Calls for a more growth-led approach dominated last week’s informal EU summit, but European leaders made little progress in the ongoing discussions over the best way to overcome the economic crisis – and stalled over disagreements about eurobonds and the role of the European Central Bank. The debate over the future of the eurozone continues to veer between two extremes: stimulus v austerity. “You cannot spend your way out of a debt-fuelled recession”, shout those on one side of the divide. Others, mostly from the left, respond that economic recovery is not possible without a major influx of public spending. But what if there’s a more meaningful discussion to be had about finding an effective middle ground, combining sustainable fiscal policy with long-term economic recovery?
As British MEP Sharon Bowles recently pointed out, it has become painfully obvious that simply downsizing bloated public sectors does not work if there are no jobs for people to turn to. Across Europe, 40 million people are now either unemployed or underemployed, leading to a huge drop in demand and causing a vicious, downward spiral of recession.
But if austerity has failed, the state is no silver bullet for economic growth either. Providing employment opportunities by ploughing money back into the public sector would provide only temporary respite, and would push countries even further into unsustainable debt. Instead, governments face the long and onerous task of channelling public investment into the creation of sustainable private-sector jobs, through increasing loans to small and medium-sized businesses, funding crucial infrastructure, and improving education, skills and innovation.
The European Investment Bank (EIB) has recently been touted as Europe’s potential saviour and there is now a growing agreement toboost its capital by 10bn euros, allowing it to give out more low-interest loans to sectors where there is currently a funding gap. Last year the bank helped fund over 120,000 small and medium-sized companies, which currently provide 80% of new employment opportunities across the EU. However, the EIB takes a very long-term perspective and is careful to preserve its AAA credit rating, meaning it often takes up to a year to approve a project as viable, so any additional capitalisation is hardly going to provide the instant solution many are hoping for.
Similarly, the new EU Project Bonds, which are going through their trial period this summer will be invested in long-term infrastructure projects and so will take a while before they bear fruit. Moreover, the empty motorways and unused airports of Portugal and Spain are a poignant reminder of how large-scale infrastructure projects funded by Brussels are not always the most effective way to restore Europe’s ailing economies. While modernising energy and digital networks may help to boost competitiveness, there is only a limited number of profitable projects to undertake, and tellingly £80bn of the EU’s development funds for this year still remain unused.
Investing heavily in education and training for the unemployed and giving incentives to businesses to hire and train new workers would be a far more worthwhile investment. Huge potential could be unleashed by reforming the bloated common agricultural policy, which still absorbsnearly half the EU’s budget, and channelling its funds towards creating more jobs. With youth unemployment reaching 50% in Greece and Spain, there is a desperate need to provide new opportunities and enhance productivity, especially after the collapse of the construction sector which had previously provided so many low-skilled jobs. However, the opposite is occurring, with Spain recently seeing its education budgetslashed by 20%.
Germany after reunification provides a striking parallel to today’s eurozone. An overvalued deutschmark in the east artificially inflated wages and reduced competitiveness, which combined with the privatisation of state-owned firms caused the region to lose 4 million jobs in just five years. However, the response was a huge investment to retrain workers and modernise East Germany’s economy, amounting to a total transfer of €1.7trn or around 4% annually of West Germany’s GDP. In addition, almost 2 million East Germans, one-eighth of the region’s population, moved west to find work. Even then chronic unemployment continued for many years until finally reaching a peak in 2005, while living standards only began to converge relatively recently. Significantly, fiscal transfers of the magnitude seen in Germany remain politically unfeasible in the EU while cultural and language barriers restrict labour mobility, meaning economic recovery in the periphery is likely to take even longer even if public investment is significantly boosted. So while growth-boosting measures are crucial in order to foster economic development in the long term, they will not provide an instant antidote to the devastating effects of austerity.
A more balanced approach is urgently needed, reducing state-subsidised jobs only when investments in the private sector begin to provide alternative opportunities. The EU drivers of austerity could learn a lot from the two-track approach taken by economic success stories such as China or Mauritius, where partial liberalisation in competitive sectors has been combined with continuing state involvement in more vulnerable areas of the economy, helping to develop latent comparative advantages. In both countries dynamic growth in newly liberalised sectors subsidised a gradual restructuring of the old, inefficient state sector, enabling a stable transition and a “reform without losers”, while huge investments have been made to foster innovation and improve higher education.
This contrasts with the “shock therapy” liberalisation that crippled the economies of the former Soviet countries during the 1990s. Throughout the EU, austerity and the rolling back of the state are having similarly disastrous consequences. However, with the tide turning against austerity, it’s not too late for a radical change in policy. Fiscal prudence and government stimulus can go hand in hand, but only when each is implemented gradually.
Published in the Guardian, 1st June 2012