Small steps to Euro­pean growth

Financial Mirror (Cyprus) - - FRONT PAGE -

The top­ics cho­sen by the Euro­pean Cen­tral Bank for its an­nual fo­rum in Sin­tra, Por­tu­gal, at the end of May were not de­fla­tion, quan­ti­ta­tive eas­ing, or fi­nan­cial sta­bil­ity. They were un­em­ploy­ment, pro­duc­tiv­ity, and pro-growth re­forms. ECB Pres­i­dent Mario Draghi ex­plained why in his in­tro­duc­tory speech: the eu­ro­zone lacks both growth mo­men­tum and re­silience to ad­verse shocks.

Draghi is un­doubt­edly right. The Euro­pean Com­mis­sion now ex­pects growth in the eu­ro­zone to reach 1.5% in 2015 and 1.9% in 2016. That cer­tainly looks good in com­par­i­son to the near-stag­na­tion of re­cent years. But, given the com­bi­na­tion of mas­sive mon­e­tary sup­port, a now-neu­tral fis­cal stance, a steep fall in oil prices, and a de­pre­ci­ated euro, it is the least we could ex­pect, and it will bring per capita GDP back only to its 2008 level. The fact that lead­ers and pun­dits are hail­ing this brighter out­look in­di­cates just how di­min­ished our ex­pec­ta­tions have be­come.

Un­til re­cently, fis­cal aus­ter­ity and the euro cri­sis could be blamed for poor eco­nomic per­for­mance. Not any­more. Although growth may ex­ceed the Com­mis­sion’s fore­cast, there are rea­sons to be con­cerned about the eu­ro­zone’s growth po­ten­tial.

In or­der to strengthen that po­ten­tial, cen­tral bankers can only ad­vo­cate eco­nomic re­forms; it is gov­ern­ments that are re­spon­si­ble for adopt­ing them. And crit­ics point out that re­peated ex­hor­ta­tions could prove coun­ter­pro­duc­tive. Af­ter all, cen­tral banks are quick to re­but mon­e­tary-pol­icy sug­ges­tions from gov­ern­ments in the name of in­de­pen­dence. Why should gov­ern­ments be­have dif­fer­ently?

Draghi has good rea­son to in­sist that, in the ab­sence of sig­nif­i­cant na­tional ac­tion, the eu­ro­zone might well stum­ble from cri­sis to cri­sis un­til its very viability is jeop­ar­dised. Par­tic­i­pa­tion in a mon­e­tary union is a de­mand­ing en­deavor that re­quires pol­icy agility among its par­tic­i­pat­ing coun­tries, as well as a sense of com­mon pur­pose. But gov­ern­ments have good rea­son to ar­gue that, as far as re­forms are con­cerned, pol­i­cy­mak­ing re­quires pre­ci­sion and po­lit­i­cal re­al­ism, which out­side ad­vice of­ten lacks. The ECB sim­ply can­not whip the Euro­pean Union into shape.

A nat­u­ral so­lu­tion could be for the ECB to rely on the other Euro­pean in­sti­tu­tions. Since 2010, the EU has been pil­ing up co­or­di­na­tion pro­ce­dures in the hope of push­ing gov­ern­ments into en­act­ing po­lit­i­cally dif­fi­cult re­forms. Each year, ev­ery mem­ber coun­try is handed a to-do list of public spend­ing, labour-mar­ket, and com­pe­ti­tion re­forms, as well as other rec­om­men­da­tions.

The Euro­pean Com­mis­sion is also try­ing to lure re­luc­tant gov­ern­ments into bolder ac­tion by of­fer­ing them more fis­cal room. And, two years ago, Ger­man Chan­cel­lor An­gela Merkel floated the idea of in­di­vid­u­ally tai­lored “re­form con­tracts” that, again, would cre­ate in­cen­tives for gov­ern­ments to en­act pro-growth re­forms.

But the ef­fec­tive­ness of th­ese ini­tia­tives has proved to be limited, to say the least. Schemes aimed at strength­en­ing pol­icy co­or­di­na­tion have merely added com­plex­ity to an al­ready Byzan­tine ar­chi­tec­ture of pro­ce­dures. Rec­om­men­da­tions is­sued to in­di­vid­ual coun­tries lack both trac­tion in na­tional cap­i­tals and co­her­ence at the eu­ro­zone level. The EU has a strong hand when a coun­try is in need of fi­nan­cial as­sis­tance, but oth­er­wise it can do lit­tle more than of­fer coun­sel.

The eu­ro­zone must over­come this short­com­ing, but no sim­ple so­lu­tion is at hand. Pro­pos­als are ex­pected in the com­ing months. There is broad agree­ment that stream­lin­ing is re­quired; but that will not suf­fice. Some ad­vo­cate fur­ther cen­tral­i­sa­tion of de­ci­sions; but that will not help, ei­ther, be­cause re­forms are in­trin­si­cally na­tional, if not sub-na­tional. In­stead, progress can be made in three di­rec­tions.

First, the ECB’s anal­y­sis of the eco­nomic chal­lenges fac­ing the eu­ro­zone should be very trans­par­ent. Gov­ern­ments should know pre­cisely how Draghi and his col­leagues as­sess the po­ten­tial for growth and em­ploy­ment and how this will af­fect mon­e­tary pol­icy. They should have a clear idea of what they can ex­pect from the ECB and what out­come (rather than pre­cise mea­sures) the ECB ex­pects from them.

Sec­ond, the EU should sup­port the cre­ation of na­tional in­sti­tu­tions to mon­i­tor do­mes­tic de­vel­op­ments and their com­pat­i­bil­ity with over­all eu­ro­zone goals. Th­ese could be mod­eled on the fis­cal coun­cils that were cre­ated a few years ago in each mem­ber coun­try to as­sess na­tional gov­ern­ments’ public-fi­nance plans. Be­cause they are part of the na­tional con­ver­sa­tion, th­ese coun­cils have proved to be a use­ful ad­di­tion.

In the same way, com­pet­i­tive­ness coun­cils could mon­i­tor the evo­lu­tion of wages and prices, em­ploy­ment and growth, and the cur­rent ac­count, and pro­vide rec­om­men­da­tions to na­tional gov­ern­ments and so­cial part­ners. Such in­sti­tu­tions would be much bet­ter placed than the EU to for­mu­late timely and gran­u­lar re­form rec­om­men­da­tions. They could op­er­ate as a net­work, rely on sim­i­lar method­olo­gies, and thus help en­sure more con­sis­tency among in­di­vid­ual poli­cies.

Third, the EU could foster ag­gre­gate ac­tion in high-pri­or­ity ar­eas by im­ple­ment­ing schemes to sup­port in­di­vid­ual cit­i­zens, com­pa­nies or public en­ti­ties, ac­cess to which would be con­di­tional on na­tional poli­cies ful­fill­ing min­i­mal re­quire­ments. For ex­am­ple, the EU could cre­ate a train­ing sup­port scheme for un­em­ployed young peo­ple, but make it con­tin­gent on the elim­i­na­tion of na­tional poli­cies that hin­der youth em­ploy­ment. Or it could cre­ate a scheme to sup­port higher ed­u­ca­tion, but re­serve it for uni­ver­si­ties in coun­tries where ed­u­ca­tional in­sti­tu­tions have been granted a min­i­mum de­gree of au­ton­omy.

The jus­ti­fi­ca­tion would be that EU money can help only in the con­text of sup­port­ive na­tional poli­cies in the same field. Con­di­tion­al­ity of this sort would be pos­i­tive, lo­cal, and non-puni­tive; it would serve as a car­rot, not a stick.

Th­ese are mod­est pro­pos­als, be­cause, when it comes to pro-growth re­form in Europe, there is no magic bul­let. There can be no cen­tral­i­sa­tion, and co­or­di­na­tion al­ways risks be­com­ing murky. But the mea­sures rec­om­mended here would serve to build a more de­cen­tralised, in­cen­tive-based pol­icy regime. This would be a good start.

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