Next to the problem of solving the acute euro crisis – but in fact very much interwoven with it – Europe desperately needs to find an economic model for its future. The approach of muddling through, it seems, has reached its limits. The short-term survival of the Eurozone depends upon a long-term economic vision, a vision that reconciles creditor and debtor states, politicians, citizens, and markets.
Since the French presidential campaign, and especially after the election of Francois Hollande, the gap between those who believe that stability is more important than growth, and those who argue the opposite, has widened.
No more muddling through
According to Jeffrey Sachs, the dichotomy of austerity and growth is false, as growth is the outcome both camps want (they only differ in their approaches). Four schools of macroeconomic thought provide the background to this divide, each with its disciples in politics, academia, and the media. There are Keynesians who advocate temporary increased government spending, that is deficit spending, to achieve full employment, which, in turn, will make long-term debt reduction easier; deficit hawks completely reject this policy and argue that any increase in budget deficits will lead to a loss of confidence and be punished by financial markets through a hike in interest rates; free marketeers advocate a smaller public sector and the deregulation of labour and product markets, as this will unshackle the entrepreneurial spirit and, in the mid-term, lead to growth; finally, there are the structuralists, including Sachs but also Sony Kapoor of Re-Define and Peter Bofinger of the German Council of Economic Experts – probably the least well-known school they call for increased public spending that enhances productivity, for example in education and in jobs and banking recapitalisation, something to be financed not through debt but through higher and different taxes.
Fiscal orthodoxy and structural reform
Since the beginning of the ‘euro’ or ‘sovereign debt’ crisis within the EU, in the autumn of 2009, deficit hawks and free marketeers have joined forces and thus dominated anti-crisis policies. One starting point of their analysis is that the euro crisis was mainly triggered by profligate governments and chronically uncompetitive economies on the periphery of the Eurozone. This diagnosis, however, has not stopped with the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The advocates of austerity and structural reforms argue that other Eurozone countries may quickly become ‘peripherised’ – unless they achieve a structurally balanced budget and make their economies competitive. This combination of fiscal orthodoxy and structural reforms is appealing as it argues that pain will lead to gain. According to this school of thought, there is no trade-off between austerity and growth; on the contrary, cutting government expenditure and regulation will result in growth.
This narrative, however, has not been empirically corroborated in past years. In the short term, and especially in the midst of a recession, austerity and structural reforms do not generate growth, and they even fail in their primary objective, reducing deficits. This has been shown not only in the peripheral countries, where the Troika imposed such a cure, but also in countries within and outside the Eurozone such as Great Britain and the Netherlands, where austerity measures failed. It is also very questionable that such an approach will yield results in the long term. A leaner government and more flexible labour markets represent the US model the free marketeers want to import to the European Union. Yet, is it not strange that the reaction to a crisis that originated in the US should copy the model at its source?
Failed austerity
Politically, such an approach does not seem to be viable. In both France and Greece, voters have turned out for parties that promise to protect them from market forces. Free marketeers may decry what they perceive as too rigidly regulated labour, services, and product markets in Southern Europe and in the EU as a whole, however such a position cannot be imposed on voters throughout Europe.
While the fiscal hawks often defend their position by criticising the absurdity of Keynesian fiscal stimulus policies, they are actually fighting spectres. Although Nobel laureates such as Joseph Stiglitz and Paul Krugman promote such an approach, hardly any European politician dares to advocate prolonged budget deficits publicly. Even the rather dangerous Francois Hollande has promised to balance the French budget by 2017. In fact, what we might call the European centre-left is closer to Sachs’ structuralist school than to Keynesianism.
Solidarity with a cause
If only the European centre-right and Germans anxious about stability were able to grasp that structuralists do not advocate fiscal deficits but increased government spending to enhance productivity (to be financed through higher and different taxes), a compromise would be possible. In fact, it is already in place. Europe has a growth strategy, Europe 2020, with the following objectives: full employment; increased R&D; ecological and energy modernisation; better education; fighting poverty. Every single one of these objectives will need more public investment. The objectives of Europe 2020, let alone a carbon-neutral Europe in 2050, cannot be achieved through austerity and structural reforms.
Shifting the focus from the euro crisis to a long-term vision for Europe would have some crucial advantages. Economically, it calls for investments that generate growth in the short term. It would make sense to invest immediately in solar energy in Southern Europe. This would have positive political effects too, as it would show EU citizens in the north that solidarity with the south will create paybacks by way of cheaper renewable energy in the future. By the same token, citizens in the south would experience that reforms they will have to undertake do serve a higher goal – a more integrated, greener, and more just Europe.
The past years have taught us that populations across the EU are not willing to commit to unconditional cross-border solidarity for the sake of nothing but a common currency. However, the visions of Europe 2020 and a green Europe in 2050 may bring different countries, different economic schools together, and, in addition, may make short-term measures to save the euro, such as Eurobonds and a common deposit insurance, easier to stomach.
Dossier
Europe’s common future. Ways out of the crisis
The EU not only finds itself in a debt crisis, it is also faces both a crisis of confidence and of democracy. Now is the time for a broadly based public debate on alternative proposals for the future of Europe. We would like to contribute to the debate with this dossier.