Better Late than Never?


Why is the European Union so slow? Why does it take so long to come to the correct proposals, and even longer to put them to work?

Two issues – among many others – stand out. The first refers to the recent “recognition” by top EU policy makers that the Eurozone and the EU as a whole have a problem of lacking demand. Recently, the newly appointed Commission President, Jean-Claude Juncker, has called for a 300 billion investment program. The most recent “informal” ECOFIN in Milan has endorsed the request for higher investment, based on a joint letter by the French and German finance ministers to boost investment. So far, so weak. Since the” beginning of the crisis, at the latest since the fading away of the 2009 government investment boom, many economists (among them the writer of these pages, in the good company of Messrs. Krugman and Stiglitz) have argued that the crisis in Europe needs a boost in demand, especially a boost to investment. More recently, such persons not easily to be reviled as “Keynesians” (for the layperson: this is the supposedly outdated economics doctrine that when private demand is lacking, public investment needs to jump in) as the IMF Managing Director, Christine Lagarde, or ECB President Mario Draghi in his recent speech at the National Bank Presidents’ meeting in Jackson Hole, have argued that public budgets in the EU must assume their responsibility to strengthen demand, especially in the countries with “fiscal space”, mainly Germany, Austria, Belgium, Netherlands. Strengthening total demand in the Eurozone/EU would also boost the economies of the peripheral crisis countries. Why is it only now, after two to three years have been lost, where unemployment has increased, where the future of many youths is in grave danger of becoming “lost decades”, do they start talking about the crumbling infrastructure in Europe, even in rich countries, like Germany, where along 10.000 bridges at a cost of 16 billion Euro need to be replaced by 2030 (according to a new study).

And even this awareness of an infrastructure problem in one country, also discussed at the Milan meeting, does not lead to urgent action. While the ministers agreed on the need for an investment push, this was not allowed to touch their Holy Grail, i.e. the continued need for budget consolidation. Thus, they fantasize about “Public-Private-Partnerships” the supposed panacea to all budget woes, where the private sector finances and runs projects, about more risk-taking by the European Investment Bank (which jealously protects its AAA rating, thus low refinancing costs), and other schemes. Italian and French suggestions to loosen the self-strangling corset of budget rules and debt brakes, by e.g. taking public investment costs out of the garget rates, were not even ignored. And even less discussion time was spent on looking at the European economy as a whole, instead of only at individual countries. The present regime of the Eurozone has not been able to instill a “European Perspective” into ECOFIN discussions. The divisions between virtuous and sinner countries still prevails – in spite of the disastrous record of the EU anti-crisis strategy, which still keeps the Eurozone GDP below its 2007 level – more than six years after the outbreak of the crisis.

The second “too-slow-to-admit, and even slower to act upon” is the issue of deflation in the Eurozone. This is a much more recent issue. Again, experts had been warning about the Eurozone and the EU falling into deflation, with its pernicious consequences on growth and debt reduction, for months: vigorous denials by the ECB President, by National Bank Presidents were repeated month after month, until last August when ECB-Draghi for the first time admitted its existence. While his defenders might say that the most recent ECB actions, more liquidity, near-zero interest rates and announcement of a new instrument, namely buying asset-backed securities from Eurozone banks, are instruments designed to counteract deflation, with the exception of the Euro exchange rate falling against the dollar, little has happened: in country after country, measured inflation rates are close to zero or negative – again leading businesses to wait with investment, debtors being burdened with higher real burdens of debt, etc.

There is no satisfaction in saying: I have been saying these things and warning of its negative effects for months or years. Of course, European policy makers are subject to different and probably much larger pressures than independent experts, of course, vested interests lie heavily on policymakers’ decision processes. But maybe it is time to open up a more transparent and open discourse on the important matters of macroeconomic policy in the EU and Eurozone, by including into the discussion not only the “usual suspects”, but open the discussion platform to “unorthodox” experts and civil society representatives. Austria could provide a rich pilot ground for such a discourse: at present, it does not exist, neither in politics, academia, nor the media! Macroeconomic policymaking is not only about the “right” substance of the decision, it is as much about timing. Years of no or very low growth are years of lost opportunities: if the EU economy had recovered from the crisis at real rates of growth of 2-3%, its GDP and employment potential today would be 10% higher than it is. This is the opportunity cost of no and slow decisions!

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Filed under Crisis Response, European Union, Fiscal Policy, Global Governance

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