World Economy

Eurozone Needs New Economic, Social Policy

Eurozone Needs New  Economic, Social PolicyEurozone Needs New  Economic, Social Policy

Europe is full of breakaway sentiment. French and Spanish voters are fed up with the old elites. Border checks are cropping up across the eastern and northern parts of Schengen. The Italians are fed up with the euro, and British, Polish and Hungarian governments are playing the “Reform the EU, Strengthen Sovereignty” game. The Germans are becoming increasingly anxious about migration and public safety. To many member countries, the EU is either part of the problem or unable to provide solutions.

Their anger would be less intense if the economy were in better shape. And “we will manage” would sound a whole lot more convincing if ordinary people had brighter economic prospects of their own, Politico EU reported.

But Europe’s economic crisis has been long and job growth is precarious. Average households struggle to meet basic social needs like housing, childcare, healthcare or education.

As Jean Pisani-Ferry, head of France Strategie, put it recently, “Failure to restore growth, bring inflation back on track and address major labor market imbalances and inequality in the distribution of income is making a joke of traditional parties’ pretence to economic competence.”

“We’re now feeling the full effects of conservative policy responses to the eurozone crisis,” he said.

Abrupt fiscal consolidation in 2010-2012 brought a double-dip recession. Mild recovery came only when austerity was eased and the European Central Bank launched unconventional measures. Still, fixed investment in the EU has fallen from the 21.4% GDP average in 2001-2010 to 19.5% GDP in 2015.

   Eurozone Interdependent

Lots of effort has rightly been invested in defining and implementing structural reforms. But Europe’s longer-term growth potential has been eroded by years of underinvestment. In turn, as the ECB has shown, low domestic demand is the main reason for small and medium-sized enterprises’ reluctance to invest.

More social democratic policies are needed now to prevent a ruinous back-slide to nationalism. But there is a tragic lack of in-depth political discussion on economic policy at the European level. The 19-nation eurozone is extremely interdependent and national governments have almost no macroeconomic tools left. Yet finance ministers rarely speak about the economic policy of the eurozone as a whole. Keeping the Stability and Growth Pact rules is very important for mutual trust, but what if the current policy mix actually hinders growth?

The commission has rightly deepened the analysis of the eurozone’s overall budgetary position and of its high current account surplus. It tabled its recommendation on the eurozone’s economic policy in November, and the European Parliament has debated it with presidents Juncker and Dijsselbloem. The parliament report on 2016 economic policy priorities should be finalized in February, well before the spring summit.

Yet the council’s preparatory bodies work much faster, without public scrutiny, and they push the discussion back to questions of national fiscal discipline and structural reforms. The Eurogroup and Ecofin approved the eurozone recommendation in January without much debate, let alone real coordination among countries.

   Needs Own Finance Minster

The eurozone needs its own finance minister and must accelerate integration of its banking and fiscal policies in order to tackle the financial, economic and migration crises it faces, Italy’s Finance Minister Pier Carlo Padoan told Politico.

Padoan’s remarks will fuel the debate over the future of the European Union at a time when its political, financial and economic institutions are under severe strain. The minister’s backing of a eurozone finance minister is also likely to open another front in the battle between Germany and Italy over whether to pool more resources to tackle the EU’s many challenges.

“I am very much in favor of moving towards the creation of an institutional figure,” the minister said in an interview in Rome recently. “The real question is not whether we like it or not but what do we ask of it. What would be the mandate for a single eurozone finance minister?” Italy is more in favor of sharing of financial resources than other European countries, notably Germany, which is sensitive to the suspicion among German taxpayers that they are paying for other countries’ mistakes.