A Euro­pean plan for France and Ger­many

Financial Mirror (Cyprus) - - FRONT PAGE -

Europe is fall­ing into a stag­na­tion trap. With growth barely vis­i­ble, and dan­ger­ously low in­fla­tion caus­ing real in­ter­est rates to rise, the weight of pub­lic and pri­vate debt has grown very heavy, and many fear that another lost decade is at hand. And, though the threat of eu­ro­zone frag­men­ta­tion has re­ceded, it has not dis­ap­peared. Given all of this, Europe is los­ing rel­e­vance in­ter­nally and ex­ter­nally. France and Ger­many – which largely drove Euro­pean in­te­gra­tion for more than six decades – must not re­sign them­selves to this state of af­fairs. They ur­gently need a common plan, not mu­tual re­crim­i­na­tion by Ger­man sup­plysiders and French de­mand-siders.

We find such con­tro­ver­sies point­less. Lack­lus­ter pro­duc­tiv­ity growth is prima fa­cie ev­i­dence of a sup­ply de­fi­ciency. The com­bi­na­tion of high un­em­ploy­ment and fall­ing in­fla­tion is prima fa­cie ev­i­dence of a de­mand short­fall. In­ter­e­strate dif­fer­en­tials within the same cur­rency area are prima fa­cie ev­i­dence of frag­men­ta­tion. The truth is that Europe suf­fers from mul­ti­ple ills.

So ac­tion is needed on all three fronts. The ques­tion is how to carry it out. If Europe were a sin­gle coun­try with a sin­gle gov­ern­ment, it would adopt a two-handed strat­egy, com­bin­ing am­bi­tious pro-growth re­forms with fis­cal-pol­icy support. The cen­tral bank would make it clear that it stands ready – pro­vided that the re­forms are real and the com­mit­ment to sub­se­quent fis­cal con­sol­i­da­tion is cred­i­ble – to serve as a “back­stop for gov­ern­ment fund­ing” (as Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi put it in Au­gust).

Europe can do none of this, and no easy so­lu­tions are avail­able. Some say that Ger­many should stim­u­late de­mand while other coun­tries, in­clud­ing France, im­ple­ment sup­ply-side re­forms. But an in­crease in debt in one coun­try beyond what is de­sir­able from a na­tional per­spec­tive can­not be traded for the ben­e­fits of pro-growth re­form in other coun­tries.

One so­lu­tion would be to es­tab­lish a fis­cal ca­pac­ity at the eu­ro­zone level, or, in plain words, a eu­ro­zone bud­get, in­clud­ing the abil­ity to bor­row. But, though that is cer­tainly de­sir­able in the long term, cur­rently there are no rev­enue flows into such a bud­get, and there is no gov­er­nance struc­ture to ex­e­cute it.

In this con­text, in­vest­ment has emerged as every­body’s fa­vorite re­sponse. The Euro­pean Com­mis­sion has pro­posed a plan to stim­u­late in­vest­ment spend­ing through a new fi­nanc­ing scheme, one that we hope will suc­ceed. But solv­ing Europe’s growth prob­lem re­quires more than just throw­ing money at it.

In a re­cent re­port to the French and Ger­man econ­omy min­is­ters, we pro­pose a prag­matic agenda that ac­counts for the fact that, while both France and Ger­many need re­forms, they face dif­fer­ent chal­lenges and must fo­cus their poli­cies ac­cord­ingly. In France, short-term uncer­tain­ties are re­duc­ing con­fi­dence, but the longer-term out­look looks promis­ing. In Ger­many, longer-term uncer­tain­ties are re­duc­ing con­fi­dence, but short-term prospects look good. In France, we fear a lack of bold­ness; in Ger­many, we fear com­pla­cency.

French pol­i­cy­mak­ers should give pri­or­ity to a new growth model, based on greater flex­i­bil­ity and se­cu­rity for em­ploy­ees, and a leaner, more ef­fec­tive state. Ger­many, mean­while, must ad­dress its de­mo­graphic chal­lenges, in par­tic­u­lar by pre­par­ing Ger­man so­ci­ety for in­creased im­mi­gra­tion, and pro­mote the tran­si­tion to an in­clu­sive growth model based on im­proved de­mand and a bet­ter bal­ance of sav­ing and in­vest­ment.

We also call for a clearer reg­u­la­tory en­vi­ron­ment. Pri­vate in­vest­ment is a judg­ment about the fu­ture. In en­ergy, trans­port, and the dig­i­tal sec­tor, to name just a few, reg­u­la­tors must set the right pa­ram­e­ters and en­sure pre­dictabil­ity. In­vestors need to know with cer­tainty that Europe is com­mit­ted to ac­cel­er­at­ing its tran­si­tion to a low-car­bon, knowl­edge-based econ­omy.

This re­quires elim­i­nat­ing un­cer­tainty about the fu­ture price of car­bon and the fu­ture regime for data pro­tec­tion. France and Ger­many should also pro­mote a “bor­der­less sec­tor” model in a few strate­gi­cally im­por­tant in­dus­tries, which means common leg­is­la­tion, common reg­u­la­tion, and even a common reg­u­la­tor. We think that en­ergy and the dig­i­tal econ­omy are such sec­tors, and we pro­pose a sim­i­lar ini­tia­tive to en­sure the full porta­bil­ity of skills and so­cial ben­e­fits.

More­over, like the Euro­pean Com­mis­sion, we be­lieve that higher in­vest­ment is a big part of the an­swer to Europe’s growth ques­tion. Ger­many’s pub­lic-fi­nance frame­work rightly at­tributes con­sti­tu­tional sta­tus to keep­ing debt un­der con­trol, but it ne­glects in­vest­ment pro­mo­tion within the re­main­ing fis­cal space. Leav­ing a worn-out house to fu­ture gen­er­a­tions to re­pair is not a re­spon­si­ble way to man­age wealth. The Ger­man gov­ern­ment can and should in­crease pub­lic in­vest­ment.

At the same time, while au­thor­i­ties are ask­ing banks to as­sume less risk, they also must pre­vent per­va­sive risk aver­sion in the fi­nan­cial sys­tem. We pro­pose in­ject­ing new Euro­pean pub­lic money into the de­vel­op­ment of risk-shar­ing in­stru­ments and ve­hi­cles that support eq­uity in­vest­ment. We also pro­pose cre­at­ing a Euro­pean grant fund to support pub­lic in­vest­ment in the eu­ro­zone that ad­vances common aims, strength­ens sol­i­dar­ity, and pro­motes ex­cel­lence.

Europe is more than a mar­ket, a cur­rency, or a bud­get. It was built around a set of shared val­ues. To up­hold those val­ues, France and Ger­many must join forces to re­dis­cover and rein­vent Europe’s so­cial model, start­ing with con­crete ini­tia­tives in the fields of min­i­mum-wage stan­dards, labor­mar­ket poli­cies, re­tire­ment, and ed­u­ca­tion.

For decades, the Franco-Ger­man al­liance bound Europe to­gether and drove it for­ward. To­day, French and Ger­man of­fi­cials is­sue joint dec­la­ra­tions and ex­change ac­cu­sa­tions. But the time for bick­er­ing is over. Europe needs ac­tion.

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