This text is based on thoughts presented by Paolo Guerrieri at the FEPS conference “Looking for a different Europe. Reflections and perspectives” on 21st March 2017
Growth, equity and solidarity should be the three pillars on which to build the future of the European union.
Over many past decades, the originality and attractiveness of the Europe’s development model was its ability to generate a sort of virtuous circle made of high growth, high equity within countries and high solidarity between member countries. With the arrival of globalisation and, more recently, the Great Crisis, something was broken. The virtuous circle of Europe has turned into its opposite: a vicious circle made by low growth, by the rise of income inequality in many EU countries, by widening polarisation between the south and the north of Europe. So, the European project is now in big trouble.
How to get out of this trap? The recipes of the populist anti-European ‘sopranos’ parties certainly cannot be used. They want to dismantle the entire construction of the EU by presenting nationalism as a tool to regain sovereignty over international phenomena such as immigration, terrorism, protectionism. It is just demagoguery.
In fact, only a European dimension would give a new chance to regain sovereignty upon these current dramatic challenges. In this perspective, the proposal of the socialist progressive forces is to revive and build a different Europe. A more flexible EU, a multi-speed Europe that is able to combine again in a virtuous circle higher growth, higher solidarity and higher equity. Let me very briefly outline below the content of this kind of project regarding the three pillars mentioned above.
To increase the real and potential growth of the euro area and the EU, the ECB’s non-conventional expansionary monetary policy (QE) is not enough. It must be backed up by other measures and policies like structural reforms, which many countries are already implementing. Certainly, more could and should be done to speed up and intensify ongoing reforms. But they can bring positive effects only in the medium and long-term. To enhance their positive effects, policies supporting aggregate demand – like expansionary fiscal policies by using the so called ‘fiscal stance’ of the EU – should be put in place. This is not being done today – or if at all, only minimally – as shown by the high output gaps in many European countries.
In addition to fiscal policies, an important contribution to higher growth of the euro area may come from the revival of investments. They have a peculiar role in being able to increase both countries’ aggregate demand and supply capacity. As shown by many empirical studies, public investments could easily be funded in the present era of zero interest rates and could contribute – in the current wide margin of spare capacity – even to reduce the national debts of countries by generating additional income, production and employment. To be effective at the euro area’s macroeconomic level, a new public investment plan – as shown by many studies – should make provision for a volume of investments well beyond the size of the – though positive – Juncker plan.
Why are these policies not made? Is it only a lack of political will? To solve the European ills, a change in the institutionalised settings is needed. We need some form of deeper Eurozone integration, to mutualise and share risks, from a proper banking union to a common fiscal capacity. In these cases, even very restricted fiscal rules are not enough. They serve only to reduce risks. But there are some areas where member countries are facing common risks –a sort of public goods or collective action problem – and require a common Eurozone or European approach. The creation of a kind of Eurozone fiscal capacity or budget should have three main functions: an anti-cyclical instrument; investment into future; macroeconomic shock absorber. Its construction requires a kind of political compromise: Northern Europe should move towards economic risk-sharing balanced by greater “risk reduction” measures promoting market discipline by Southern countries. No one expects such a consensus to materialise before the German election. But depending on the outcome of this year’s votes in France and Germany, the period afterwards could offer potentially fertile policymaking terrain.
Finally, the revival of growth should not be done in purely quantitative terms, but that growth should also be fair. One shouldn’t repeat the same patterns of exclusion and income inequalities made in the past two decades. Unequal societies do not function well. In other terms, we need to foster inclusive growth in Europe, by combining more efficiency and more equity at the same time.
To have an inclusive growth one should create benefits for all segments of a country’s population, so to generate a fair distribution of the growth opportunities. Various policies can contribute to it. First – active labour policies to strongly address unemployment, especially youth unemployment. Secondly, welfare systems should be reformed for greater effectiveness. Third, social mobility should be strengthened in many countries, particularly in southern Europe. Lastly – but no less important – on the tax front, it should return to far more progressive personal income taxes and the tax on property should be proportional or progressive, not regressive, as it is now
In conclusion, we need policies to bring European economies back to robust growth, but that growth should be associated with more solidarity and fairness to regain the trust of citizens in the European process. One should add that we are still very far away from all that.
It means that we shall double our efforts.