Advertisement
Advertisement
The euro-zone’s stagnant growth has been a conundrum for incumbent European Central Bank President Mario Draghi, and looks likely to remain a problem for his successor Christine Lagarde. Photo: Reuters
Opinion
David Brown
David Brown

Europe must fix its economy with stimulus to help the people, and member countries, that need it most

  • Neither austerity nor supply-side economics that put the haves above the have-nots will pull Europe out of its doldrums
  • To rescue the economy, Brussels must help its poorer members and spend on key infrastructure and social services
Europe’s economy has hit the skids and is in some trouble. Growth is slowing dramatically thanks to global trade tensions , economic confidence is under threat, inflation is too low and Europe’s policymakers are perplexed about what to do next.

Europe’s monetary locomotive has run out of steam and the European Central Bank is scratching around for ideas on how to reboot recovery and reflate domestic demand. It has three options – cut interest rates again, reopen the doors to more quantitative easing or devalue the euro to boost exports. The ECB has done it before and it can do it again. The problem is that it still has the hallmarks of a temporary fix. 

There is another way, of course, which is for governments to reverse fiscal austerity, cut taxes and start spending again. It may be anathema to Europe’s conservative central bankers, but a dream come true for Europe’s populist politicians.

After all, it would be taking a leaf out of US President Donald Trump’s primer for jump-starting economic growth; the easy way and let the future sort out the nasty budget maths. The magic of supply-side economics, the marvels of increased tax incentives and the mystical wonders of the Laffer curve (cut taxes to boost tax revenues!) should finish the job. It’s another recipe for disaster without a coherent plan.

In the absence of any near-term resolution of the US-China trade war, Europe needs to come up with a comprehensive strategy bringing together the best of monetary and fiscal easing, which can not only boost domestic demand and job creation for wealthy leading nations like Germany and France, but can also provide a sustainable recovery for those parts of the euro-zone economy like Italy, Spain and Greece, which are in urgent need of permanent repair.

This means equitable shifts of productive power to the parts of Europe crying out for tax transfers, investment subsidies and radical action plans that can help eliminate disparities of growth, employment and wealth opportunities across the region.

It is pointless to have a unified customs union, a single currency and common monetary policy that benefits only wealthier nations, without an effective European fiscal policy to tackle economic hardships blighting poorer member states. It is anathema that Germany enjoys near-record low unemployment while 40 per cent of young workers under 25 in Greece have no job.

How can bond yields fall as equity markets rise? Here’s how

ECB President Mario Draghi seems amenable to cutting rates again and relaunching another tranche of bond buying under the euro-zone’s quantitative easing programme to speed up recovery, but options are limited. The Federal Reserve has given the green light for global interest rates to come down again, good news for the US, China, Turkey and countries with healthy interest rate buffers but less use for the euro zone and Japan with negative interest rates and less scope to play with.

The ECB can cut rates again, flood the market with liquidity and weaken the euro, but it needs to ensure the extra stimulus is being directed towards consumers, businesses and exporters who will make a radical difference to recovery, rather than benefiting financial intermediaries and speculators who have used the liquidity windfall to stoke up an unprecedented boom in global stocks and bonds.

Italian Deputy Prime Minister and Interior Minister Matteo Salvini, of the right-wing League Party, is one of the European populists to capitalise on a eurosceptic platform during a time of economic austerity for his country. Photo: EPA-EFE

This is where inflation has finally surfaced – not in higher prices for goods and services, but in world financial asset prices going through the roof. Europe needs lower rates but it also needs a strong dose of Keynesian fiscal expansion too, with deficit spending on key infrastructure, transport, telecommunications, health, welfare and education to generate stronger multiplier effects and lift aggregate demand.

Europe must dump neoliberal fiscal austerity, preached by Germany and suffered by the poorer euro-zone nations. It seems unfair at a time of need that Germany is running a budget surplus close to 1 per cent of GDP, while the rest of the euro zone is being forced to tighten its belt in the name of fiscal stabilisation.

Europe’s populist politicians might have a point. Europe must break its restrictive fiscal shackles before it is truly free to recover.

David Brown is the chief executive of New View Economics

This article appeared in the South China Morning Post print edition as: Ending austerity is the key to building Europe’s recovery
Post