Austerity versus growth – reflections by Enja Sæthren

Posted by Enja Sæthren

Enja Sæthren NEWThe conundrum that has divided economists is the question of whether it is possible to have both growth and austerity at the same time. Though there has long been a conflict between Berlin’s call for austerity and Paris’s preference for stimulus, the last act from the constitutional court in Germany has made me more optimistic. Is there room for that? Or are the constraints following the decision of to much significance? Is this a step towards a new tendency or is it just my wishful thinking? I think the last developments, also regarding the vote I the Netherlands, proves that it’s not too late to save the euro, but one could argue that it is growing too late to save the EU… Is it?

Dealing with the economic crisis

Fabian Zuleeg, EPC Chief Economist

The way we used to integrate does not work anymore. When you’re looking at the idea of further integration the question that follows is how to do that in today’s situation. There is talk about a whole new direction; we have to communicate with the public to create a wide debate, and at the same time we have to take account for the fact that some countries don’t want to be part of a more integrated Europe. It’s dangerous to believe that political reform in itself is enough. We need growth, which for instance can be achieved through stimulating private investment. The union has changed massively; therefore we have to rethink collectively about what direction we want to go.

Source from the Commission

This is both a financial crisis, an economic crisis, a political crisis and a social crisis. The financial crisis has got most attention, but is also the most misunderstood. The financial crisis is not one-dimensional, but quite complex – it’s not purely financial, but also a consequence of political misreading. Still, the fundamental problem is that we don’t have mechanisms to deal with crossborder banks and debt, and there’s a lack of a proper lender of last resort. Adjusting to a changing world is another aspect – which is closely related to economic adjustment as well: New economies in the world economy – especially China- shapes the European context.

So, how to deal with it? We have a start; we finally have a central bank that does its’ job. In addition we move towards having common rules regarding banks in trouble – a step towards integration of banks on the European level. But among many voters the issue is still: why should tax payers contribute to the suffering banks? Another current main challenge is how to guarantee political commitment due to changing political leaders and governments.

Some solutions could be:
  • We have to stimulate investment, but there should be a higher degree of control.
  • We have to adjust within Europe and even within Germany, not just adjust related to the rest of the world.
  • We need increased political integration, but this requires more than before – we need though political leaders, in addition to a debate about democracy.

First and foremost, optimism is needed. We don’t spend, invest or create political reforms because we are afraid. That is a self-fulfilling prophecy. Therefore we need a shift in mentality to be able to solve the crisis.

Meeting with Cecilia Malmström

During the last time we have seen an unprecedented level of economic coordination. The baking union means a further step in that direction.

There is an erosion of trust, therefore we have to focus on other areas as well – climate change for instance; at the time few discuss Europe’s role in questions of the environment. There should also be more talk about enlargement – one should approve of that and motivate willing countries in order to create a more dynamic union.

Though it is a political, economic and social crisis the main task is to define values – it thus follows that it risks being a crisis of values. To be able to create a community based on mutual understandings we probably need some sort of convention to gather people and negotiate.

Regarding the changes in power balances between the Commission and the Parliament; the parliament has gained more influence in the decision-making process. Could this mean that the EU becomes more democratic and gets increased legitimacy?

Policy debate: restoring trust

Also based on an article in Washington post, 2012 – june
The story of austerity and growth has clearly not been a lovestory.

The German-enforced belt-tightening to bring down debt has produced a sort of popular backlash against the E.U.- a backlash that perhaps could be its undoing. One could describe the situation as an opening of a dangerous gap between the collective governance Europe needs to thrive and the national citizens that are more hostile to the European project now than ever. To save the euro could be said to be the easy part; while restoring confidence in integration will probably be a much more difficult task.

The E.U. has managed years of economic pain in the name of good housekeeping, but in doing so it has sacrificed growth. By the end of 2012, Greece’s GDP is expected to have fallen by 20 percent since 2009. Italy and Spain are back in recession. Unemployment among Spanish youth now is about 50 percent. The euro zone as a whole had zero growth during 2012’s first quarter.

These conditions are challenging the bonds that hold the E.U. together. Not only has the push towards austerity claimed 11 governments, but several elections, except for the latest news from the Netherlands, has strengthened the political forces that work against integration. The dominant tendency has been that the political mainstream is losing market share to smaller parties on the left and right that are opposing the E.U. – because in times of crisis people tend to seek radical solutions.

Therefore my answer to the question of how to salvage Europe is that we should develop a European community of mutual values and understandings. Only if people can identify with Europe, will they be willing to contribute to the bigger project of saving it. Thus the focus will shift from the stirrings of national protection towards European integration.