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The controversy surrounding the findings of the American economists Rogoff and Rheinhardt, establishing a link between economic growth and the level of public indebtedness, constitute the most recent episode in the crusade by those advocating a change in the orientation of “Europe”. Thus, those pleading for more growth and solidarity and for less austerity believe that they have found the necessary “academic” support for their thesis.
However, such an interpretation gives far too much importance to the work of R & R. If one should rightly question the “scientific” validity of any “mathematical” formula or number that is supposed to govern economic behaviour, such as the 90 per cent level of public indebtedness, it is necessary to show equal circumspection before accrediting the opposite thesis which pretends that there is no correlation between public indebtedness and growth.
While politicians and economists will debate endlessly these questions, that remain far removed from citizen’s understanding and preoccupations, markets will, without doubt, severely sanction those who impose their ideologies at all costs. It is both a fundamental error and an intellectual fraud to compare the debt/growth relationship of countries (regardless of the selected sample) which historically have retained throughout their monetary sovereignty with that of EMU Members who have lost theirs: for instance “market access”, a key growth component, is far more constrained within an EMU that lacks automatic transfer mechanisms.
What is indisputable is that the EU/EMU has neither the adequate institutional architecture nor the appropriate instruments to deliver a policy capable of influencing significantly economic growth. Within such a context, the debate concerning debt levels is largely marginal and distracts attention from the real priorities.
The EU/EMU has only scant “own resources” and must rely, as far as its financing, entirely on the “goodwill” (or ill will) of Member States. The recent debate of the 2014-2020 Financial Perspectives is the perfect demonstration of this dependence. As long as this situation is not remedied, any calls for a “change in orientation” of “European policies” will smack of incantation and hypocrisy in which “Europe” has become the ideal scapegoat to justify in front of public opinion the shortcomings and failures of national governments.
Let us recall some inescapable “truths”: first of all, economic policy at European level is carried out through the implementation of various Directives and Treaties – adopted by Member States – and in particular those negotiated in response to the current crisis: the Budgetary treaty (25 MS), the “six-“ and “two-packs” (27), the EMS (24), the Stability and Growth Pact. The Commission has been tasked with this mission though, as “guardian of the treaties”, it is strictly limited in its capacity of interpretation; in so doing, it is using fully the flexibility enshrined in the texts, as is clearly demonstrated by the extension of the timeframe granted recently to several Members to comply with their budgetary obligations (golden rule). As long as these Treaties and/or Directives are not revised, the Commission (Europe) has no real possibility of altering its objectives.
Second truth: only a significant autonomous budget of the EU/EMU, financed by “own resources”, is capable of supporting a European economic policy that ignores concepts such as “I want my money back” to the detriment of the EU general interest. Endowed with a significant degree of financial autonomy, the EU/EMU would be in a position to incur and service an amount of “mutualised” debt which would further enhance its resources. In parallel, the ECB could – at last – assume the function of a fully empowered Central Bank. It could interface with the EU/EMU (but not with individual Member States) on the American or British model, as requested by a number of vocal advocates. Its democratic legitimacy could – without jeopardising its independence – be secured by making it accountable to the appropriate EU body.
Implementing such reforms requires deep Treaty changes which take a significant amount of time. It is, however, essential that a “political” agreement be reached rapidly defining both the objectives and a precise calendar for their realisation. President Van Rompuy has been tasked with presenting such a plan at the forthcoming June Summit. Its adoption should become the cornerstone of EU policy, underpinning the efforts to deal with employment, growth and other social challenges, if one wishes to avoid handing the initiative to the growing nationalist and populist movements. A “democratic” victory of any one of these factions within a Member State could paralyse any further integration within EMU and would irrevocably augur of its ultimate collapse.
Paul N Goldschmidt, Director, European Commission (ret); Member of the Advisory Board of the Thomas More Institute
Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259
E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu