be concentrated in the countries whose competitivity deteriorated more; and like fiscal consolidation, they should be spread over a sufficiently long period as to not impose short term significant pain.
Probability of all this happening? Your call. Chances are that the box will remain desolately empty…