Hancké, B. (2014) “Two years after Mario Draghi’s ‘whatever it takes’ moment, the Eurozone is once again staring into the abyss“, LSE EUROPP, 21 October.
Growth in the Eurozone has declined significantly over recent months, raising fears that Europe could be heading toward another economic crisis. Bob Hancké writes on what it would take to generate growth in Eurozone states. He argues that the best – and possibly only – option for European governments is to adopt a strategy of public investment in infrastructure, human capital, public health and welfare. Crucially, there should be a balance between fiscal expansion and fiscal consolidation policies based on the state of individual economies, not on the blind application of one or the other principle across the entirety of the single currency area.
Here we go again. Two years after Mario Draghi’s ‘whatever it takes’ moment, the Eurozone is again staring into the abyss. Growth has collapsed over the last six months, inflation is now so low it no longer greases the machine – some of the EMU member states are facing deflation, in fact – unemployment is stable at a very high level, and even the economic locomotive, Germany, is stalling. Debt, public or private is rising or stuck at a high level, and governments seem, to put it mildly, unable to do much about it all.
France and Italy are engaged in a contradictory balancing act, along the lines of ‘yes, we will balance our budget, but not quite yet, since our economies need some oxygen’. And the ECB seems slightly overwhelmed, running against the wind; it’s not even clear if the central bank can do all that much, given where we are, and the infighting within the ECB makes it likely that action from Frankfurt will be slow and not nearly of the shock and awe variety that Europe needs.
The conundrum is, in essence, one of growth. In the words of Keynes: ‘if you take care of growth, the deficit will take care of itself.’ Since deficits and debts are a function of government revenue, and that itself is a function of how fast the economy grows, the numerator (expenditure) can stay stable, or even grow, as long as the economy – and thus tax intake – grows at the same pace or faster. How, then, do you produce growth in the Eurozone?
Relevant posts:
- Pisani-Ferry, J. (2014) “Europe According to Draghi“, Project Syndicate, 31 August.
- Wren-Lewis, S. (2014) “Mario Draghi At Jackson Hole“, Social Europe Journal, 26 August.
- Guha, K., (2014) “Can Mario Draghi Beat Deflation?“, Bloomberg Opinion, 12 February.