RAstaNEWS Green Book29-02-2016
RAstaNEWS just issued its Final Report / Green Book.
In the years following the launch of the RAstaNEWS project in early 2013, the Eurozone crisis seems to have somewhat subsided. However, the recent Greek crisis and the negotiations leading to the country’s third bailout programme in August 2015 reminded us of the effects that unsustainable debt levels and dangerous macroeconomic imbalances can still have on the stability and resilience of the Eurozone.
Meanwhile, economic growth levels in the Eurozone are still a far cry from the relatively healthy recovery recorded in other advanced economies, above all the United States. Recent data suggests that the euro area may have grown by 1.5% in 2015, markedly lower than the US economy (2.5%; IMF 2016). Such sluggish growth prospects have endured since the end of the Great Financial Crisis, so much so that euro area real GDP is still below the pre-crisis peak, while the US exceeded it already in 2010 and is now almost 10% above those levels. Stymied growth prospects have translated in much lower job-growth rates and very low inflation.
At the policy level, EU Institutions and Eurozone national governments have painstakingly taken a number of important steps in the direction of reforming EMU policies and the overall EMU governance framework, often at the cost of long debates and deep political divisions. However, EU Institutions have mainly focused on fiscal policy sustainability, over which they enjoy greater latitude since the formalization of debt and deficit rules within the Stability and Growth Pact (SGP).
In light of the persistent need to rebalance the Eurozone, the challenge for the RAstaNEWS consortium has been to single out what is still missing from the EMU policy framework – something the consortium has consistently referred to as “holes in the cheese” – in order to spot weak points and propose desirable policy solutions.
Drawing from current ongoing RAstaNEWS research, the consortium partners present here a multi-pronged strategy to reform EMU macroeconomic policies and avoid the fate of recurring crises. In the short-to-medium term, the strategy includes the following elements:
1. A revamped Juncker plan;
2. Much closer coordination of national fiscal policies at the supranational level, making room for the possibility to define a euro-area fiscal stance;
3. An even more accommodating monetary policy, implemented until macroeconomic conditions change significantly in the Eurozone periphery;
4. A true euro-area wide implementation of macro-prudential policies, which should also account for potential contagion effects between different financial institutions.
The rationale for such expansionary policies should be cast in the perspective of the “jobless growth” phenomenon, a persistent feature of the global business cycle. This means that unconventional monetary policy should last su ﬃ ciently long to allow for the dissipation of recessionary and deﬂationary trends not only at the euro area level, but also at the Member State level, in order to allow for the unemployment rate to come down considerably, and that an important role could and should be played by fiscal policies. In this regard, it is also crucial to reverse cumulated competitiveness imbalances as soon as possible during the correction and stabilization phases.
In the longer run, RAstaNEWS partners consider that there is a need to set out a new course for EMU policies and governance. Such new course should have the following objectives as priorities:
1. A full, conscious shift from fiscal to full macroeconomic surveillance with a renewed emphasis on growth enhancing reforms. It should also be acknowledged that faster nominal income growth is crucial to obtain fiscal consolidation that are both sustainable and socially acceptable. In this regard, it would be crucial to reevaluate the “contractual” dimension of intra-EMU bargaining, as proposed in the 2012 Van Rompuy report, whereby EMU member states may be awarded some fiscal room to support growth in the short term by binding themselves to enact detailed structural reforms within a certain time horizon. As it is right now, the concession of flexibility by the Commission takes place within a sanctions-waiver, ex post scheme. Establishing the flexibility allowance more firmly would allow to greatly reduce short-term uncertainty that risks stifling the effects of flexibility on aggregate demand;
2. The creation of a proper euro-area fiscal capacity. The EU budget currently amounts to around 1% of GDP and 2% of total member state governments’ expenditure. This is clearly insufficient in order to give the EU and the euro area sufficient room to agree upon and enact credible countercyclical policies;
3. The setting of a differentiated, politically-consensual, EMU-wide fiscal stance, with a Eurogroup that is tasked with deciding upon what the EMU’s overall fiscal stance should be, while also agreeing upon temporary relaxations (or strengthening) of Member States’ fiscal positions, according to country-specific cyclical conditions;
4. A “depoliticized” ECB and strengthened macro-prudential regulation at both the EMU and EU level.