Ten Steps To Revive The European Economy

Manuel de la Rocha

Economistas Frente a la Crisis (Economists Confronting The Crisis) is a group of Spanish economists founded in 2011, who refuse to remain indifferent to the increase social suffering and inequality brought about by current economic policies. Our aims is to challenge the dominant conservative economic paradigms and promote a broader debate on proposals capable of influencing the understanding of the crisis and therefore of providing policy alternatives to manage the crisis in an effective way.

In its founding manifesto, Economistas Frente a la Crisis (Economists Confronting the Crisis) maintained that the European Union must champion the welfare state for everyone. Otherwise, not only democracy would be dealt a blow but the basis of the EU itself would be compromised. The Manifesto, written at the end of 2011, focuses on the economic and political repercussions of austerity measures on economic growth, unemployment and the model of social harmony that we, as European citizens, had built for ourselves.

In the two years that have passed since then, we have witnessed how flawed economic policy has endangered the continuity of the Euro and has caused great human and social suffering. During the summer of 2012, strains in the financial markets led Spain to seek a bailout for the banking system, in view of an imminent systemic collapse which, due to contangion effects, would have had a devastating effect on the European project.

Nowadays, the European economy has a shrinking growth potential, as reflected in the significant drop in real and potential GDP. This reduced potential implies that the short-term measures needed to jump-start the European economy may have little impact due to the detrimental impact of the crisis on our industrial and human capabilities; i.e., the millions of unemployed, the loss of human capital due to weak investments in R&D and education, and the bankrupcy of thousands of businesses.

Essentially, the foundations on which a robust recovery of the European economies could be built have been shaken to the core. The risk of entering into a jobless recovery, in the midst of a deflationary trend, threatens to hold back already weak economic growth. Growing levels of inequality and poverty also jeopardise cohesion and the European social model. The crisis has been used as an excuse to cut back social and environmental rights, which Europe should by no means leave behind.

For Spain, Europe has always been a source of ideas for change and progress: the Republican ideals of the French Revolution, the social and political movements that grew after the industrial revolution, or the modern ideas that grew beyond our frontiers while we suffered from the Franco dictatorship, to name just three. Our entry into the European Economic Community was Spain’s return to a place it should never have left. As Spanish citizens we cannot feel other than pro-European. Our education as economists and our professional backgrounds have given us the knowledge to uphold and consolidate the pro-European approach of Economistas Frente a la Crisis.

However, Europe’s institutional structure and its economic response to the crisis have been so damaging to European citizens as a whole, that euroscepticism is now rife and on the rise. EU leaders have been partly responsible for this, having pushed Europe so far off  its own project. Those are the same people who paradoxically now warn against a return to national, unsupportive attitudes. In the face of a deep economic crisis, the European Union has failed its citizens. It has failed in its aim to create prosperity, jobs, equality and solidarity. It has failed because it has not defended its raison d’etre, the model proposed by Europe to Europeans and the rest of the world: the welfare state.

This combination of an incomplete institutional framework and a flawed economic policy has caused the European project to fracture, causing wounds that will take a long time to heal. A legacy of 50 years of progress in European integration, cohesion and solidarity is now threatened by deep-seated divisions between the core and the periphery, between borrowing and lending countries, between eurosceptics and federalists. The response to this scenario must come from a stronger and deeper Union. A lapse into naïve, complacent Europeanism would be a fatal error. European economic policy is not set only by a select few countries. It is the rules of the game themselves that are eschewed by certain political interests, thus preventing the implementation of alternative economic policies intended to foster economic progress and enhance citizens’ wellbeing.

The time has now come for progressive European political organisations to review their position on the European integration process and the rules and institutions that were born out of Maastricht. Acknowledging this is by no means bad for the building of Europe, but rather the way out of this anti-european spiral.

Three Principles To Tackle The European Crisis

The proposal of Economistas Frente a la Crisis for Europe is based around three key pillars:

Firstly, a change must occur in fundamental aspects of European economic policy, while at the same time tackling the social and economic repercussions of the crisis. Austerity policies imposed by the conservative majority that governs EU institutions have proven counterproductive since they have further depressed economic activity without achieving their primary goal of significantly reducing public debt and deficits. European economic policy must be recovered as a means to hand Europe back to its citizens. The way out of the crisis will not be complete if we leave aside those who have been mostly affected by it, as any such incipient recovery would be lame and lacking any legitimacy. European political forces of the left should champion proposals to foster growh and job creation without sacrificing workers’ rights. Moreover, the necessary adjustment of EU internal imbalances should be more symmetrical and solutions to the debt overhang must be found so that its burden does not drag down growth in the years to come.

Secondly, Europe’s exit of the crisis must hinge upon a deliberate backing of a new, balanced, environmentally sustainable growth model, guaranteed by financial stability and built upon the European welfare state. Achieving this growth model requires the culmination of the Single European Market in sectors such as energy, telecommunications, services and the creation of a truly European labour market. Greater integration of EU markets and greater backing of strategies to innovate and foster good public education will help improve productivity and growth. An active industrial policy must also play a leading role in changing the productive model. It is important to also stress that sustainable and balanced growth cannot be achieved unless social inequalities are drastically reduced.

Lastly, in order to prevent future crises, the EU must decisively move forward in the consolidation of European economic governance, in particular through the culmination of the Monetary Union. To bolster this move towards integration, there must be further structural reforms that encourage growth without resorting to de-regulation or sacrificing citizens’ rights, who have already been victims of mindless austerity policies. Structural reform means amending the Stability and Growth Pact to provide incentives to public investment, particularly in sectors with high added value, while avoiding the unproductive over-investment which characterised the boom years. Structural reform means financial risk mutualisation and strengthening solidarity in financial regulation. Structural reform means freeing monetary policy of the restrictions imposed by certain members states, who have prevented the ECB from adopting a more expansionist and modern monetary policy, which would have required the use of tools aimed at diminishing deflationary risks and preventing the appreciation of the euro – yet another obstacle to economic recovery. In short, a monetary policy that contributes to economic and social cohesion.

This new economic governance must be completed with progress towards the Political Union, that would rebalance powers within the EU, reduce the democratic deficit and foster cooperation between citizens who suffer from similar social and economic difficulties. This is an ambitious institutional reform that is essential in order to bring Europe back to its citizens.

Time is running out for Europe. Clinging on to policies that destroy solidarity between countries and citizens is a direct attack on the foundations on which Europe was built: the welfare state – the proposal of the European Union for the whole world. Economistas Frente a la Crisis is making an appeal for the recovery of economic policy and its application to progress and citizens. Only in this way may Europe be recovered.

Our 10 Steps for Europe

(see link to full Manifesto)

1. Reducing unemployment must be the priority of economic policy
2. Efforts must be symmetrical in order to achieve balanced growth
3. Facilitation of private sector deleveraging with a view of minimising its costs
4. Financial stability for the real economy: Tackling financial fragmentation to help credit flow to SMEs
5. Environmental policies as a leverage for economic growth
6. The European architecture must be completed with a social pillar
7. Reforms in fiscal governance: Fiscal policy for growth and employment. The EU budget as a means for stability
8. Reforms in Financial Governance for stability and growth: Banking Union and sharing of risk
9. Reforms in Monetary Policy Governance: The ECB at the service of economic and social cohesion
10. Reforms in Political Governance: Rebalancing powers to redress the democratic deficit