I’ve spent the last couple of days in Rome at the excellent ‘Beyond Austerity’ conference, not to be confused with the TUC’s own upcoming (and highly recommended) ‘After Austerity’ conference.
Most of the papers from Beyond Austerity are available here and are well worth a look.
I can’t really do justice to two days of discussions in one blog post (and another post specifically on banking and financial regulation will follow next week) but I thought it might be interesting to try and summarise the key points of what a European growth agenda might look like.
The general view (no longer at all controversial) was that austerity has failed in Europe – austerity kills growth, throws people out of work, drains confidence from the private sector, retards investment and often leads to higher not lower deficits. The social costs are often tragic and the political impact can be extremely severe.
There was widespread recognition that the main driver of the Eurozone crisis had been a balance of payments problem rather than a problem of excessive public spending/deficits. Indeed one participant remarked that it was tragedy that Greece had been the first country to run into serious problems – had it instead been Spain or Ireland (where public finances were in excellent health before 2008) then the causes of the crisis would have been much clearer. The narrative of ‘profligate periphery’ countries would have been harder to form and austerity would not have been the default cure.
The plight of the periphery countries (and in particular Spain, Portugal and Greece) was widely recognised. Austerity is killing their economies but they have little room for a fiscal expansion given the bond market’s concerns.
Given this situation the immediate short term steps required are:
Fiscal expansion where there is room: In a Eurozone context the key country here is obviously Germany. But Eurozone countries faced with low bond yields, external surpluses and relatively low debt/GDP ratios should be launching targeted, timely and temporary fiscal expansions aimed at boosting domestic demand. This would have important spill over effects into the Eurozone periphery boosting their exports.
Wage growth where there is room: Given the inability of countries to externally devalue by allowing their currency to depreciate then the burden of restoring competiveness falls on ‘internal devaluation’. Stripping away the econo-speak this means cutting real wages in the periphery. Leaving aside the social consequences the economic impact is also very damaging. The burden should instead be shared more symmetrically – rather than just hoping for falling real wages in deficit countries, Europe should be arguing for rising real wages in surplus countries – both to help expand domestic demand there and to provide a boost to the competiveness of deficit countries.
Balanced budget expansions everywhere. Even in countries without the fiscal space for a debt financed expansion, fiscal policy is not useless. Countries should launch taxation funded increases in public investment. If these taxes are levied on the better off with lower marginal propensities to consume then the multiplier of this expansion could be reasonably high.
ECB action. The ECB should act decisively in the short term to end soaring yields in periphery countries by intervening in the bond markets and placing a ‘yield ceiling’ on periphery debts. A credible commitment to act from the ECB could end the problem of soaring yields in hours. This isn’t a long term solution to the underlying balance of payments issues but is an important step in stopping contagion.
Expansion of the European Investment Bank. The EIB should have its capital at least doubled (relatively cheap in the context of the current ‘bailouts’ of Greece, Portugal, Ireland, etc). This would allow around an additional €60bn annually of new lending. This should be concentrated in infrastructure investments and export industries in the periphery aimed at raising their competiveness and supporting their balance of payments.
Eurobonds. In the medium term Eurobonds of some sort (pooling of Sovereign debt so that all members stand behind each other’s liabilities) are probably required but in the short run there maybe problems with implementation. As a first step the EC should issue its own bonds (backed by all EU or Eurozone member states collectively) and use the proceeds to fund major investment and infrastructure problems. This would also have the effect of providing a new source of ‘safe’ assets to the markets.
Taken together this package has the real potential to stop the rot in Europe and allow people to start to look towards a recovery.