A few months ago, 25 of the 27
members of the European Union solemnly signed a treaty that committed them to
enshrining tough deficit limits in their national constitutions. This so-called
“fiscal compact” was the key condition to get Germany to agree to increase
substantially the funding for the eurozone’s rescue funds, and for the European
Central Bank to conduct its €1 trillion “long-term refinancing operation”
(LTRO), which was essential to stabilizing financial markets.
Today, however, the eurozone’s attention has shifted to growth. This is a recurring pattern in European politics: austerity is proclaimed and defended as the pre-condition for growth, but then, when a recession bites, growth becomes the pre-condition for continued austerity.
About 15 years ago, Europe
endured a similar cycle. In the early 1990’s, when the plans for the European
Monetary Union (EMU) were drawn up, Germany insisted on a “Stability Pact” as a
price for giving up the Deutschmark. When Europe fell into a deep recession
after 1995, attention shifted to growth, and the “Stability Pact” became the
“Stability and Growth Pact” (SGP) when the European Council adopted a resolution on “growth and employment” in 1997.
The need for growth is as
strong today as it was 15 years ago. In Spain, the unemployment rate then was
as high as it is now, and in Italy, it was higher in 1996 than it is today.
Politically, too, the background is the same: the “G” was inserted into the SGP
under pressure primarily from a new French administration (at the time headed
by Jacques Chirac). Today, France has again given the political impetus for a
shift to growth.
Making growth a political
priority is uncontroversial (after all, who could be against it?). But the real
question is: what can Europe do to create growth? The honest answer is: rather
little.
The key elements of a growth strategy discussed among Europe’s leaders
these days are actually the same as in 1996-1997: labor-market reforms,
strengthening of the internal market, more funding for the European Investment
Bank (EIB) for lending to small and medium-size enterprises (SMEs), and more
resources for infrastructure investment in poorer member states. The last two,
in particular, attract a lot of attention because they involve more spending.
But circumstances are also quite different today. The EIB’s business
model would have to be radically changed to make it useful to promote growth,
because it lends only against government guarantees, whereas southern Europe’s
fiscally stressed sovereigns cannot afford further burdens. Moreover, contrary
to a popular misconception, the EIB cannot lend directly to SMEs. The EIB can
only provide large banks with funding to lend to local SMEs. But the ECB is
essentially already doing this with its three-year LTRO loans.
There is also talk about a “Marshall Plan” for southern Europe. Fifteen
years ago, there was a clear need for better infrastructure there. But, since
then, the southern countries have had a decade of rather high infrastructure
investment – more than 3% of GDP in Spain, Greece, and Portugal.
As a result, most countries in the EU’s south probably have a sufficient
stock of infrastructure today. In fact, more infrastructure investment would
actually make most sense in Germany, where infrastructure spending has been
anemic (only 1.6 % of GDP, or half the rate of Spain) for almost a decade. That
is why Germany’s famous Autobahnen are
notoriously congested nowadays.
But one does not need European funding to finance infrastructure in
Germany, where the government can raise funds at negative real cost. At the
rates that it is paying today, the German government should be able to find
many investment projects that yield a positive social rate of return. Given
that Germany is close to full employment, more infrastructure spending there
would probably suck in imports (and attract unemployed construction workers
from Spain), contributing to much-needed rebalancing within the eurozone.
Unfortunately, this is unlikely to happen, because infrastructure
spending runs up against popular opposition. Indeed, such spending is decided
at the local and regional level, where grass-roots opposition to any large
project is strongest (it took more than 20 years, for example, to push through
the modernization of Stuttgart’s railway station).
The urge to be seen to be “doing something” is leading Europe’s
policymakers to rely on the few instruments with which the EU can claim to
foster growth. But they should recognize that today’s growth crisis is
different. The real bargain should not be austerity plus a Marshall Plan for
the south, but rather continued austerity plus labor-market reforms in the south,
combined with more infrastructure investment in Germany and other AAA-rated
countries like the Netherlands.
Deep service-sector reforms in Germany would also help to unlock the
country’s productivity potential and open its market to services exports from
southern Europe. That way, the South would have a chance to find jobs for its
rather well-educated young people, whose only choice now is between
unemployment and emigration.
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