Europe in search of a growth model to create jobs and improve competitiveness
Germany and the Netherlands have the most diametrically opposed views regarding fiscal management in the eurozone and, therefore, the revision of the famous (but now dead, to all intents and purposes) Stability Pact. They are now holding consultations: If they reach an agreement, it will be accepted easily by the other partners. A few days ago, four countries, Germany, Greece, Poland and Italy, sent a letter to the Irish presidency asking that the European Council of political leaders retain full power in deciding penalties or proposals for the adoption of measures against members which violate the fiscal provisions of the pact. Additionally, a week ago, French Finance Minister Nicolas Sarkozy asked his eurozone counterparts to set out rules on the economic governance of a united Europe. All this is part of a growing debate about how best to promote Europe’s major goals of creating jobs and drastically improving its competitiveness in the globalized economy by 2010. To be sure, Greece’s co-signing of the letter does not reflect any concern about these goals. After years of self-delusion about the real progress and potential of the Greek economy, the country is returning to a defensive position – with fiscal deficits larger than had been budgeted for in successive years, a public debt larger than we can hope to repay in a short period of time, the danger of a steep fall in the rate of investment and growth, and the serious prospect of a swelling of unemployment. These are the problems that make two goals more imperative then ever: tidying up public finances and freeing up entrepreneurship. Greece’s real reason for co-signing the letter was to avoid being pilloried, not just in having its finances placed under supervision by the European Commission but, chiefly, in terms of the high interest rates it will have to pay in financial markets for the loans it will need in order to meet the deficits should the bad state of public finances be fully revealed. If the deficit looks like it is being assessed according to political criteria in the medium term, Economy Minister Giorgos Alogoskoufis can hope for a more lenient stance on the part of the Commission and the Council and, more importantly, the capital markets. In the wider European context, current efforts to water down the enforcement of the originally agreed upon fiscal management rules in the European Constitution enter their final stretch at the two-day summit that starts in Brussels tomorrow. These efforts prove that Europe is not in any position to decide what growth model it desires. The maintenance of politicians’ right to negotiate depending on the circumstances that prevail on their national scenes may be sound logically within the context sovereignty in crucial issues, but will jolt the foundations of the common currency. The solution does not lie, as Sarkozy seems to believe, in adoption of a policy based on the model of the US Federal Reserve and Alan Greenspan, where low inflation is a simultaneous target along with full employment. Indeed, such a «wish» may be included in the Fed’s charter, but not in the rather mechanistic way that the European «deficit» ministers seem to perceive it. It is a well-known rule that, on a long-term basis, there is no dilemma between inflation and growth. The European central bankers in Frankfurt should be showing greater «indifference» to the fiscal excesses of governments, as the Fed has skillfully done. Nor should they fear that repeated exhortations to the governments for speedier structural changes in the micro-economy may end up sounding tiresome and dogmatic. In the last analysis, let them not forget that politics still takes precedence in our democracies.
