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Concluding remarks
The evidence discussed in this note raises some questions relevant for the long-term sustainability of the eurozone. The system seems unable to generate sufficient growth and inflation to place excessive public debt on a credible reduction path. It does not seem to have a functioning adjustment mechanism to reabsorb existing competitive imbalances;11 their correction solely through domestic deflation policies in deficit/debtor countries would worsen an already dismal growth performance and possibly soon hit a hard wall of political and social resistance. Under these trends, one cannot exclude that at some stage a new financial shock may hit a highly indebted country – possibly when the ECB’s bond-buying programme will come close to its end – while discussions on an effective risk-sharing mechanism remain stalled in a climate of deep mutual mistrust.
The eurozone is not condemned to this doomsday scenario and could be lifted from this unsustainable path by appropriate policies, but these would require choices that its members seem at present unwilling to make.
On the one hand, it is imperative to raise the growth path of the Eurozone economy, and the ECB expansionary policies may not suffice to this end. There is an urgent need to raise public and private investment in Germany and elsewhere, to improve material and immaterial infrastructures where the European economy has been falling behind (IMF 2014). The ultra-low level of long-term interest rates offers ample opportunity to borrow and invest long-term at attractive returns. The Juncker plan (European Commission 2015b) may be of help in this regard. However, a significant increase in private investment will not be forthcoming without a major market-opening initiative by the European Council and the Commission – which brings me to the second horn of a strategy to rescue the eurozone from its eventual demise.
The eurozone (and the EU) needs aggressive market opening in services, which is the area where it has been systematically lagging behind the US in GDP and productivity growth, and which holds the promise of generating significant income and jobs. There is an especially urgent need to open Europe’s network utility services to competition and cross-border integration, which would attract substantial private investment from all over the world for the consolidation of the fragmented and inefficient energy, transport, and communications industries in the area. Over the longer period, the Eurozone should aim to achieve a full integration of labour and capital markets, which is the only way to finally eradicate market segmentation and competitive imbalances from its economy.
All of this is predicated, of course, on the hypothesis that budgetary and structural reform policies in the eurozone member countries will be kept on a course of improving convergence in fundamentals.