In a world economy where all BRICS are weak or weakening, where Japan is combating its crisis, and only the U.S. has significant growth rates, the weakness of the Eurozone is worrying. What should be done?

The new EU Commission finds itself in the middle of a shooting-out between two increasingly outspoken camps: Should growth be stimulated by quantitative easing, and by state-induced spending programs? Or should austerity policy be continued, accompanied by structural reform in the southern EU countries? This is indeed a question that indicates a divide – mostly between Germany, Finland and the Baltic countries in the second groups, and most of the others in the first. The problems of France and Italy to push their budget deficits below the 3 per cent limit of annual debt against GDP. The southern governments not only encourage themselves, but also Germany to increase spending, forget about balancing the budget (to be reached in Germany in 2015 for the first time in decades), and instead start spending and investing into infrastructure and other goodies. A related fight is going on in the ECB, where a majority supports the line of Mario Draghi to do “whatever it costs” to save the Euro, against some other central bank governors criticizing the lax attitude of the ECB, buying very questionable state bonds ignoring their market value.

  1. Shen Dingli 2 weeks ago

    First, it is not right to state that all BRICS are weak or weakening.
    China, for instance, presently enjoys a growth rate over 7%, far more than the US does. If the US’s growth is “significant”, China is more than significant. Also, as long as China is growing, it is not weakening, but getting even stronger.

    Second, how should it be done for the Eurozone? Look at China. Given the US financial crisis in 2008, China launched its stimulus plan to invest RMB 4 trillion yuans, in parallel to the US stimulus and QE, much of that for its infrastructure. Now, with the maturing of its fast train, part of its infrastructure spending, China is ready to export its technology, so as to support its Silk Road strategy.

    Financial austerity certainly cuts spending and hence the risk of fiscal deficit. However, this is a cautious but passive approach. A proper balance shall be a mix of measured spending with targeted austerity.
    Fiscal sequestration is of course necessary for some members of the Eurozone to allow more resources for development. In the meantime, public spending on infrastructure could help – increasing jobs and investing in the future.

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  2. Alexei Voskressenski 2 weeks ago

    The question about measures is very important but technical. What Europe lacks is a consensus on how to use a political will to ensure the growth of the EU zone by any technical means. Those states or regions which resolve this question in Eurasia generally (EU, Russia or China) will also format Europe’s future not only in economics but also in politics, at least partially. So the EU cannot stimulate the growth by quantitative easening if Italy and France do not succeed in pushing the budget deficit below 3%; the same logic is valid for structural reforms in the southern EU countries. No structural reforms – no balancing the budget, so what is the purpose for the quantitative easening?

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  3. Hildegard Müller 2 weeks ago

    The example of Germany shows that a sound budget is good for a country’s competitiveness. An economy based on many pillars, including the industry but also other sectors, is less vulnerable to a crisis. To develop such a mix should be a guideline for future activities of the EU. It is important to hold on to the stability criteria and to avoid deviations that we have had to observe in the past. Solidarity among the member countries is a valuable asset. Nevertheless, the nation-states have to carry out reforms. Also here, Germany has shown that this is the way to a successful future. Everybody is called upon to return to the path of reforms.

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  4. Barbara Dietz 2 days ago

    Currently, a number of economists and EU politicians vote strongly for governmental spending instead of putting more effort into the reduction of budget deficits. To a certain extend it seems reasonable to respond to stagnation and crisis by governmental investments into infrastructure, education and health care. However, in the case of countries where structural reforms are in the beginning, corruption prevails and tax evasions are prevalent, governmental spending might miss their major objectives. Those demanding a higher flexibility in the European austerity agenda have to face this dilemma. This leads to a central aspect of the austerity policy debate which is related to the question of how to efficiently reduce governmental deficits. Options are either decreasing governmental spending or tax increases. In the report “Europe’s Fiscal Crisis Revealed: An In-Depth Analysis of Spending, Austerity, and Growth” it was found that spending-based fiscal adjustments were not only more likely to reduce the debt-to-GDP ratio than tax-based adjustments, but were also less likely to lead to a recession. Spending-based adjustments, the report argues, can induce economic growth, if accompanied by the right type of policies, for example by changes in public employees’ pay and public pension reforms.

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5 Comments

  1. Wisam 1 week ago

    I tend to agree with Ms. Muller’ comment that the German model has proven successful. Stability and balanced budgets are key to attracting foreign direct investment and promoting Europe at large as a good place to do business, which is the key to economic prosperity. The Southern European states need to change their mentality and focus on economic development this way, instead of focusing on populist policies (ie: cheap wins) that would have the state go bankrupt by having a population rely exclusively on government handouts. Difficult choices ahead for the European Community.

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  2. AW 1 week ago

    I strongly believe, that only severe structural reforms in southern member countries and France can save Europe. Those social states are extremely outdated and unable to compete within the framework of a globalized economy. A simple, but inconvenient truth, that Europeans have to face is that they are now competing with Indians and Chinese willing and able to work 60 hours a week and the US employees, who have hardly any sick leave and a couple of vacation days a year.
    Obviously, the Scandinavian model is not a solution – it is easier to make people work harder and cut social spending than fight corruption and make them actually pay taxes, as examples of Italy and Greece show.

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  3. Daniel Cardoso 3 days ago

    I’m stunned by AW’s pessimism. I understand the dilemmas the we all face today are massive, but, when coping with them, we should always bear in mind the type of world we want to build and live in. After so many years of social struggles in which men and women around the world manage to improve their working and living conditions, we, as society, can’t allow all the rights that were attained to vanish and come back to the 19th century. Talking about competitiveness, Europe’s social policies are (and will be) one of its strongest qualities in comparison to other parts of the world. And these policies will be the ones securing and attracting qualified professionals to stay in or come to Europe. Instead of cutting social rights and salaries, I suggest we focus on innovation, science and fair distribution of wealth.
    About taxes, evasion is a big problem, but more worrisome is the role that offshores play in this scenario. The recent news about Luxemburg and how it attracted companies by offering ridiculously low corporate taxes harms competition in Europe and cuts the possibility of tax revenues to stay in countries in need like Southern European countries. This is, in my opinion, much worse than tax evasion, because it results from an overall policy that goes against the goal of solidarity in Europe.
    Lastly, I’m all in favor of sound budgets, but they have to take into account two important things: social stability and possibilities of sustainable recovery. What austerity programs showed so far is that none of these conditions were taken into account, making these programs terribly flawed. Still, in this regard, the German model has been increasingly criticized for being too mercantilist. German growth rates slowed down and the pressure to increase wages and public investment is growing. Measures like these would help not only Germany but also other European countries because it would allow them to export more.

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    1. AW 2 days ago

      At the SVR we have just completed a study on outmigration from Germany, which proves, that there are high professionals leaving Germany for the USA, Canada and Switzerland. So the European path is obviously attractive not for everybody.
      I agree with your argument about tax heavens. Not because I am in favour of the insane high taxes in Europe, but because the rules of game should be the same for everybody.
      Talking about the urge to save money in Europe, I was talking more about meritocracy, a principle, which has been completely forgotten. All those social spending for people not able and not willing to work do produce cheaply bought voters for populist parties, that’s all. How on Earth can somebody, who pays more taxes than he or she gets in social benefits, vote SPD or other sorts of communists?

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      1. Daniel Cardoso 2 days ago

        Instead of worry about the “insane high taxes in Europe”, it would be awesome if AW showed some concern regarding the insane levels of inequality not only in Europe, but all over the world. I’m sure AW is aware of Oxfam’s report which shows that “almost half of the world’s wealth is now owned by just one percent of the population, and seven out of ten people live in countries where economic inequality has increased in the last 30 years”. Some European countries do better in this respect than other parts of the world, because they have fair tax systems. If you don’t distribute wealth with taxes and income with higher wages, you end up with cases like the US and the UK, which are, among OECD countries, the most unequal ones. Inequality is not only bad in itself, it also has a negative impact on health, security, social mobility, education, political participation and moral attitudes. http://www.equalitytrust.org.uk/about-inequality/effects

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