Austerity and growth: a fine balancing act
BELGA PHOTO BENOIT DOPPAGNE
As EU leaders met on 23 May to discuss which course of action should be taken to ensure economic growth, Germany and France were already at loggerheads over the issuance of ‘Eurobonds’, which would be underwritten by all 17 eurozone states.
This is one of several options that the EU and eurozone countries can ponder over, as calls to implement measures to boost growth increased following the G8 summit at Camp David, where budget doves can claim a small victory in that there was a change of emphasis from purely austerity measures.
The declaration in Washington makes it clear that the re- energising economies should now to be priority of governments, while recognising different approaches. “Against this background, we commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us.”
The leaders were keen to stress that its does not need to be a choice of austerity or growth, and that both can be part of the same package as this line in the communiqué suggests. “We welcome the ongoing discussion in Europe on how to generate growth, while maintaining a firm commitment to implement fiscal consolidation to be assessed on a structural basis.”
Growth figures do not make good reading for the first quarter of 2012, as Eurostat figures revealed the eurozone in a state of inertia at 0%, with the EU crawling slowly behind on 0.1%
Alongside Eurobonds, some of the alternatives that the EU has include increased paid in capital to the European Investment Bank (EIB), and French President Francoise Hollande has even suggested that the remedy to cure the recent downgrading of several Spanish banks would be to recapitalise them with the bailout fund.
EU Project Bonds may also be an option as they were agreed upon in principle at the Copenhagen summit on the 1-2 March, where it is hoped that the bonds will increase demand for the capital debt markets. It is an initiative that will be financed by the EIB, in the attempt to attract long investors such as insurance and pension funds.
Imaginative ways of creating growth will be necessary as dipping into the public purse to pay for stimulus measures could be deemed to be unrealistic, with Eurostat declaring that the collective debt of all the EU member states stood 82.5% of GDP by the end of last year.
For example when Spain informed Brussels that they could not keep to the 3% of GDP agreed in the fiscal pact, the markets were unforgiving in their bond yield rates.
Janis Emmanouilidis, a senior policy analyst with the European Policy Centre, opined: “First of all there will not be a result from the 23 May meeting, and its more of a precursor to the June summit. The question is to what level the actual effect on growth will be from the choices made, it’s not about an emphasis on one decision on a single way of thinking , its about producing a package.”
“The devil is really in the detail of the measures for growth to be used, the member states have to reduce public expenditure and deficits as the overall levels of debts are unsustainable. There will be no miracle happenings for economies such as Greece and Portugal, that will be a long process that will take years.”
Looking to the future it’s the PIIGS economies that will need to be pulled up if the EU is to recover sustain ably.
Emmanouilidis added: “If we have a growth pact that targets the whole of the EU the effects will not be great. Part of the structural problem for EU member states is that there has not been a convergence of European economies, the divergences has contributed to the crises, and the vulnerable countries are the ones that need help.”
This may come from more organic measures, such as robust free trade agreements mentioned in the Camp David communiqué, in support of the WTO’s anti-protectionist stance.
A free trade agreement between the EU and the US has been suggested, where a High Level Working Group on Jobs and Growth that was set up at the November 2011 EU-US summit continues to negotiate terms, with trade regulations already reduced in agriculture.
Fitch Ratings, a unwavering supporter of hawkish deficit reduction, in their “Basecase Scenarios” paper, outlined the direction they believe the eurozone needs to go, with policymakers needing to implement additional measures that will facilitate a smoother path to growth.
In the financial sector, a greater pooling of the responsibility for financial supervision is a necessity, with an increased supervisory role for the European Banking Authority, with greater fiscal sharing to enhance bail-out funds.
The ECB should continue with its expansion of its balance sheet, with more credit lending available, as long as the private sector and investors are reserved in providing liquidity to solvent financial institutions.
Labour market and product flexibility must also be increased to cope with asymmetric shocks and boost potential growth.
Political reform Fitch also believes is required to strengthen governance on a European wide scale, with more reverse qualified majority voting as seen over the fiscal pact.
ABOUT THE AUTHOR
Peter Taberner has previously written for Financial News, Investment and Pensions Europe, Utility Week, EGOV Monitor, European Pensions, Suite101.com, PPP Bulletin, Global Pensions Weekly, Tobacco Journal International, IPS and Seeurope.net.
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