The European Union appears to be reaching a watershed moment with respect to economic policy. Economic growth and employment levels are far from satisfactory but the worst part of the euro crisis seems to have passed.
Economic analysis is not useless when it comes to emergency triage but it has its limits
At the end of May, the European Commission’s economic recommendations called for countries to shift their focus from austerity to structural reform. Only last week, the International Monetary Fund released a controversial report dealing with the effectiveness of the Troika’s Greek rescue policies.
Although the report was primarily optimistic, critics have seized upon its admission that the IMF underestimated the austerity’s impact on Greek GDP and the apparent policy disagreements between the IMF and the European Commission.
Many in the IMF appear to believe that Greek debt should have been restructured prior to the implementation of the country’s austerity programme, a move that was staunchly opposed by the European Commission. Those in favour of an earlier restructuring argued that delaying the process allowed private creditors (who knew some restructuring was inevitable) to flee and made Greek debt less sustainable.
The Commission, on the other hand, argued and continues to argue that restructuring had to be delayed until protection measures could be implemented to safeguard financial systems in the rest of the eurozone from the Greek ‘contagion’.
This is not the debate European policymakers need to focus on. There was no easy choice. Even, as the IMF report admits, its macroeconomic predictions for Greece were far too optimistic, a deep recession was inevitable and less strict austerity cuts in Greece were impossible.
Nobody can know with certainty how the balance sheets of other European banks would have reacted to an earlier Greek restructuring because there’s no way to know how much such a bailout would have led investors to re-evaluate other troubled countries in the eurozone.
Macroeconomic projections are never an exact science, yet, the IMF had to predict not only where Greece was headed but what the effects of very large, nearly unprecedented, changes would be. The fact that Greece had trouble accurately reporting statistics and the size of the policy changes exacerbated the potential for error.
Economic analysis is not useless when it comes to emergency triage but it has its limits.
Every situation is unique and fundamentally unpredictable elements of human behaviour tend to play a far greater role in crisis situations than in normal economic circumstances.
Rather than play a game of would-have-could-have-should-have, it is Europe’s responsibility to set the stage for future growth based on well-established economic principles.
Although the EU has made great strides in establishing the common market, there are still serious trade barriers inside Europe that need to be handled and even more serious barriers to fluid labour markets.
Looking outward is just as important as looking inward: the EU is pursuing a free trade deal with the United States that has the potential to be a serious engine of growth but EU trade relations with China have recently taken a nasty turn.
Sound economic policy is based on optimising long-term growth rather than basing future planning on the particularity of each crisis.
The most overlooked part of the aforementioned IMF report indicates that Greece fell behind in its structural reforms and privatisation plans. Although Greek leaders were able to get the public to swallow the bitter pill of austerity in the form of benefit cuts and tax hikes, Greece was unable to iron out flaws in the tax code, overbearing economic regulations, or barriers to efficient wage negotiation. As a result, Greek productivity is lagging.
As the rest of the EU shifts from austerity to structural reform, it too must avoid this trap. Opinion polls show that euroscepticism is rising throughout Europe due to understandable economic frustrations. European leaders at both the national and international levels have an obligation to channel this frustration into an effort to streamline the EU, not abolish it.
Public anger must be used to smash Europe’s inefficient bureaucracies, not retreat from the progress the EU has made.
David Casa is a Nationalist MEP.