As Europe's growth prospects take a beating, critics of austerity seem to be riding high. It would seem that Europe's "reflationistas" are on a roll.
But a closer look at developments suggests a more limited future shift. Draghi’s recent remarks about a “growth compact” were a call not for a loosening of fiscal policies, but rather for a coordinated acceleration of structural reforms of labour and product markets in the euro area “to facilitate entrepreneurial activities, the start-up of new firms and job creation". The ECB is not signalling any change of course.
All told, Hollande essentially has no choice but to govern as a centrist social-democrat, eschewing a radical new direction in euro area policies and staying on today’s path.
The Fiscal Compact and the new euro area fiscal surveillance rules might well be to the advantage of Hollande and Europe’s centre-left more broadly. For one thing, these constraints effectively eliminate large scale tax breaks as an electoral platform for the centre-right. For a lesson on future euro area elections, look no further than the sorry plight of Germany’s centre-right Free Democratic Party (FDP), which can no longer lure voters by calling for large additional tax cuts in Germany without falling foul of the new fiscal rules. As a political force, the FDP has been neutered.
There is no doubt that the Fiscal Compact’s forced coordinated austerity will precipitate a regional slowdown. But in light of the global economic situation, this might not be a bad time for a euro area push toward fiscal consolidation. Consider the possibility of fiscal consolidation being postponed. The IMF’s Fiscal Monitor makes it clear that eventually all industrialised countries need sizeable fiscal consolidation. From a quasi-mercantilist point of view, it makes sense for the euro area to implement austerity now, while both the US and Japan continue heavy fiscal and monetary stimulus and China still grows at 8 per cent a year and helps prop up other commodity exporters. Assuming that my colleague Nicholas Lardy is right about a possible significant slowdown in China’s economic growth in 3-5 years, with adverse consequences on the rest of the world, postponing inevitable austerity might mean having to undertake it in an even more hostile global economic climate in the future.
By focusing on tight spending rules at the national level, the Fiscal Compact leaves only centralised euro area level stimulus options available for European leaders. But such a development will help strengthen the “European centre” and expand the availability of jointly guaranteed European debt. This centralisation could take the form of a bigger European Investment Bank (EIB) balance sheet or even new forward-looking European Project Bonds. Looking down the road towards the possibility of eurobonds, such a step is a far better way to stimulate the European economy than having Germany bear the load of a new domestic stimulus.
Full article
© Peter G Peterson Institute for International Economics
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article