Debating Europe recently had a suggestion sent in from Paul in the UK, who argued that the strategy of austerity in Europe is not working. Paul argues that what is really needed is a new “Marshall plan” for the EU – a Keynesian approach to growth based on increased public spending and investment. This is also something that Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, recently suggested might help Greece out of its current malaise.
Here’s Paul’s suggestion:
What the leading Europe nations need to do is to float a fund based on euro-bonds based on the whole eurozone, rather than just the weaker countries and so having much lower rates. The deal should include more financial and economic restructuring between the eurozone members. This would give countries, such as Greece, time to re-organise say their tax collecting structure and some of the funding should be to provide support from other countries. The funds should also support weak non-euro economies, such as Latvia, helping them towards euro membership.
During our interview with Daniel Dăianu, former Finance Minister of Romania (1997-1998) and liberal Member of the European Parliament (2007-2009), we asked him for his reaction on this idea.
What Paul has suggested – a Marshall plan – can be seen from two perspectives. One is making it part and parcel of a crisis management strategy, in the vein of what Pier Carlo Padoan and others have suggested. If you impose austerity in Italy, Greece, Ireland and Portugal that can easily backfire, and the whole programme will go down the tube and it will be even worse for the single currency area. And there is a lot of rational behind such a plan. In fact, already I think the European Commission and the Council are moving in that direction, saying these countries should be assisted with additional funds, etc.
But there is another perspective that has to be brought into the picture – and it’s not linked with the current crisis management period. We don’t know how long it will take, but let’s assume that we do get over this current crisis period. The union has to create a more effective range of instruments for fostering convergence, bearing in mind there is, for various reasons, a cleavage between the Northern and Southern fringe of the union. If this cleavage is not dealt with adequately, in due course we’ll see tensions emerging again.
But isn’t there an enormous moral hazard in this approach? Wouldn’t a Marshall plan, in effect, be rewarding states for bad behaviour?
I agree with those who emphasise the moral hazard dilemma. And I agree that there is a need for fiscal rules. But tighter fiscal rules are not the magic formula. There is a need for fiscal rules complemented by EU level policies that should foster convergence. Greater investment financed by eurobonds can be an organic component of a range of tools and instruments which should make up an overall economic policy of the eurozone. But it needs to be a genuine policy of the eurozone – not simply the result of national policies being added, one to another…
So, just imposing fiscal rules is not enough. Let me give an example that demonstrates why: the sovereign debt crisis, to a large extent, has been exacerbated by public budgets taking over the debts of the private sector. Of course, you have the case of Greece, which is glaring – we also have the cases of Italy and Portugal each with large public debts. But if you think about Ireland and Spain, it’s the non-government sector which is the origin of the current public debt. So the discussion should be broader. And if we accept it as a working assumption, clearly just focusing on fiscal rules is totally inadequate. One has to think about how to enhance gains of competitiveness all over the single currency, all over Europe, all over the union.
Moreover, since Germany, the Netherlands and Finland are export oriented, running large current account surpluses, one has to think about EU level policy if we want to maintain the cohesion of the union. You hear people in Berlin who keep saying, ‘why should Germany think about the rest of the pack? The rest of the pack should think about raising their competitiveness!’ But this is not a union. If we think along national lines, we are going to perpetuate the current flaws of the single currency.
What do YOU think about the idea of a “new Marshall plan” for Europe? Is austerity working? Are there limits to how much debt a country can accumulate? Or do we need to kick-start the EU economies with an investment drive? Perhaps you agree with Daniel Dăianu that a “Marshall plan” should not be just a “one-off” policy, but should rather be part of a package of tools available as part of full fiscal union. Or maybe you think we all need to tighten our belts and pay for the good times. Let us know in the form below, and we’ll take your comments to policy makers and experts to get their reactions.