A comprehensive strategy for Eurozone’s long term growth gains momentum

European Commissioner László Andor responsible for Employment, Social Affairs and Inclusion delivered an inspired speech entitled “Countering the crisis: fixing Europe’s monetary union and upgrading EU employment policy“, during an event at the London School of Economics. His idea about the European project is included in the very title of this speech that is connecting Europe’s monetary union with the efforts to upgrade employment. He started by observing that within some months after December 2012, European decision makers seeing the danger for a slippage of the economy into a self-feeding recession, have decisively shifted the policy focus from fiscal consolidation to growth. The relevant passage is quoted here below, ”In fact, the euro area has been in a double-dip recession for more than a year. Of course, with such worrying outlook, the debate on how to achieve growth is intensifying. In 2010-11, expectations were based on a safe exit from the crisis. Therefore, fiscal consolidation was given first priority in order to assure financial markets of governments’ responsibility…in practice this was followed by a double-dip recession with rising unemployment as well as debt-to-GDP ratios. We have also seen a growing divergence between the ‘core’ and ‘peripheral’ countries within the euro zone, as I will show. In March 2012, 25 European governments signed up to the so-called Fiscal Compact, committing themselves to strict limits on structural budget deficits..But then the focus started slowly shifting from the numerator to the denominator of the debt/GDP ratio…perhaps the key observation about the current crisis is that there is an unprecedented divergence — or polarization — in unemployment and other socio-economic outcomes among the 17 countries sharing the common currency”. Eurozone moves He briefly identifies here the current double-faced problem of the euro money zone, which is recession and growing divergence between member states. This is not however the standard reading of the current situation in Eurozone, at least not yet. There are still those who do dismiss both those observations. They still insist that only Teutonic fiscal consolidation can guarantee sustainable growth in the long run, and as a result they don’t accept that recession is now the main problem, let alone divergence. Actually some German politicians propose that the unemployed of the South should move North to find a job, possibly in Germany. However those fiscal discipline lovers are bit by bit forced by reality to recognize that the long-term solutions they preach for sustainable growth, may take too long to materialize  So they start sharing the fear that in the between the European project may collapse. It is astonishing to see how stubborn those Germans are, being stuck to such obsolete ideologies. It takes the prospect of a real catastrophe to make them start changing their minds and accept what was evident for decades now, that is “in the long run we all are dead”. John Maynard Keynes has really changed the political economy. Let’s now see what Andor proposes for Eurozone to achieve a real monetary union and at the same time promote employment and growth. Actually in a few words he describes a full-scale programme for Eurozone to solve its short-term problems and secure long-term prosperity for all. The relevant passage is quoted below. “A clear lesson from the past three years is that a systemic crisis of a currency union cannot be overcome if we rely predominantly on adjustment within the individual troubled countries – fixing budgets, rescuing national banks and trying to restore national competitiveness against other countries by cutting labour costs. Internal devaluation is not the solution for a systemic crisis. The so-called ‘Baltic model’ of abrupt fiscal consolidation and wage cuts may have restored market confidence in these small economies, but this adjustment has taken a major social toll, with high unemployment and significant net emigration of young people. Applying this simultaneously in much larger economies is certain to produce a disaster, also because of the effect on aggregate demand in Europe. Re-balancing within the monetary union must be symmetrical, at least in the absence of fiscal union. Fiscal consolidation and internal devaluation in the periphery need to be balanced by higher consumption and investment in the core. This requires structural reforms within the surplus countries, such as adequate minimum wages and prevention of in-work poverty. If the surplus countries were willing to help restore the periphery’s growth potential through large fiscal transfers, the need for expansion in the core would be smaller. But without such fiscal transfers, we cannot have recovery – or even proper re-balancing – in Europe unless domestic demand in the core countries grows and they accept higher inflation than the periphery. A genuine EMU also needs to be based on an understanding that employment and social crises in some of its parts have negative impact on other Member States and the currency union as a whole”. A full programme This is a complete politico-economic programme containing all the modern thinking that has being developed by open-minded economists in Brussels and elsewhere in Europe and not only. It starts with the recognition that the widely advertised ‘Baltic model’ cannot work at a scale comprising the entire southern half of Eurozone. Mass emigration of millions of Greek, Spanish, Portuguese, Italian and even Irish and French workers to seek a better life in Germany, cannot offer a viable solution. This proposal is based on the theory about factors of production mobility, expected to cure the gaps of labour and capital when and where they appear. In today’s societies however such a mass emigration of labour will lead to a complete economic, political and social collapse and chaos in the South. In such an eventuality the North will also pay a dear price. Is this what Germany wants? Obviously the answer is NO. Since this massive transfer of labour is impossible, Andor goes to the next available mega-policy solution, which is simply the transfer of capital from North to South. He bravely says that the surplus countries of Eurozone have to transfer some of those surpluses to the South. It goes without saying that this transfer will not have the form of a gift. As Andor proposes, it will be realized mainly through a generous home incomes policy in the North to strengthen growth for the entire Eurozone, though reviving aggregate demand all over the single money zone. Then comes the gift, which will take the form of support from sovereign to sovereign. But also in this case it doesn’t really have to be a gift. It may take other forms too. Germany is gaining so far by helping to bail out Greece, Ireland and Portugal. In any case Andor implicitly observes that the North cannot have it all. He says that, “If we are serious about coming forward with systemic solutions that would enable the economic and monetary union to prosper over the coming decades, we must base such solutions on a clear understanding of what the employment and social dynamics have been during the current crisis, and how the euro crisis and the social crisis are linked”. Truly this is the first time that a European Commissioner dares to put together a comprehensive package of economic policies for a long-term European strategy. One can imagine that those thoughts have been widely discussed in the Berlaymont.