BRUSSELS – Despite the result of the elections in Italy, the rise of anti-European political forces across the continent, surging unemployment (11.9 percent in January according to Eurostat), and the continuing recession, the eurozone’s fiscal policy is unlikely to change in the following months, according to reliable Brussels sources. “Deficits and rising debt are a hurdle to growth, they do not facilitate growth,” an EU Council official told reporters in Brussels, ahead of this Monday’s Eurogroup meeting.
The Commission has also repeatedly pointed out that lowering the pace of fiscal consolidation for countries suffering from recession will be examined on a case-by-case basis, and that the current rules allow sufficient room for maneuver.
This insistence on contractionary and deflationary measures has triggered harsh criticism, not only from the far-left and the far-right in Europe, but also mainstream leading economists. Strangely enough, the focus of this criticism is not the German government, but the European Commission’s vice president, responsible for economic and monetary affairs, Olli Rehn.
Nobel Prize laureate Paul Krugman referred to a “Rehn of Terror” in Europe and mocked the commissioner: “[For Rehn] the big problem with austerity isn’t that it doesn’t work, it’s the fact that economists keep publishing studies showing that it doesn’t work,” Krugman wrote in his New York Times blog. Also, Spanish newspaper El Pais published a feature last week, in which it asked 10 leading economists about Rehn, and found that eight in the sample disagree with his policies.
Guntram Wolff, deputy director of Brussels-based think tank Bruegel, tells Kathimerini that Rehn’s letter to EU finance ministers in which he claimed that the discussion on fiscal multipliers, and recession, is damaging confidence, was a grave mistake. “It seemed like he wanted to suppress academic debate, and that was wrong.” But other than that, Wolff adds, attacks against the Commission are unjustified:
“Given its limitations, the Commission has done quite a good job so far. It is not the Commission that decides which sovereign debts will be restructured and how much money will be channeled into each country’s adjustment program.” Nonetheless, Wolff thinks that the pace of fiscal consolidation in Italy was a little higher than necessary.
Daniel Gros, director of the Center for European Policy Studies (CEPS) in Brussels, is even more dismissive toward the “Rehn of Terror” argument. He claims that current policies are the only choice: “Greece and other countries had no choice other than to reduce deficits because the debt levels were on an unsustainable trajectory. The UK the US, perhaps even Germany, might have the luxury of being able to avoid austerity if they so choose, but not most of the euro-area periphery.”
Janis Emmanouilidis, senior analyst at the European Policy Centre (EPC) in Brussels, tells Kathimerini that both sides of the argument have their merits: “Yes, the voices of criticism are increasing. But even if it sounds strange, I think that both sides are right or, rather, have strong arguments. One cannot go either ways – ‘austerity’ or growth-enhancing measures, which at the end of the day cost money. The ‘right’ recipe – as is so often the case – lies somewhere in between, and one needs to find the right balance at a given time – which, by the way, also means that one needs to learn from one’s mistakes. Under the present circumstances, there is a need to provide for more time and a need to somehow [socially] cushion the measures taken. The Italian vote has inter alia shown the need to do so. But one cannot abandon the policy of cutting down public deficits/debts, because that would [also] undermine regained confidence.”
For Megan Greene, chief Economist at Maverick Intelligence and senior fellow at the Atlantic Council, media coverage and commentary doesn’t do justice to Rehn’s views: “I don’t think his position is quite as cut-and-dried as the likes of Krugman are insisting. I spoke with Olli Rehn at a conference on Thursday, and we both highlighted in our speeches the need for a more symmetric adjustment in the eurozone so that the burden doesn’t only fall on the weaker countries that are being pushed even further into recession/depression. Surely inherent in that argument is the belief on Olli’s part that the austerity measures being implemented are undermining growth in Europe’s periphery.”
The economic situation in the eurozone, in light of the Italian elections, the continuing negotiations on a Cypriot bailout and the ongoing troika review of the Greek Adjustment Program, will be discussed in a Eurogroup meeting on Monday in Brussels. No concrete decisions are expected, while a shift in the general direction of the current fiscal policy is almost out of the question. Although it is clear that the rise of populism in Italy has alarmed Brussels, a “wait-and-see approach is deemed appropriate, at least for the moment.
In the meantime, in his speech in London on Thursday, Rehn, said that “while I am not sure if Keynes himself would be a Keynesian today, at least an unreconstructed one, I am in fact a Keynesian myself.” Surely Krugman will have something to say about that…