Germany wants the EU to export itself out of its unprecedentedprolonged economic stagnation – a policy known as beggaring thy neighbour. While the Eurozone has relied on monetary policy to promote recovery, due to austerity investment in Europe is anaemic. The solution could be a common Eurozone fiscal policy, but how should this be financed and administered?
Dieter Vesper is a macroeconomist resident in Berlin
Economic growth, whilst weak, has returned to the Eurozone, although the high imbalances in the current account are still a serious problem for achieving sustainable economic development.
Lack of demand in many countries has led to shrinking private investment activity and public sector investment has also reached a low level. Due to austerity policy, public investment and other growth-relevant government expenditure, such as spending on education, have been reduced. A serious problem is the extremly high imbalance in the German current account. This surplus of more than 8 % of GDP is also contrary to the objectives formulated in the macroeconomic monitoring goals of the European Union.
Within Germany the macroeconomic problem of high external trade surpluses is scrupulously ignored and the European crisis is primarily perceived as a public debt crisis. Austerity is seen as a suitable way of reducing public debt in the countries facing an economic and financial crisis: Imports there should be significantly reduced by accepting an adjustment recession. Declining wages and taxes are intended to improve the international competitiveness of these countries. However, the danger is overlooked that this is equivalent to the attempt to scoop water with a sieve, and this is precisely what has happened.
If the European economy slackens, this is mainly due to a lack of demand. It has also not been animated by a yearlong unorthodox monetary policy, such as quantitative easing, without the inflation rate rising. In the meanwhile monetary policy seems to have exhausted its possibilities. The investment engine shows no sign of starting. Even in Germany, which has the strongest economy in Europe, investment activity – the core of any growth – is far too small. Therefore, in Germany it is more than overdue that new economic ideas be incorporated into economic policy action. Due to its prominent position, Germany has a locomotive function. The German economy has benefitted enormously from the Monetary Union by building up huge trade surpluses within the EU.
First of all Germanys policymakers should follow a strategy which will create higher overall growth via more public investment. This is an urgent need in almost all areas of government. Due to its neglect in the past a huge demand for restoration and modernization of public infrastructure has built up. Estimations of the accumulated needs in terms of public infrastrucure add up to 7 % of GDP. Additionally there are many costs resulting from the inflow of high numbers of refugees.
More money for public infrastructure can make a significant contribution to reducing trade surpluses. Higher investment creates not only more growth in Germany, but also increases the demand for more imports, which would especially benefit other EU nations. The public budget in Germany shows significant surpluses. Therefore, financing additional expenditures on public infrastructure is currently no problem whatever.
In addition, it must be clear that in a monetary union economic success is in the interest of all Euro-members. If a monetary union is to be successful, all member states must feel equally responsible and understand their economic and financial policies as a common project.
Over the years monetary policy alone has been a means of stabilizing and strengthening the Eurozone economy. This duty has overwhelmed monetary policy. Monetary policy needs urgent support from fiscal policy and a change of course is necessary here. However, especially in Germany this change presupposes a change in the mentality of policy decision-makers. The actions of the decision-makers have for decades been shaped by neoliberal patterns of thinking, and one result of this thinking is the restrictive regime of the European debt rules. These rules, which are based on the “debt brake”, prohibitively limiting deficit spending, implemented in Germany, make it difficult to finance much needed additional government expenditure.
Last but not least, one more aspect needs to be put into focus. All fiscal policy must be coordinated with a common goal. Both Germany and the other major European countries must increase their integration. In political reality, however, there are still particular interests, such as local governments, being promoted by a decentralized, regulated fiscal policy. Therefore, the economic policy architecture of Europe needs to be drastically changed. In the future the possibility of central fiscal policy interventions to stabilize economic development must be set up alongside centralized monetary policy in order to solve macroeconomic problems more quickly and efficiently.
In this regard the creation of a “euro zone budget” (a tool of the devil from the German perspective) will be of great importance. Three questions arise in this matter: From what sources are the revenues to be fed? What volume can such a budget realistically contain? Which tasks should be financed?
A Eurozone budget should be limited to making a contribution to smoothing cyclical fluctuations in the Eurozone. In this case, its volume does not have to be particularly high – the allocational and distributional function of fiscal policy would still be reserved for the national budgets. A maximum of 2 % of Eurozone GDP is being discussed, and this amount should be sufficient to achieve the desired central stabilization function. The focus of activities at the supranational level should be on public investment. This could either be implemented directly (in which case the European Investment Bank (EIB) could take control), or funds could be channeled from the Eurozone budget into national budgets in order to stimulate public investment projects there.
Since the development of revenues follows the business cycle, a stabilizing effect is achieved by the Eurozone budget when, in phases with high GDP growth rates, additional revenues are not returned to the economic cycle but saved in „reserve funds“. In periods of slow growth or even an economic crisis these reserve funds can be used to spend more money. Regardless of the stabilizing effect of the Eurozone budget, the question of how the budget is to be financed has to be discussed.
As far as the burden on citizens is concerned, the Eurozone budget could be financed „neutrally“ by having the member states transfer an appropriate contribution to the Eurozone budget. However, the national budget`s room for manoevre would be correspondingly reduced. An alternative would be tax increases. Above all, capital-related taxes as well as the introduction of a financial transaction tax would be considered in Germany. On the one hand, higher rates on these taxes would scarcely limit the mass purchasing power and, on the other hand, higher tax rates would defuse the issue of inequality in the distribution of wealth. In the end, the European debt rules should not be a taboo. Why should the “golden rule” of fiscal policy not be applied at the supranational Eurozone level, according to which future-related expenditures like investment can be financed by loans?
In this context one important question arises: who should have the decision-making powers for the Eurozone budget? One idea is control by a Eurozone financial commissioner and a parliamentary supervisory board, and another proposal aims at a Euro-treasury. The latter idea goes further because such a treasury could unite the future public investments of member states (on not the local but central level) as a pool and finance them through joint bonds. Current expenditures of the member states remain bound to the existing rules of the Euro-fiscal regime. A Euro-treasury, however, would require more extensive institutional changes.
The German growth model, based on the beggar thy neighbour principle (wage reductions and high external trade surpluses), is not a blueprint for Europe’s recovery. On the contrary, an offensive growth policy is needed in which the expansion and modernization of the public infrastructure are a key priority.