17 September 2013

BFM/Schäuble: Ignore the doomsayers - Europe is being fixed

What is happening turns out to be pretty much what the proponents of Europe's cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth. This has taken critical observers aback. It should not have, because, in truth, we have seen it all before: we still live in the real world, not in a parallel universe where well-established economic principles no longer apply.

Take Germany. In the late 1990s it was the undisputed "sick man" of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline. A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. A second wave of expenditure restraint and reforms followed once the financial crisis was past its peak.

The government, while striving to consolidate the public finances, reprioritised spending. Between 2010 and 2013 the German government raised spending on research and education by €13.3bn, while staying committed to its fiscal course. As much as policies matter, Germany’s competitiveness, its integration in the global economy and its ability to create jobs were not the fruit of government fiat but of the myriad decisions we call the market.

What happened in the eurozone early in the decade is only contextually different. In the "boom" phase, several of its members let labour grow expensive and their share of world trade shrink. As the bust came, jobs vanished and public finances deteriorated. The reaction was not only the produce of a European consensus – backed in many cases by national parliaments – but it followed a well-established recipe, not just by Germany but by the UK in the 1980s, Sweden and Finland in the early 1990s, Asia in the late 1990s and many other industrial and emerging countries.

The recipe worked then and it is working now, somewhat to the chagrin and bemusement of its numerous critics in the media, academia, international organisations and politics. The adjustment was ambitious and sometimes painful but its implementation was flexible and adaptive. The European safety nets have provided a well calibrated mix of incentives and solidarity to cushion the pain.

So what lessons can we draw from the German adjustment of the 2000s and the more recent example of the eurozone? I see two.

1. Structural reforms take time to work. Those responsible for them need patience and an aptitude to ignore the siren calls of quick fixers and the protestations of special interests. Signs of improvements are no reason to backtrack – they are a reason to persevere.
2. However bad the times, we should fight the human tendency to extrapolate the present forever into the future. Systems adapt, downturns bottom out, trends turn. In other words, what is broken can be repaired. Europe today is the proof.

Full article

Comment by Andrew Watt for Social Europe: Wolfgang Schäuble And The Doomsayers – Both Are Wrong!, 19.9.13

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