December 10, 2012 7:33 pm
Europe must stay the austerity course
Confidence is returning as structural reforms help rebalance the economy, says Olli Rehn
The eurozone is living through lean times, but there is light at the end of the tunnel. On the one hand the short-term economic outlook remains weak. On the other hand, there are signs that confidence is returning.
Ireland has returned to the debt markets. In September more private capital moved into Spain than out for the first time in 15 months.
And Italy recently sold 10-year debt at the lowest yield since 2010. That was clear recognition of the resolve shown by Mario Monti’s government to boost competitiveness and pursue sound public finances. With Italian bond yields on the rise again after Mr Monti’s decision to stand down, it is also a reminder of the need to maintain resolve in the future.
The progress made reflects important decisions at both the national and European levels. These decisions have begun to rebuild confidence, calming markets and countering fears of a collapse of the euro. Far-reaching structural reforms are helping to rebalance the eurozone economy.
Progress is tangible: current account imbalances among eurozone members have fallen markedly, as competitiveness lost by some members in the decade before the crisis is regained.
It is true that the correction of current account imbalances has so far come predominantly in deficit countries, but this is no surprise given the scale of the challenges they face. As John Maynard Keynes noted before the Bretton Woods talks, such adjustment is “compulsory for the debtor and voluntary for the creditor”.
This does not invalidate the case for a more symmetrical external rebalancing within the eurozone, involving creditor as well as debtor countries. The European Commission has said surplus countries should implement reforms to strengthen domestic demand. Germany could do this by opening up its services market and by encouraging wages to rise in line with productivity, two of the recommendations made to Berlin by the EU Council last July.
But at the same time, we should be aware that the eurozone is neither a small open economy nor a large closed one, but a large open economy that trades a lot with the rest of the world.
This means adjustment channels are influenced significantly by global economic interdependence. A reduction of surpluses in the north will not lead automatically to a corresponding increase of demand for exports by the south.
The principal beneficiaries of greater German demand would be the central European economies closely integrated into Germany’s supply chains. Our analysis suggests that a 1 per cent increase in German domestic demand would improve the trade balance of Spain, Portugal and Greece by less than 0.05 per cent of gross domestic product.
This would not get us very far, which is why policies to enhance competitiveness – both structural and cost-related – remain crucial for the adjustment and rebalancing of the eurozone.
The case for a significant fiscal stimulus in Germany, as some call for, is also weak. The country will de facto have a much less restrictive fiscal stance in 2013 than the rest of the eurozone: the structural budget balance is expected to be little changed in Germany but to increase by 1 percentage point of GDP in the eurozone as a whole.
Berlin’s fiscal stance is also fully in line with the recommendations made by other organisations, such as the International Monetary Fund, and promotes growth-friendly components of spending such as education and research, as consistently called for by the European Commission.
In spite of persistent misperceptions to the contrary, the EU’s reformed stability and growth pact takes full account of evolving economic conditions. Each country’s consolidation effort is specified in structural terms, removing the effects of the business cycle and one-off measures, and takes into account the country’s fiscal space and macroeconomic conditions. If growth deteriorates, a country may receive extra time to correct its excessive deficit, provided that the agreed consolidation effort is being made. Such decisions have been taken this year for Spain, Portugal and Greece.
We also intend to explore further ways, within the rules of the stability and growth pact, to accommodate public investment in our assessment of national fiscal plans.
In order to overcome the crisis and restore confidence, we must continue to remove structural obstacles to sustainable growth and employment; pursue prudent fiscal consolidation; and turn bold thoughts into convincing actions when redesigning and rebuilding our economic and monetary union. In short, we need to stay the course and pursue decisive reforms in our member states and deeper integration in the eurozone.
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The writer is vice-president of the European Commission, responsible for economic and monetary affairs and the euro
Copyright The Financial Times Limited 2012.
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