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Europe needs a growth strategy

Thursday, August 18, 2016  |   |  Tags:

Italy is making the case that the EU should allow it to increase public spending to stimulate growth:

Italy is preparing to negotiate a new deal with the EU that will allow it to reject the politics of austerity and boost public spending in an urgent bid to rescue its crumbling economy.

New figures released on Friday showed the Italian economy achieved 0 per cent growth in the second quarter of this year, down from an already disappointing 0.3 per cent in the first quarter. And experts fear the government could be forced to downgrade its growth forecast for this year to 0.8 per cent or even less. […]

“In the mind of the government, a new policy of increased expenditure in the public sector, on things like infrastructure projects, could relaunch the economy by boosting the movement of capital.”

Stateside, if you’re paying attention to the presidential race, you’ll also notice talk of increased spending on infrastructure projects — it’s one of the few issues both Donald Trump and Hillary Clinton agree on (the scope, implementation and payment of such projects is entirely another matter).

Interestingly, as Gillian Tett pointed out in The Financial Times over the summer, “fiscal austerity is going out of fashion” across the Western world: “if nothing else, the shift in rhetoric is a powerful sign of rising disenchantment among western policymakers, not to mention voters. Relying on monetary policy alone no longer seems viable.”

Which brings us to a controversial piece in The Financial Times  today by Nobel-prize winning economic Joseph Stiglitz. In his piece, Stiglitz repeats his call for “a move away from austerity towards growth-oriented fiscal policies”:

The rule changes needed to make the euro work are in an economic sense small. A common banking union, most importantly common deposit insurance; rules to curtail trade surpluses; and eurobonds or some other similar mechanism for mutualisation of debt. Monetary policy to focus more on employment, growth and stability, not just inflation. Meanwhile, industrial and other policies should be orientated to helping the laggard countries catch up to the leaders. Most importantly: a move away from austerity towards growth-oriented fiscal policies. But these seem well beyond the politics of Europe today, with Germany still arguing that “Europe is not a transfer union”.

Now, Stiglitz’s piece is controversial in that he argues that “the euro was flawed at birth.” In short, he outlines the structural problems with the euro, its various mechanisms that make “macro adjustment difficult” and limits on fiscal deficits which have predictably resulted in “excessively high unemployment” and low GDP — all of which most economists agree are true. His piece is premised on the notion, however, that the way to save Europe is “with an amicable divorce, possibly moving to a ‘flexible-euro’ system.”

Whatever the solution, it’s clear that the status quo isn’t working — not for Italy, Greece or any other country. While the refugee crisis and later the Olympics have kept Greece’s economic crisis out of the headlines for a while, be ready for those headlines to come roaring back.

Earlier this week, Larry Elliot at The Observer explained why the Greek crisis isn’t going away, pointing to the flaws in the 2015 deal:

There were three obvious problems with that 2015 deal, which secured Greece its third bailout in five years. The first was that the new dose of austerity would make it more difficult for Greece to emerge from a slump just as severe as that which gripped the US in the 1930s. The second was that Greece’s creditors were making unrealistic assumptions for growth and deficit reduction. The third was that sooner or later the Greek crisis would flare up again. It was a case of when, not if.

When the Greek crisis hits the front pages again, it will be a reminder that Europe needs a new strategy — not just for Greece, but for the entire European project.

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