ENG European Union Eurozone Macro Analysis

Macro Focus: Europe needs a New Deal to restart growth

The election of the Socialist François Hollande to the Presidency of the French Republic and the massive rejection of the mainstream pro-austerity political parties by the Greek electorate are clear signs that Europe is reconsidering growth over austerity. Indeed, the “austerity and nothing but austerity” mantra, championed by German chancellor Angela Merkel and her allies, failed to impress grassroots European citizens exhausted by the dire consequences of the global financial crisis, and disillusioned with the lackluster performance achieved by their political leaders. Their message is clear: it is time to recognize that you cannot administer a “one-size-fits-all” remedy that endangers the very life of the patients you are trying to heal.

This may be somewhat cruel for the incumbent leaders, who would argue that they tried to do everything they could to solve the crisis. But the truth is that these leaders failed to provide the “light at the end of the tunnel” for their constituencies and were ultimately sanctioned for that. As the French writer and poet Jean Cocteau once said: “there is no love, there are only proofs of love”. By contrast, the incoming leaders in France, Greece and elsewhere know that they have no time for void rhetoric and that they have to deliver, the sooner the better.

What remains to be seen is how this will be translated into deeds. Grappling with a public deficit that he must under any circumstances bring down below the 3% of GDP level in 2013 (with a view of balancing the budget in 2017), François Hollande already indicated that any growth-enhancing measures would be taken, first and foremost, at the European level. This view has been echoed by EC Commissioner for EMU Affairs Olli Rehn in a speech delivered on May 5th, in which he said that Europe needed to “further boost investment to supplement the other policies of the growth agenda, such as growth-enhancing structural reforms and the completion of the single market”. This means “more European cross-border and community investment in infrastructure – energy, transport, innovation, research and communications” that could be delivered through the European Investment Bank.

This may sound reasonable, but it still lacks the sheer momentum and utter inspiration that is required to uplift the Eurozone animal spirits beyond their current amorphous state, and to provide the much-needed ground for growth acceleration. Indeed, any standalone initiative that would rely too much on the working outs of the European Union’s institutions could be drowned in the murky sands of a complex multi-faceted decision-making process, without exhibiting clear measures of success.

Hence, what is needed is a New Deal that would be adapted in quantity and quality to the magnitude of the problem, i.e. to the structural growth divergences and deficiencies among the Eurozone members. This New Deal should receive sufficient funding from a common pool of resources based on an appropriate combination of tax levies and euro-bonds. In short, there would be no economic revival of Europe unless Germany and some other European states stop playing beggar-thy-neighbour policies. At the end of the day, any member state, large and small, would lose from such “chicken games”, while they would all benefit from the successful implementation of a thorough growth agenda.

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