FEPS Fresh Thinking

Keynes teaches us that we should not slow down growth in periods of already sluggish growth!

Last year ended with an EU Summit and 2012 started as 2011 ended. At the beginning of January Merkel and Sarkozy met in Berlin and at the end of the month we will again have another summit. It seems there is a trajectory towards similar procedures for this New Year.

Persistently urging austerity measures and cuts from the most affected Eurozone countries in the south is not the appropriate policy. But something has changed! We realise when we carefully read the press; when we look at posts and analyses published by economists such as Paul Krugman; when we attend debates here in Brussels and elsewhere; that there is more and more acknowledgement that austerity measures will not solve the crisis in Europe.

At the root of all this is the macroeconomic imbalances within the Euro Zones. This is nothing new. I argued this point throughout last year. What are the consequences of this verdict? Austerity will deepen these imbalances. The countries in the South of Europe (but also others) will probably go through further downgrades in the near future. These countries will not be able to recover, because there is a lack of coherent European economic policy and coordination.

European leaders are fighting against the wrong crisis. Fundamentally, we do not have a sovereign debt crisis in Europe. We are facing in Europe a balance of payments crisis and, more specifically, a current account crisis in the ‘peripheral’ economies as well as in the central countries which are still doing relatively well.
In economics, the current account is one of the two main components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income and net transfer payments.

Action to reduce a substantial current account deficit in one country usually involves increasing exports or decreasing imports. Firstly, this is generally accomplished directly and in the short term through import restrictions, quotas, or duties, or subsidizing exports. The emphasis lies on short term. However in Europe we have a single market, so restrictions, quotas, subsidies from one member state against another are not possible. The second possibility is influencing the exchange rate to make exports cheaper for foreign buyers. This will indirectly increase the balance of payments. This is also impossible within the Euro Zone. We are living in a single currency zone.

But current account deficits can be reduced by promoting an investor friendly environment and adjusting government spending to favour domestic suppliers as a possible policy-action.

How could this be done? The answers have existed for a long time: We need an economic investment and industrial policy in Europe with accompanying instruments like investments in the public sector, facilitating credit lines for small and medium sized industries to invest, Eurobonds to finance and coordinated labour market policies to avoid social dumping. Europe should therefore develop a common fiscal policy and differentiated policies in terms of the sectorial and geographical needs.

All this together with greater responsibility for the European Central Bank will help much more to overcome the crisis. But such thinking seems to be absent from the current “Merkozy” talks.

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  1. Hi Ernst … with the election of Martin Schulz to the EP presidency and the assumption of the Presidency-in-Office by our Danish sister party, do you think we have been handed powerful, new platforms from which to articulate our alternative? How do you think we might use these new platforms?

    There are a number of impoirtant changes coming together at this time: (a) the election of Martin Schulz and Denmark’s assumption of the presidency-in-office , (b) the growing and increasingly focussed indignation of citizens right across Europe, (c) the likely defeat of Sarkozy and Fillon in May, and (d) the increasingly strident calls from the IMF, US government and other world bodies for investment in growth in Europe and a turning away from austerity.

    Do you think that these phenomena offer the real prospect that the Merkozy consensus is about to disintegrate?

    Desmond (PES Dublin).

  2. Dear Desmond, indeed there is tendancy that the Merkozy “consensus” is about to deintegrate – especially in the perspective of the upcoming French elections. The Merkel government is also facing serious problems. Martin Schulz is the right person to bring forward progressive policies here in Brussels. We have to give him the support …..

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