An economic plan for Europe

If Northern Europe had superior economic and financial policies compared to Southern Europe then it would not be in dire straits now too. Germany and Holland might look strong but they depend much upon a stable euro for their exports, and they need countries to absorb their earnings when their home markets apparently are unattractive. Northern Europe is not an Atlas that can carry Southern Europe, and compared to 10 years ago it hasn?t done so well either.

There is something seriously wrong with economic and financial policies, not only in Southern Europe but also in Northern Europe. The main problem is that policy makers do not sufficiently listen to economic advice. The EU leaders meet again coming weekend and Ms. Merkel and Mr. Sarkozy promised a Grand Plan to bring stability. They likely will base their solutions upon economic ideas that are in urgent need for revision. A more important result would be a top level decision to enquire deeply into the preparation of policy making itself.

An economic plan for Europe needs four elements: (1) better governance, (2) investments for employment and growth, (3) fiscal policy based upon functional finance, and (4) monetary stability. Of these, governance is the main point, mainly w.r.t. economic advice.

The Grand Plan as it has been announced till now contains more power for Brussels, with a Commissioner to check on deficits and guidelines, and the power to punish. Policy makers in Brussels who failed till now will get more power? My economic advice is different. Such powers already did not work in full democracies with powerful ministers of finance. I would advise to give more power to scientists at the national level, where economic science has proven to have failed much less, and where science is open to society at the level where it matters. Good governance at the national level requires that the Trias Politica model of democracy with Executive, Legislative and Judiciary powers is extended with a fourth constitutional power, an Economic Supreme Court. This Court must be grounded in science but has the power to veto the budget if it contains wrong information. The current separation of powers allows too much room for politicians and bureaucrats to manipulate information. Obviously, nations can already start behaving as if that amendment would already be in place. The actual change of the constitution might take more time but would only formalize that behaviour and commitment for the future.

A main EU policy error is the current wrong mix of fiscal and monetary instruments and options for growth. The European Central Bank has clipped wings because countries were afraid of each other?s debts. The current economic crisis however is a monetary crisis because it originated in financial markets with deregulation, innovations, fraudulent mortgages, undercapitalized banks, Basel rules that regard government debt as risk free, and so on. Hence this should be tackled partly with monetary means like the US Federal Reserve has done. The EU has now created the EFSF, again clipping the ECB and burdening the national fiscal instruments, and limiting the scope for productive investments that create jobs. Again the ECB is enshrined in fear, fear that spills over to markets. Again an instrument is clipped that now would be of prime economic importance.

Professor Yiannis Varoufakis of Athens University has compared Greece with the canary in the mine whose death is a warning that can save many lifes. When the European leaders meet coming weekend the Greek delegation has the option to sit still and be quiet and radiate gratitude, and hope that the dead canary message gets across. But the delegation also has the opportunity to expand in diplomacy and explain about aspects of democracy that the Northern European delegations may not be aware of. If Greece has learned to value and respect the advice by economic scientists ? and we would not only think of Socrates ? then Greece may actually help the EU instead.

*Thomas Colignatus (1954) is a Dutch economist. His Economic Plan for Europe can be found at http://mpra.ub.uni-muenchen.de/33476/ An interview by Protesilaos Stavrou of Cyprus can be found at http://protes-stavrou.blogspot.com/2011/10/plan-for-europe-interview-with-thomas.html

[Kathimerini English Edition]