How to pull the eurozone out of the mire by John Springford and Christian Odendahl
The eurozone economy is in serious trouble. Unemployment is stuck above 11 per cent, and growth and inflation have undershot expectations for the umpteenth time. European leaders were supposed to hold a jobs and growth summit on October 7th. They have had to shelve it: the only thing on the agenda was the ‘Youth Guarantee’, a small programme to get young people into work. The summit’s postponement reflects the growing divide over how to turn around the European economy, whose dire state is threatening the EU’s political future. At this juncture, a radical, five-pronged strategy is required to pull the eurozone out of its slump. Higher public investment, temporary income tax cuts, tax reform, structural reforms aimed at boosting competition in product markets and more aggressive monetary policy all have to come together to bring about recovery. When financial panic hit the eurozone’s periphery, some emergency deficit-cutting was understandable. But the eurozone-wide embrace of austerity – even in those countries that faced no debt crisis – was a bad mistake. And the form that austerity took was disastrous. Eurozone public investment was slashed by a fifth in real terms between 2009 and 2013. Investment is far easier to cut than spending on welfare or public services, since the pain is mostly felt by future generations. But economic theory and evidence shows that public investment in depressions boosts growth, increases tax revenues more than it raises deficits, leads to a lower debt-to-GDP ratio in the medium term and raises productivity in the long term. There is hardly anything worse than cutting public
investment in a severe economic crisis. Now that the European Central Bank (ECB) has calmed the panic in the periphery and government borrowing costs across the eurozone are at record lows, fiscal retrenchment across the eurozone needs to end. Budget consolidation should be a medium-term goal that is postponed during a severe recession. A public investment stimulus of 1 per cent of GDP would return the eurozone’s investment rates to those seen before 2009. Ideally, the eurozone would pool resources to create a common fund for investment to help peripheral countries with less fiscal room for manoeuvre. Should leaders balk at such fiscal transfers – and recent history suggests that they would – most governments,