Growth is a good intention, but requires bold transformation of crisis policies

By Ferdi De Ville

Even more than other years, ‘to grow’ topped Nicolas Sarkozy’s wish list for 2012. With the French presidential election coming up in late spring, the current president can miss a recession like, let’s say, a hotel maid entering a room at the wrong moment. The wish for growth also scored high among other EU heads of state or government’s New Year’s intentions. Only for Angela Merkel, for cultural reasons and because of the better state of the German economy, stability ranked one place higher.

Alas, as with other desires, growth does not come about just by wishing it. It unfortunately lacks the self-fulfilling prophecy character the idea of a recession has. Indeed, as European politicians fear a deeper recession in 2012, they have repeatedly reinforced their austerity programmes, bravely anticipating worse-than-hoped-for prospects in their efforts to bring their budgets towards balance. And look, by acting in that matter, they are manufacturing the dreaded recession.

On their first meeting of the new year on 9 January 2012, the leaders of France and Germany stressed that growth is a priority in their policies to combat the euro crisis, the second pillar of their approach. Of course, Merkel was quick to stress that this does not mean that Member States of the eurozone can slow down, let alone refract from, their fiscal consolidation paths. To the contrary, the Fiscal Pact that will constitutionally oblige governments to balance the budget agreed at the 8-9 December Summit of 2011, is on track to be signed by 1 March, Merkozy declared.

If growth cannot come from stimulus packages that, in the eyes of Merkel and, admittedly, most other top officials and politicians in the EU would only further increase public sector indebtedness, how then? Their answer is: further structural reform and completion of the internal market. This is the mantra for growth the EU has been repeating ever since the Lisbon Strategy in 2000, with very limited success. The question that follows is: if structural reforms and deeper integration have hardly succeeded in stimulating growth in relatively good times before 2008, how on earth should we expect them to do so in a prolonged crisis? How should, for example, liberalisation of some protected professions in Italy add to growth in a time when Italian companies are not recruiting hordes of accountants, to say the least? To believe that structural reforms will generate growth in the short term equals believing that the extra percentages of unemployed citizens (that amount to double figures among for example Spanish youth) since the crisis are unwilling to work, rather than desperate to find a job.

One of the envisaged measures now reportedly is to make cross-border labour mobility easier. In general but especially for young people, by for example simplifying cross-border apprenticeships. As with many other EU crisis measures, this may look good on paper. It brings the eurozone closer to an optimal currency area (by enhancing labour mobility) and along the way encourages intra-European exchange by youngsters (albeit in a one-way fashion), a kind of Erasmus for recent graduates. However, the question is if it will work out that positively, and will be felt that way by, for example, Spanish construction workers, their families and communities. And under what conditions such temporary jobs abroad will fall, maybe reopening the country-of-origin discussion from the infamous Services Directive? It can hardly be ruled out that such a measure will be perceived as encouraging uprooting people for economic reasons, and serve to delegitimise and alienate the people further from the European integration project.

The European Commission is risking the same loss of legitimacy by forcefully rejecting the Belgian (as other) budget plan and demanding quick amendments if the Di Rupo government wants to avoid a fine. It is clear that the Commission is just (in a rather eagerly fashion) executing what it has been tasked with by eurozone governments last year, but the perception is that ‘Brussels’ is one-sidedly preaching austerity. This may bring down one of the last standing bulwarks of the once convenient ‘permissive consensus’.

Is there any alternative? Yes, there is. The Commission should (as Barroso has done on a [too] few occasions) become much more visionary in promoting a fair and balanced exit from the multiple crises. That is the economic, euro- and budgetary crises that are much interconnected anyway. This involves a more balanced adjustment between member states, whereby creditor states are accepting their part of the effort needed to make adjustment by debtor states more easy. It means stimulating internal demand and accepting higher inflation than in the periphery. As the German government is as we write borrowing at negative (!) interest rates, stimulus measures come literally without a cost. And next to such a rebalancing exercise between eurozone member states, a fairer distribution of the burden within member states is needed. Long-standing measures towards a social Europe such as a financial transaction tax, harmonisation of the corporate tax and a European minimum wage have become now more thinkable than ever, and could serve to rally the Occupiers and Indignados around Europe, rather than drifting them away from the European integration project.

Ferdi De Ville is assistant professor at the Centre for EU Studies, Department of Political Science, Ghent University where he teaches and writes on economic and monetary union and the euro crisis.