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How to make Europe’s incipient recovery durable – A rejoinder

Buti, M. and Padoan, P.C., (2013), “How to make Europe’s incipient recovery durable – A rejoinder”, VoxEU, 08 Οκτωβρίου.

Our recent Vox column triggered an interesting and lively debate (see for instance Krugman, 2013; Fatas, 2013; Watt, 2013). In it, we argued that weak private investment is partly to blame for the growth shortfall of the Eurozone compared to the US in the past few years and that putting in place conditions for stronger investment was essential to turn the recent pick up of confidence and activity in the Eurozone into a robust and self-sustained recovery (Buti and Padoan, 2013). We further argued that a policy strategy to support investment and the recovery should be articulated around three mutually reinforcing elements – reducing policy uncertainty, repairing the financial system, and undertaking structural reforms.

We would now like to push further by providing a few additional arguments. While there seems to be a large consensus around the idea that repairing the financial system is a necessary condition to revive growth in the Eurozone, other aspects of our proposed policy strategy have been criticised by some commentators. Our reading of these criticisms is that they revolve around three major arguments:

  • First, differences in fiscal policy have been at the root of growth differences between the Eurozone and the US in recent years and fiscal easing is the main policy advice to support an investment recovery.
  • Second, although policy uncertainty has been high in recent years, this is essentially a by-product of depressed economic conditions. Resolving policy uncertainty is unlikely to boost growth in a meaningful way.
  • Finally, while structural reforms are beneficial in the long term, their short-term effect is unclear, especially in a context of depressed activity and when monetary policy is at the zero lower bound.

We will address these three arguments one by one.


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