Europe's turning point

The European Central Bank's grand plan to purchase massively government bonds - around a trillion at the pace of 60 billion a month until September 2016- will certainly help prevent deflation. But Draghi's manoeuvre will not be enough - it needs to be accompanied by reforms and a realistic investment plan to revive the European economies. In the meantime, the euro has reached almost parity with the dollar, boosting exports especially in the southern economies. 

It is a turning point.because it raises the issue of eurobonds and a common fiscal policy. The EU treaty explicitly says that the EU should have a political configuration by means of transfers of sovereignty of the single states.

Germany should take the initiative and if it does not, the other States should force it to do so or go ahead without it. The only problem is that national leaders are reluctant to adopt such decisions. This does not look good for the future: in a global economy, continents are competing, not single States, most of which are irrelevant without an integrated space. But for the time being, the European Central Bank is leading the recovery process in Europe, clashing with Germany's interests. . 

P.S: The querelle  between Greece and Germany has led, temporarily to a satisfactory outcome. Greece has obtained 7 more billion euros of loans but in turn will have to commit to reforms. The issue is which reforms: those of the Troika"s memorandum or Tsipras's electoral promises? 

Tackling inequality involves more State, maybe a different one

The Davos World Forum has shown  consensus about  inequality as a global issue and that governments should find ways to tackle it. This has little to do with generosity or equity issues. it is juts the recognition that economy recovery cannot happen if income inequality is not reduced substantially in order to increase aggregate demand. The problem is that there is wide disagreement on how to tackle inequality and the role of the State.  

Liberal optimists think that open markets are the best remedy against inequality using as their best argument how globalization contributed to lift out from poverty hundreds of million people. This is of course arguable as many economists believe that unregulated markets have produced - before and after the financial crisis of 2007-08- brought wages down and increased poverty. 

However, much of the discussion concerns the role of redistribution - through many instruments, including taxation of the wealthy people or more public spending for the poor, or even a combination of both. Classical redistribution should not be ruled out to combat poverty and alleviate the social crisis for the middle classes.    

In a critical note to Piketty's work, R.Haussman, Harvard academic and former Venezuelian minister, argues that redistribution is "just  palliative, not curative". He's right: productivity is the problem - and all firms are not equal in terms of productivity and therefore the income they can distribute varies too. 

Given productivity constraints, the inequality problem has to be addressed  by investing in people, providing them with the right skills and creating job opportunities. The issue is to connect poor places (countries or regions) to inputs but this requires means to reduce existing economic disparities. It is a matter of  policy trade-offs. 

There may be more innovative redistribution policies such as the ones suggested by Mazzucato and  Rodrik. In substance, governments should finance their spending from the earnings in investing public venture funds. It means, however, a bigger role of the State in investing in funding new technologies and  to socialize the gains from innovation for citizens. 

The Piketty moment

Piketty's book , 'Le Capital au XXI siècle" has become a reference point in the current economic debate. It has revived the issue of economic inequality and brought it into the policy agenda. But no book has been so divisive among economists. 

The main point of the book is that governments should put in place a progressive wealth tax for the purpose of income redistribution and correct growing inequalities. In other words the rich should pay more so that the poor (or the impoverished middle class) could get more disposable income and spend more in goods and services. The consequence of inaction would be a return to the situation which prevailed in the early 19th century where the big fortunes concentrated most of total wealth. This happens, according to Piketty when the rate of return of capital is durably higher than the rate of growth of an economy creating a situation of disequilibrium which aggravates economic disparities. As heredity of capital becomes more important relative to labour, the big fortunes continue to grow almost mechanically while the wealth of the middle class tends to erode. To avoid this perverse mechanism, our societies has social institutions which aim to reduce such inequality but today these institutions are becoming more fragile and less capable to respond to such challenge. 

In our societies hardly hit by the crisis, rising inequality threatens the values of social justice which are at the heart of democracy. In past years, a neo-liberal discourse has prevailed, putting aside the issue of inequality and focusing on growth, which is good per se and in theory should benefit to all. The evidence shows that this is not true since not all or even a small fraction of the population actually benefits from growth. Orthodox economic policies based on sustained deficit reduction  led to a prolonged recession which has even widened the economic inequalities within societies, with the poor becoming poorer and the rich becoming richer. 

European governments, in particular France and Germany, have showed inaction to combat the crisis and its consequences in terms of social disruption. Is it a folly to argue that there are alternatives to current economic policies and that we should wait for the return to growth. History tells us that austerity does not contribute to  debt reduction bit in turn plunges the economy in a recessive or prolonged low growth cycle. The return to nationalism becomes the expression of the anger of the population which feels threatened by markets and globalization. 

Since the main inequality is unemployment which affects primarily the young, it is necessary to abandon austerity policies and pursue pro-growth policies. But they have to be coordinated at the European level which implies a stronger integration between economic policies and institutions. If we want to pursue progressive economic and social policies, we need to rebuild EU institutions around the euro area to make economic decisions more effective. 

Another source of inequality is on taxation: big multinational companies pay less taxes than the small and medium ones. This requires better coordination of tax policies along with the introduction a wealth tax as proposed by T.Piketty. It is obvious that such measures have to be taken at the supranational level with permanent exchange of information between States to avoid fraud and capital relocation for fiscal reasons. 

Furthermore, there is not enough investment into education, which increases the disparities in access to culture. the rich can afford expensive schools and universities making the education gap with the poor wider. In some counties, in particular in Italy, the amount of interests on debt represent 6-7% of the GDP while expenditure for university is less than 1%. This means compromising the well being of future generations with widening gaps in education and culture. 

While there may be an issue of high debt and States have less and less resources, it is also evident that collectively European economies have never been so rich in terms of  economic output. But private wealth has often become much larger ( in Italy the ratio is one to 7) than public wealth as a share of the GDP. If part of this wealth can be used to reduce inequality, this will also be a powerful engine for more growth as it will stimulate demand and reduce the appetite for financial investments. 

This is a matter of political choice and democracy. It is a pure illusion to think that a market economy can work without polity and ethics, rules and institutions. 

Hope for Europe

There are tangible signs of change concerning the future of Europe. Let's take here three important facts.   

In his address to the European parliament on November 25,  Pope Francis called for a united Europe. His main argument was human dignity as a central value for the rebuilding of Europe. This is an extract from his speech: 

Promoting the dignity of the person means recognizing that he or she possesses inalienable rights which no one may take away arbitrarily, much less for the sake of economic interests.

At the same time, however, care must be taken not to fall into certain errors which can arise from a misunderstanding of the concept of human rights and from its misuse. Today there is a tendency to claim ever broader individual rights – I am tempted to say individualistic; underlying this is a conception of the human person as detached from all social and anthropological contexts, as if the person were a “monad” (μονάς), increasingly unconcerned with other surrounding “monads”. The equally essential and complementary concept of duty no longer seems to be linked to such a concept of rights. As a result, the rights of the individual are upheld, without regard for the fact that each human being is part of a social context wherein his or her rights and duties are bound up with those of others and with the common good of society itself.

The second message is delivered by Mario Draghi in a speech at the University of Helsinki. He said (perhaps more openly than before) that Europe has to guarantee the sovereign debt of all States. The reference is clearly for Greece in case of victory of Szyriza at the forthcoming elections. The danger of a unilateral decision of withdrawal from the euro area would put at risk the whole monetary union. But Greece could stay if Europe holds  responsibility for the Greek debt for 50 years (as asked by Tsipras), which  is relatively small compared to Italy or Spain. This explains why Draghi has urged for further economic and fiscal integration while continuing his plan of massive purchase of private bonds. 

Last but not least, the president of the European Commission, Jean Claude Juncker has proposed the European Parliament a 3 year investment plan of € 315 billion starting from Autumn 2015. However, this amount is allocated to a specific Fund which includes so far €21 billion. But this initiative is different from previous ones as regards the modalities through which it will be made up. The Fund will be topped up by contributions from member States (including from non-EU States and other international funds) with a larger participation from richer EU States. In fact this is a step toward a genuine EU budget to issue guarantees for sovereign debts (to which Draghi referred to in recent declarations). 

Member States will contribute - up to at least € 200 billion in exchange of the possibility of making investments - outside the parameters of the Stability Pact- which should create new jobs and income in order to stimulate global demand, and generate new tax revenues and therefore save some financial resources for further investment.

As the economic scenario deteriorates in Europe, it would be difficult for member States to reject the Juncker Plan. There is no alternative than an EU wide plan for growth and jobs. 

The combination of these three messages provides some hopes for the future of Europe. In times of crisis and rise of populism, we need to mobilize all  our forces to act for the common good. 

Jürgen Habermas: Democracy in Europe

Productivity is Key to Recovery

Policy makers seem to be short of ideas to get out of the crisis. The mantra of austerity has prevailed over the last four years. Now it is the time of reforms. But which reforms? The focus is put on labour market flexibility. We know that this is a false problem. Even  countries with high flexibility of the labour force like the US or the UK have undergone a severe crisis.  

Recently, the ECB governor, Mario Draghi made an important speech at the Brookings Institution. He said in his introduction that he re-read the open letter from John Maynard Keynes to President Roosevelt published in the New York Times on 16 December 1933. Why is it an important letter? Well, Keynes acknowledged the efforts of Pdt Roosevelt was in his view the only one to have understood the sense of  urgency for a profound change.  But he raised some criticisms on the Us programme arguing that not enough was done to boost recovery. The point about Keynes' letter is that he stressed the primacy of recovery to reform.  

Draghi's speech contains an agenda on how to exit the crisis, but unlike Keynes's point, he insists on reforms first before the need for fiscal space for supporting investment. This is arguable , but understandable in the European context.

However, there are two important points in his speech. First, he explains that a self sustaining recovery requires some prior conditions to be in place. First and foremost, new jobs have to be created by rising productivity of the business system, training of young people and support to maintain  social equity hardly hit by the austerity policies. 

The second point is that the ECB will continue providing liquidity support to the real economy, but this is insufficient for recovery. If productivity does not increase in businesses the liquidity will remain in the banks, funds or households; output will not rise, nor investment or consumption. This explains why in certain countries (for example in Italy) tax reductions for low income people have not  resulted in increases in consumption. 

In Draghi's words,  there will be no recovery if some conditions are not in place, namely, if we don't have both a rising workforce and rising productivity. But "for many European countries, there is scope to increase labour participation rates over time. But given demographic trends, raising structural growth will have to take place primarily through productivity"

Social cohesion is not antinomic to growth. However, it does not mean freezing the production structures to maintain employment. It implies change, that is through innovation and technical progress to generate productivity gains. 

The message is clear, but we must not forget Keynes' wisdom which proved to be right.

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