28 May 2013

Andor et al: Austerity could only ever bring Europe so far

In a joint op-ed for the Guardian, László Andor, Pervenche Berès, Joan Burton, Yves Leterme and Henri Malosse write that there can be no solution to the EU's crisis without restructuring economic and monetary union.

In the past year the EU policy debate has rightly shifted towards growth, as opposed to "austerity only". But we still lack a robust recovery strategy worthy of the name. Such a strategy would require a new policy mix based on the following elements.

First, we must urgently set up an EU-level banking union to restructure or close down failed banks. Companies need access to more credit, under better conditions, to invest and grow. Europe's financial sector must cut its debts faster, including through greater debt write-offs and shaking up banking structures. 

Second, consolidation in weaker Member States needs to be balanced by higher consumption in stronger EU countries. The monetary union cannot rely solely on squeezing troubled countries, which depresses overall demand. "Symmetrical rebalancing" requires structural measures in stronger countries, such as allowing wages to catch up with productivity and adequate minimum wages to prevent in-work poverty. 

Third, if weaker Member States are to regain competitiveness while keeping the euro, they need investment in the real economy. This must be based on sophisticated industrial policy and support for entrepreneurship, so that restructuring produces sustainable business models. If used wisely, EU funds such as the European social fund can be a major source of financial support, together with the European Investment Bank. 

Fourth, Europe's monetary policy must become more expansionary. The ECB has bought Europe time through its bond-buying pledge, turning itself into a conditional lender of last resort. That is to be welcomed. But it is becoming increasingly clear that Europe's financial crisis cannot be overcome in a deflationary environment, so a different inflation outlook is necessary. We must rethink the ECB's role and powers. 

Fifth, Europe must invest in human capital – creating opportunities for people. EU ministers have agreed  a youth guarantee, to ensure that every young person gets a job, apprenticeship or learning opportunity within four months of becoming unemployed. Now individual Member States must put it into practice. Similar "social investment" must be boosted across the board – for example, through the provision of quality childcare and the re-skilling of older workers. The target must be full employment. 

European leaders should focus on finding a systemic, long-term solution to the crisis, restoring each country's growth potential and convergence within the monetary union. Europe should convene a Bretton Woods-type conference to put in place an economic and monetary arrangement for the coming decades. 

For such a lasting arrangement, a grand bargain between surplus and deficit countries is needed, ensuring a sustainable economic future for each. Some pooling of government debt, and cross-country automatic stabilisers (where, for example, the costs of cyclical unemployment are shared between the member states by using common European funds) should be seriously considered for Europe's monetary union.

Rebalancing through aggressive reduction of government spending and similar measures in deficit countries (under the euphemism "internal devaluation") is, without higher domestic demand in the surplus countries, a recipe for long-lasting recession and disintegration. There is no solution to the crisis without reconstructing Europe's economic and monetary union, and without shifting the focus on to people's needs and potential. Austerity could only ever bring us so far. We must now move to the next stage.

Full article

© The Guardian