Italy calls for a Bretton Woods for the Eurozone #Newbretton
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French President Francois Hollande has announced that he will ignore the European budget constraints; his intention is to defer the return of the deficit/GDP ratio to below 3% for two years. This could signal the end of Fiscal Compact austerity.
The French decision only highlights the critical state of the overall system (and the widespread violation of the rules) that has existed for some time. There are many countries in the EU whose deficit/GDP ratio is greater than 3% (in addition to France, also Spain, Portugal, Greece, Croatia, Slovenia and even virtuous Poland), while Germany has been persistently violating the upper limit to the trade surplus.
Some of these countries, although subject to rigorous intervention (or rather precisely because of it), now have public finances that are spinning dangerously out of control, with a strongly increasing debt/GDP ratio. This is the case of Greece, Spain and Portugal, but also Italy. The blame for this falls not only on the enforcing of national and European austerity rules, but also on the failure of the ECB (in spite of its merits in the rescue of the euro during the storm of speculation) to avoid disinflation and ensure an inflation rate of around 2%. Quite simply, EU policy measures during the post-global financial crisis have failed, and this has resulted in a decline in aggregate demand (consumption and investment), the end of growth, deflation, the deepening of imbalances between North and South and, paradoxically, a worsening of the public debt situation, the very thing which was the principal objective of the ECB and the very reason for the severity of fiscal policies.
The problem with this decline is that while the macroeconomic situation has changed dramatically, the EU continues to be in the hands of diligent officials applying obsolete rules. The point is, then, not to ensure compliance with these rules. New rules are needed and these cannot be formulated by those whose job is to monitor compliance.
We expect, then, the Italian Government to understand the crucial importance of this moment and not to be satisfied with negotiating possible exemptions to the present rules. We expect the Italian Government to firmly face up to the truth by demanding the launch of a Conference for a new "civil macroeconomics" in the European Union.
The main issues to be discussed in the formulation of a new agreement should be the following:
1) A far more active role on the part of the ECB, enabling it to buy public and private bonds, as has been the case with the US and UK central banks.
2) The worthlessness of a monetary union if the potential force of its central bank, which is far greater than that of national central banks, is not fully exploited. From this point of view a number of questions deserve a central role in the ongoing debate. One is the plan proposed by Wyplosz named PADRE (politically acceptable debt restructuring in the Eurozone), which envisages a feasible way of restructuring the public debt of the member states. According to this plan, the ECB could buy public debt that exceeds 60% of GDP. This debt would then be converted into a zero-interest perpetuity to be repaid over the years by the share of seigniorage revenue each member state has the right to claim. In this way, a large proportion of the resources used at the moment to repay interest on outstanding public debt would be freed and thus result in a strong stimulus to domestic demand in all member states. This would be a win-win strategy for all, even for Germany, whose exports to the rest of the Eurozone would also increase. A gradual implementation of such a plan is highly desirable, although an experimental application at a smaller scale (involving a portion of public debt) to monitor the real effects of such a policy could be implemented immediately.
3) These macroeconomic advantages would enable member countries to implement structural reforms with regard to the main drivers of economic modernization (digital infrastructure, industrial policy, technological and organizational innovation, efficiency and effectiveness of public administration and of the justice system, social welfare for the jobless, measures to combat unacceptable economic and social inequalities which compromise economic growth). The implementation of these structural reforms is essential to increase the benefits of i) and ii) and must be carried out both as part of an overall European policy and through a process of democratic choice within each member country.
4) The construction of mechanisms able to counteract asymmetries in the euro area. This will involve, first, a penalty mechanism not only for countries in deficit, but also for surplus countries, with an obligation to implement policies to raise domestic demand to offset asymmetries, and, second, a European subsidy for the unemployed as an automatic stabilizer providing benefits or re-training in exchange for social work, a subsidy to be suspended if a job offer is refused.
5) A concrete expansionary EU fiscal policy to implement public investments at a European level and thus develop physical and digital infrastructures in member countries, the aim being an EU budget with its own resources going well beyond the current 1% and reaching between 3 % and 5%.
6) A strong commitment to tax harmonization and the reduction of excessive heterogeneity in the national taxation of companies. The latter has led to tax avoidance and profit-shifting and to unreliable statistics on growth. Tax havens within the union must no longer be tolerated, and aggressive fiscal behaviour should be considered as state aid (as would seem to be the current orientation of the Union regarding the recent cases).
7) A strong commitment to political unification and towards promoting the active participation of European citizens in the democratic nomination of their representatives to European institutions. These nominations should no longer be exclusively on a national basis, so that the welfare of all Europeans citizens will be the focus of European decision-making.
A book of dreams? On the contrary, we believe this to be a realistic alternative that would benefit all, would restore growth and sustainability, and avoid the deterioration of the current imbalances and traumatic end of the euro. It would be much better for the European leaders to face the truth and inaugurate a constituent phase leading to the creation of a new system based on these seven points. A lack of an agreement will lead almost inevitably to the end of the euro and return to national currencies.
22 October 2014
International Guarantee Committee (in progress)
Achim Truger-D-University of Cologne
Andrea Terzi-CH-Franklin University, Switzerland
Andrew Watt-UK-IMK – Institut für Makroökonomie und Konjunkturforschung
Branko Milanovic-USA-CUNY Graduate Center
Charles Wyplosz-FR-Graduate Institute Of International and Development Studies, Geneve and Director of International Center of Monetary and Banking Studies
Francesco Saraceno-FR-OFCE, Paris
Giovanni Dosi-IT-Scuola Superiore Sant'Anna
JeanPaul Fitoussi-FR-University of Paris
Jeffrey Sachs-USA-Columbia University
Joerg Bibow-USA-Skidmore College
Jordi Surinach-E-University of Barcelona
Pascal Petit-FR-University Paris Dauphine
Robert Skidelsky-UK-University of Warwick
Romano Prodi-IT-Università di Bologna
Ronald Dore-UK-London School of Economics
Ronald Janssen-BE-ETUC, Bruxelles
Sergio Rossi-CH-University of Fribourg
Victor Ginsburgh-BE-Université Libre de Bruxelles
Please, see Italian Committee at:
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