"It's Economic Growth, Stupid !"

 March 28, 2012

Over the last two weeks, economic discussion among EU leaders has revolved around two main topics: austerity and increasing to 1 trillion euros the money available to the ESP. Few of the current leaders, if any, are concentrating on finding solutions to the real economic challenge facing the Union, that of kickstarting economic growth on the continent. As Barry Eichengreen argues,

“Though no one can say for sure what Tobin would have thought of Europe’s crisis, his priority was always the pursuit of full employment. One suspects that he would have urged European policymakers to dispense with their silly fixation on a financial transactions tax and instead repair their broken banking systems and use all monetary and fiscal means at their disposal to jump-start economic growth”.

With the exception of a few EU members (Germany, Finland, Austria, Denmark), growth is stagnant, or negative (in Greece, Portugal and Ireland, for example) and the average rate of unemployment has crossed the psychological threshold of 10 percent. Whilst countries like China have spent close to 1 trillion USD in 2008-2009 in order to maintain employment and growth, the EU is envisaging to invest a measly 100 billion euros to the scale of the continent, if that. To compound economic woes, aggregate demand in deficit EU countries is about to suffer further shocks as a result of the unwise implementation of draconian austerity measures.

According to Jean-Claude Trichet, former ECB director, the average budget deficit within the EU is 70 percent of the aggregate GDP. That compares very favourably with Japan’s 212 percent or with the US’ 100 percent public debt ratios. Maastricht Treaty “fair weather” provisions notwithstanding, most EU member countries could add a few percentage points to their deficits in order to adequately finance growth and employment investment schemes coordinated by Brussels. To avoid pressure from international financial markets, national governments could – as the Japanese have always done – sell their treasury bonds to their own citizens, vital stakeholders in a solid economic recovery.

Whether our political leaders realise it or not, the only way out of the current crisis is by spending close to 1 trillion euros over the next few years on various development and infrastructure projects. The EU’s energy security, for example, does need the Nabucco project to go ahead in order to diminish our dependence on Russian oil and gas and pipelines. Although the European Commission is trying to allocate money for other much- needed infrastructure projects, the EU budget is at the mercy of member states’ contributions. That brings into question Brussel’s ability to adopt and implement the pan-European growth agenda we need.

And yet, a comprehensive pro-growth strategy is essential, if both the employment and current sovereign debt crises are to be overcome. To get to it, national leaders should, however, do away with their fixation on golden rules and austerity measures, and start investing massively in projects that will slash the current unemployment rate, taming it to the levels experienced by Germany, Austria or Finland. The urgency of such an investment and spending agenda is, unfortunately, recognised only by economists. Unable to deliver the right mix of economic policies, EU politicians have found it more expedient to give in to xenophobia, racism and nationalism, some of them for electoral reasons.

Whilst populist discourse might in normal times prove helpful in winning elections, in the current economic climate it could only aggravate matters and prolong the crisis. In fact, voters in major European countries are more concerned with their diminished purchasing power and job prospects than with illegal immigration and/or security issues. Any politician or their advisers who fail to grasp that should make an exit from the political game. (sources: Project Syndicate, Le Monde, Reuters, Deutsche Welle, Xinhua)