From the TUC

Beyond Austerity: A Growth Plan for Europe

04 May 2012, by Guest in Economics

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.

2 Responses to Beyond Austerity: A Growth Plan for Europe

  1. Exit the elephants, enter the balanced budget multiplier | A Fistful Of Euros
    May 7th 2012, 5:42 pm

    […] general, it looks quite a bit like this post on the British TUC blog. On the European level, Hollande is arguing that if the Germans don’t want eurobonds, then […]

  2. jonathan
    May 8th 2012, 9:30 pm

    Thanks for the link.

    It’s interesting for me to reflect on the specificity of this kind of thinking versus the generalities spewed about austerity. I keep reading in the US the kind of beliefist denial of reality that frightens me: claims that the “left” only wants “more spending” coupled with vague notions that the problems are “structural” without any substantitive recommendations attached. I’m trying to say this policy issue has become a classic example of non-arguing in which denying believers avoid discussing the actual issues by claiming the argument is about something simplistically high level which can be countered by equally simplistic generalities. They need to talk about nothings because they can’t look at the facts, either of the underlying issue or of the actual proposals made.

    In the US, for example, this vague jabber about structural problems deflects the reality that substantial proposals have been put forth to address the literal infrastructure, both the physical and educational, and that these have been repeatedly rejected. But they talk about “structural” concerns because they portray a made-up “left” which simplistically demands “more spending.”

    We see this a lot. In every generation. But usually it doesn’t matter. It may matter a heck of a lot now. And that’s bad.

    Another example in the US is healthcare. The denialist believers insist the best solutions come from the market. It’s a great slogan. National health care has been a big topic since the 1960’s, so where are the market solutions? There aren’t any, unless you count the ones now being rejected by those who claim the market will provide solutions. When people say “the market will generate the best solutions,” I say, “Show me one.” They fall back on “It will.” This is faith being expressed as policy. (As a humorous aside to show the depth of the denialist beliefs, when pressed by the NYT to provide a solution, one of the leading Republicans said they’d add all the poor to Medicaid, meaning they would expand a huge government program. This says to me you could hit these people in the head with a brick and they would not understand.)