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This must involve demand management, not just supply-side reforms. And while peripheral countries should continue to put their fiscal houses in order, the core must be willing to take up more of the economic slack.
First, Europe must increase its level of investment. Austerity has led peripheral governments to cut back spending on public works. While this is inevitable, they should not overdo it. Just as importantly, countries of the core – currently enjoying near-zero real interest rates – should increase public investment. The Commission should do what it can to support infrastructure spending on a pan-European basis.
Second, the eurozone must do more to support the internal devaluation pursued by the countries at its periphery. Wages in these Member States will eventually fall enough, but the process will be long and painful. A coordinated fiscal move could make the process smoother. Countries such as Spain and Italy should shift taxation from labour to consumption, but Germany and other surplus countries could help by doing the opposite. The effect would be to stimulate consumption in the core, while reducing unit labour costs in the periphery.
Third, there is room for further monetary easing. A new three-year longer-term refinancing operation should take place only in a real emergency. The ECB should cut its policy rate, however, which is currently at 1 per cent.
Political consensus behind such a growth agenda will not be easy to build. But as economic conditions get tougher, the high priests of fiscal austerity are bound to become more isolated. It is therefore encouraging that an increasing number of politicians, including François Hollande, the French presidential hopeful, are calling for a “European growth strategy”.
Any such plan must include concrete measures that can have an immediate impact. Europe has been been talking too much about growth for too long, while doing too little. It is time to act before it is too late.
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