WASHINGTON – The respected The Economist magazine dishes out good economic growth advice to Europe, (The World’s Biggest Economic Problem, October 25th 2014). Here are the highlights. Stop Germany’s “austerity fixation”. Severe spending cuts contribute to economic stagnation in under performing countries like Italy and France.
Less austerity, more reforms
Wise policy-makers should agree to relax austerity a bit. In exchange, the countries that will gain some more breathing room (Italy, Greece, Spain, France and Portugal) should commit to serious reforms that will enhance economic growth.
This is a nice idea. But it is naive to believe that this can happen. Italy and France are still prisoners of outdated ideologies that in practice work against growth. Sure enough, there are some sincere reformers. But they face an enormous, established and entrenched opposition.
Of course, as The Economist suggests, it would be good for France and Italy to shed excessive and often stupid regulations, old labor laws that discourage hiring more workers, confiscatory taxation, and a lot more.
Of course, it would be nice if elected leaders could see the light and understand that economic growth requires a pro-growth “eco-system”. There are literally mountains of evidence indicating that if it is too difficult or too expensive to start or grow an enterprise you will have very few of them. Everybody should know that.
More of the same
Still, despite all the empirical evidence about what should and should not be done to create growth and jobs, the hoped for structural reforms are not coming along. Therefore, the notion that you can have a deal whereby in exchange for less austerity the struggling countries will get serious about reforms is wishful thinking.
This is what they will do. With a green light for less austerity, they will free to borrow more in order to finance more public spending that they will re-label as “investments”.
Translation: “Expect more of the same”.
Mega Plan for Infrastructure
By the same token, The Economist suggests that Europe should engage in a Grand Plan aimed at creating/modernizing “Pan-European” infrastructure. This would create jobs across the EU, while improving overall economic productivity. All this could be funded by the European Investment Bank, (EIB), with the help of the European Central Bank, (ECB) that could agree to buy bonds issued to finance these productivity-enhancing mega-projects. There you go: solid projects, easy funding.
This is another wishful thinking marvel. Think about it. First you need an agreed upon and carefully prioritized Grand Plan with the concurrence of 28 countries. Just imagine getting this done.
Then you need agreement among all the obvious and not so obvious stakeholders regarding an implementation schedule. Among them: the EIB, the EU, the ECB, the central and local governments of the countries concerned, (The Economist likes regional infrastructure), and then all the economic interests affected.
And finally you will need to win over all the environmentalists, greens and assorted “Luddites” who are against building anything new, as a matter of principle.
What The Economist suggests is not technically impossible. But it is politically impossible.
Lack of pro-growth political parties
Let’s say again that in many European countries policy debates are shaped mostly by political forces, (the Socialist Party in France, the Partito Democratico in Italy), that (amazingly) continue to believe in watered down but still damaging socialist ideologies.
These beliefs in general place redistribution and egalitarianism ahead of measures that will increase production and wealth creation. Despite the spectacular failure of this approach, hard to sell anything else.
Unless all of this changes, forget about serious (as opposed to cosmetic) plans to create the needed pro-growth “eco-systems”.
I would think that The Economist‘s editorial writers know all this very well. But their essays full of good, practical advice assume a radically different type of audience.