After the crisis : reform, recovery, and growth in Europe PDF
Preview After the crisis : reform, recovery, and growth in Europe
OUP CORRECTED PROOF–FINAL,6/6/2016, SPi After the Crisis OUP CORRECTED PROOF–FINAL,6/6/2016, SPi OUP CORRECTED PROOF–FINAL,6/6/2016, SPi After the Crisis Reform, Recovery, and Growth in Europe EDITEDBY Francesco Caselli, Mário Centeno, and José Tavares 1 OUP CORRECTED PROOF–FINAL,6/6/2016, SPi 3 GreatClarendonStreet,Oxford,OX26DP, UnitedKingdom OxfordUniversityPressisadepartmentoftheUniversityofOxford. ItfurtherstheUniversity’sobjectiveofexcellenceinresearch,scholarship, andeducationbypublishingworldwide.Oxfordisaregisteredtrademarkof OxfordUniversityPressintheUKandincertainothercountries ©thevariouscontributors2016 Themoralrightsoftheauthorshavebeenasserted FirstEditionpublishedin2016 Impression:1 Allrightsreserved.Nopartofthispublicationmaybereproduced,storedin aretrievalsystem,ortransmitted,inanyformorbyanymeans,withoutthe priorpermissioninwritingofOxfordUniversityPress,orasexpresslypermitted bylaw,bylicenceorundertermsagreedwiththeappropriatereprographics rightsorganization.Enquiriesconcerningreproductionoutsidethescopeofthe aboveshouldbesenttotheRightsDepartment,OxfordUniversityPress,atthe addressabove Youmustnotcirculatethisworkinanyotherform andyoumustimposethissameconditiononanyacquirer PublishedintheUnitedStatesofAmericabyOxfordUniversityPress 198MadisonAvenue,NewYork,NY10016,UnitedStatesofAmerica BritishLibraryCataloguinginPublicationData Dataavailable LibraryofCongressControlNumber:2015957297 ISBN 978–0–19–875468–8 PrintedinGreatBritainby ClaysLtd,StIvesplc LinkstothirdpartywebsitesareprovidedbyOxfordingoodfaithand forinformationonly.Oxforddisclaimsanyresponsibilityforthematerials containedinanythirdpartywebsitereferencedinthiswork. OUP CORRECTED PROOF–FINAL,6/6/2016, SPi Foreword CarlosdaSilvaCosta,GovernorofBancodePortugal ‘Ifonedoesnotknowtowhichportoneissailing,nowindisfavourable.’ LuciusAnnaeusSeneca InJanuary2014IinvitedProf.MárioCentenotoorganizeadebateandcarry outanin-depthstudyonstructuralreformandmacroeconomicadjustment processes in the context of an Economic and Monetary Union, the only restrictionbeingtoensuretheproject’sscientificquality.Prof.MárioCenteno has worked intensively since then, together with renowned scholars. To this end, Banco de Portugal held a Workshop on 16 January 20151 and the ‘Growth and Reform in Europe in the Wake of Economic Crisis’ conference on9May2015.2Importantcontributionswerepresented—someofwhichare compiledinthisbook—thatdefinethechallengesfacingEuropeinthenear futuretoensuretheprosperityofeachmemberandtheunionasawhole. ThisprojectispartofBancodePortugal’sexpressconcerntocontributeto thecreationofwidescientificdebateonthecausesofcurrentmacroeconomic imbalances,theoperationalrulesinamonetaryunion,andtherequirements forthesuccessfulparticipationofmemberstates.Thesearekeyelementsfor defining the areas of consensus and of compromise to underpin the discus- sionofeconomicpolicyguidelines,withinaframeworkofreconciliationof short-term,long-term,andinter-generationalinterests. Europe is at the start of an economic recovery process, after more than eightyearssincetheoutsetoftheinternationalfinancialcrisis.Atthisstage, it is essential to reflect on the economic growth model we want for Europe and, in that context, define objectives, identify constraints, and establish a strategytoachievethoseobjectives.Inaddition,reformsmustbeidentified that need to be introduced into the European institutional model for the strategytowork. 1 Adjustment in European Economies in the Wake of the Economic Crisis’ Workshop, https://www.bportugal.pt/en-US/OBancoeoEurosistema/Eventos/Pages/WorkshopAdjustmentin EuropeanEconomiesintheWakeoftheEconomicCrisis.aspx. 2 http://confeuroeconomy.bportugal.pt/en-US/Home/Pages/default.aspx. OUP CORRECTED PROOF–FINAL,6/6/2016, SPi Foreword I. What Type of Economic Growth Model for Europe? The reflection on the type of economic growth model for Europe must necessarilytakeintoaccountEuropeancitizens’incomeaspirationsandthe existing capacity to fulfil such aspirations. We know that there is currently agapbetweenEuropeansociety’saspirationsandtheproductioncapacityto fulfil them. To prolong this situation will place pressure on member states’ fiscalpoliciestoraiseexpenditureandmayalsoleadtoanincreaseinemigra- tionandhouseholdindebtedness.Hence,thepriorityistoidentifyandput intopracticeconditionsthatpromotesustainablepotentialoutputgrowthin Europeasawholeandineverymembercountry. WhatShouldBeOurGoal? Europe must aim to pave the way for a rise in the per capita income of Europeans, in a context of achieving an unemployment rate close to the natural rate and of safeguarding fundamental macroeconomic balances. In fact, an increase in per capita income with high unemployment gives rise to social cohesion problems, which will be all the more serious the more unequalistheterritorialdistributionofunemployment.Inturn,anincrease in per capita income based on the activity of sectors fed by demand that is not sustainable in the long term—supported, for example, by the growing indebtednessofeconomicagents—willproveunsustainableandhencetem- porary.Onecannotforgetthattheprocessestocorrectthistypeofsituation involvehighmacroeconomic,social,andpersonalcosts. The increase in per capita income does not mean that sustainable pros- perity has been achieved in Europe, as it could be temporary. The unem- ployment rate must be considered simultaneously with the sustainability of economic agents’ indebtedness levels and their implications for society’s cohesionmustbeassessed. WhatAretheConstraintsonAchievingthisGoal? Inthepursuitofthegoalofincreasingpercapitaincome,theeuroareacur- rentlyfacesaseriesofconstraints,causedbyanaccumulationofimbalances inthepast. First,theeconomicagents’indebtednesslevelsaredifferentacrossmember statesandoftenquitehigh,whichlimitspolicies(intermsoftheirnatureand sustainability)aswellastheinitiativesoftheeconomicagentsinquestion. Second, long-term unemployment levels are very high. This means that jobs must be created not only to absorb unemployment resulting from the vi OUP CORRECTED PROOF–FINAL,6/6/2016, SPi Foreword Schumpeterianprocessandtheincrementofproductivity,butalsotoabsorb thisstockoflong-termunemployed. Third,restrictionsresultingfromdemographictrends,withtheprogressive ageingofthepopulation(associatedwithahigherlifeexpectancyandalower birthrate)andtheconsequentdeclineintheproportionofthelabourforce. WhichStrategyShouldweAdopt? The increase in the rate of return on new investment is instrumental to optimizingsavingallocation,achievinganincreaseinpotentialoutput,and ensuring the sustainability of the European social model. This means that value added per asset in Europe will have to grow more than would be necessary with a younger population and a less inclusive social model. It is therefore crucial to allocate resources efficiently and, at this level, the financialsystemplaysakeyrole. The strategy to achieve this result includes a considerable investment in radicalinnovation.GrowthinEuropeancountrieshasbeendrivenbyincre- mentalinnovation,whereasintheUSAradicalinnovationassumesamajor role. The available studies on this issue suggest that the most innovative economieshavefourfundamentalfeatures: 1. Highcompetition.Innovationisaneffectivewayforenterprisestodeal withcompetition; 2. Highqualityofeducationanduniversitiesandpredominanceofacul- tureofmeritandentrepreneurship; 3. Flexiblelabourmarket; 4. Significantshareofcapitalmarketsincorporatefinance. Inadditiontothesefourfeatures,therearetwootherconditionsthatIdeem importantsothateconomiesretaintheideastheyproduce: 5. Theexistenceofalargemarket(incontrasttosmall,fragmentedmarkets orautarkyregimes); 6. Society’sabilitytodealwithfailure. Europepresentslimitationsasregardssomeofthesefeaturesthatneedtobe solved to fully benefit from the potential of the single market and radical innovation. First of all, strong investment is needed in the field of techno- logicalresearchanddevelopment(R&D).Inaddition,itisimportanttofoster the implementation of the outcome of R&D through close liaison between research centres and the corporate sector. This requires development of an entrepreneurshipculturesupportedbysociety’sabilitytodealwithfailure. vii OUP CORRECTED PROOF–FINAL,6/6/2016, SPi Foreword Inaddition,thequalityofhumancapitalshouldbeimprovedonanongo- ingbasisthrougheducationandvocationaltraining.Educationfacilitatesthe transmission of the knowledge necessary for the adoption of new working methods and new technologies—making it possible to adjust labour supply tolabourdemand—andalsoincreasesaneconomy’scapacityforinnovation bydevelopingnewideas. Finally, it is essential to promote and develop alternative financial instruments to bank financing and new types of financing, including seed andriskcapital.ThedeepeningoffinancialintegrationinEurope,including the creation of a single capital market, is key to facilitating European enterprises’ access to innovative financial instruments. Corporate self- financingisanotherdimensionthatcannotbeoverlooked.Strategiesrelying on extremely high leverage make enterprises more vulnerable to slowing demand and often incapable of responding to new market challenges. Self-financing must be reinforced so that enterprises become more resilient andcapableofmakingastrongercontributiontogrowth. II. Which Reforms to the European Governance Model are Necessary? To address these challenges, the European governance model requires changes.Specifically,anapproachfromthegeneraltotheparticularshould beadopted—anoverallview—tocomplementthetraditionalapproachfrom theparticulartothegeneral. It must be assumed that the whole is greater than the sum of its parts. Therefore, the whole must have its own governance model ensuring the reconciliation of the parts and the consistency and compatibility of the respectiveactionswiththeoptimizationofthewhole.Therefore,thefollow- ingshouldbetakenintoaccount: • spillovereffectsfromeachmemberstate’sactionsontheother countries; • centralcoordinationofthememberstates’policies. The body responsible for the economic policy of the whole and its consis- tencywithnationalpoliciesintheeuroareashouldbetheEurogroup,which wouldhaveapermanentandindependentgovernmentbody.Inaddition,an independentEuropean‘PublicFinanceCouncil’shouldbesetup,responsible forissuingdulyfoundedopinionsonfiscaladjustmenttrendsofthemember statesandtheeuroareaasawhole. Europe should also be equipped with mechanisms to safeguard the cohe- sion of the group in response to disruptive factors, such as: idiosyncratic viii OUP CORRECTED PROOF–FINAL,6/6/2016, SPi Foreword shocks exogenous to policy; common shocks but with asymmetric effects; and specific shocks resulting from poor policies by member states. The first two types of shocks require an attitude of collective responsibility within thegroup.Theshocksresultingfrompoorpoliciesbymemberstatesrequire financialsupportmechanismswithinherentconditionality.Forthiscase,it is vital that there is an institution, independent from the member states, empoweredandresourcedtonegotiatethefinancialsupportandassociated conditions with the country in question—a European Monetary Fund. An empowered institution, in the sense that it must not require approval by national parliaments of the conditions and the amounts required for the purpose;andresourced,inthesensethatitshouldbeequippedwithtechno- logicalandtechnicalmeansallowingforpromptandinformedaction. Thestrengtheningoftheintegrationprocesswillnaturallybeaccompanied by a democratic legitimization and accountability process. In this context, the great challenge is to ensure that the European Parliament is able to organizeitselfinlinewithtwogroups:theEuropeanUnionandtheeuroarea, creating a sub-Chamber that ensures control and political legitimization of alldecisionstakenatEurogrouplevel. In parallel, it is fundamental to optimize the operation of the European Commission, an entity that is critical for ensuring the existence and opera- tion of the European Union as a whole, and vital for contemplating the futureofthatsamewhole.Therefore,inthelongrun,theCommissionshould transitiontoaninternalorganizationmodelsimilartotheEuropeanCentral Bank’s: a Board of Commissioners formed by a commissioner from each member state who, in the framework of a collegiate body, participates in policy stance decisions and the resulting legislative proposals; and an Exe- cutive Board responsible for day-to-day management and implementation ofthepoliciesdefinedbytheBoardofCommissioners.TheExecutiveBoard would comprise a small group of commissioners, appointed on a rotating basisamongthememberstates. Finally, I would like to highlight a subject that I think is very important and that must be taken into account at both the European and national levels. There is no economic policy without political leadership conferring legitimacyandmeaninguntoit.Itshallbetheresponsibilityofthepolitical agents to decipher the proposals advanced by the economists, giving them senseandlogicasresponsestoeconomicgrowthsustainabilityandpeople’s aspirations, that is, by legitimizing them and making them possible. The dialoguebetweeneconomistsandpoliticians,whilerespectingtheirspecific fields (scientific versus social mobilization), is crucial and should go hand in hand, to produce sound economic policy. A good technical solution is not enough for it to be transformed into a successful or a viable policy. Likewise, a political message is not enough for it to be technically feasible. ix
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