The last few days witnessed remarkable statements by European economic policy makers: the German finance minister praises higher wages, the boss of the Bundesbank says German inflation rates could be temporarily higher, Angela Merkel talks suddenly about the need for growth, and the IMF warns Germany of consolidating too fast. It will have to be seen whether these outings mark a sea-change in policymaking or are just occasioned by recent election results where voters soundly defeated the existing European economic policy. The French and the Greek governments were number 10 and 11 in Europe who got voted out of office since the beginning of the crisis.
But these statements, if they are followed up by deeds, afford a glimmer of hope that finally politicians are willing to listen to their populations. The threat of throwing even more people into poverty, the 50% unemployment rates of young people in a number of countries, the high and rising unemployment, all these are signs that Europe is once more falling into a deep crisis, after the first phase had been overcome by massive stimulus programs.
We all can observe that an economic policy which is nearly exclusively geared towards deficit and debt reduction proves counterproductive even for its own self-chosen targets: national products are shrinking, tax revenues dry up and poverty-related expenditures increase, such that debt ratios increase further and deficits need to be widened. The European economy needs growth in order to consolidate its budgets and lower its debt dependency. In the present situation debt service eats up more and more of “shrinking” tax revenues and crowds out more productive government expenditures. The sequencing must be to re-establish growth first and reduce deficits and debt afterwards. The obverse sequence – pursued by the EU up to now – is economically stupid and politically unacceptable.
One would think that it is self-explanatory: if private demand is lacking, because household incomes are stagnating or falling, people are afraid to spend money, lest they lose their jobs; if private enterprises do not invest because they do not see demand for their products and because their capacity utilization is low and falling; if nobody wants to (net-)import, but everybody wants to export – in such a case government expenditures must fill this demand gap in the short run, and thus get the economy humming along. The European Union is the second largest economic space on earth, producing around 27% of world GDP. This gigantic economic area must be able to generate enough demand in order to grow again. Every day labor or capital lies idle is a welfare loss which will never be reversed; recession and depression have long-lasting effects (“hysteresis”) which cannot easily be overcome. This is why a European growth strategy which fills the demand gap and re-creates the dynamics of the European economy is so important. For this reason, the new growth propagandists who talk only about “more structural reform” in Europe are wrong: of course, reforms are always needs, since the world around us is changing. But at present we lack aggregate demand. To generate this, we need to activate idle EU money and new money; we need to instil a positive outlook in people and enterprises, such that they undertake new ventures, create new jobs and expand production. (It is another story whether traditional growth should not be replaced by a more sustainable concept, which has human wellbeing at its core – and not material production!). A European growth program needs to avoid wasting scarce resources and to have growth and job creation as the criteria for projects which enhance the growth potential and competitiveness of the European economy. There is also fiscal space in the surplus countries of Europe to expand their budgets, to increase their unit labor costs and thus help the more restricted deficit countries in generating demand. The European asymmetries which became glaringly apparent during this crisis need adjustments from all sides: deficit countries as well as surplus countries.
All this leads to the old request, unsuccessfully raised when the Eurozone was established: the joint monetary union needs to be complemented by a “fiscal union”, but not one, like the recently concluded fiscal pact, singularly geared towards budget consolidation and debt reduction, but one that includes also expansive elements of fiscal policy, jointly executed at the European level.
Then we get to another area, the need for a “banking union”. All major European banks work across borders, in several countries. But so far, regulation and especially banking problems resolution is done on a national level, not jointly by all countries concerned. In the present environment this leads to the following results: either banks de-leverage in their host countries, in order to fulfil the capital requirements in their home countries (as Western banks are doing in Eastern Europe, and US banks in Latin America), or they impose heavy bank levies on foreign banks in order to consolidate their budgets, or they fight – if banks need to be closed down – who will carry the necessary burdens. In other words, uncoordinated efforts to shift the burdens to somebody else, instead of a common and joint responsibility.
And, finally, we need a “financial union” for government financing. We should seriously think whether the important social task of government finance should not be taken away from volatile and frequently irrational private financial markets and handed to a public institution which is democratically legitimized and supervised. This would be either the European Central Bank (in a “lender of last resort” function), or the European Stability Mechanism. A less radical solution would be to emit Eurobonds, joint bonds guaranteed by all Euro/EU governments. Because of their guarantors they would require lower interest rates than at present. In order to avoid “moral hazard”, i.e. the practically costless unlimited expansion of government budgets, existing proposals to e.g. limit Eurobonds to 60% of GDP and let individual countries find their own financing beyond that could be pursued.
A new European economic policy would be much broader than hitherto. Slower budget consolidation, joint tax policies, a common growth policy and joint banking regulation and responsibility, plus joint government financing, together with an expanded mandate for the European Central Bank – all these elements would help us overcome the present deep crisis, both economically and politically. Crisis resolution requires broad support from the populations concerned, otherwise it cannot succeed. A broader mandate for economic policy might also reduce the call for simple solutions, uttered increasingly by populists from all parts of the political spectrum. The first order is to replace the unsavoury, narrow fiscal pact by a significant number of growth elements. We need to get our budgets in order, we need to reduce our debts, but first of all, we need to get the economy going.