Last week’s contribution focused on the European Council and the ‘possible’ economic agenda for the near future. The communiqué at the end of that meeting was not known at the time the article was written. It is now possible to comment on and assess the official communiqué following the meeting and really establish which way the wind will blow in the EU in the coming months.
From what had been leaked to the media, the odds were that the EU would allow member states flexibility with regard to the deficit – GDP ratio as long as they implemented the necessary structural reforms.
In reality there has been a departure from previous orthodoxy that fiscal consolidation was to be given priority above all else. However, governments could no longer ignore the rise in unemployment and, especially youth unemployment, to unacceptable levels; the low levels of economic growth; the deep recession characterised by a low level of consumer demand and investment to an extent that some analysts are fearing deflation; the looming challenges of an ageing society.
In reality there has been a departure from previous orthodoxy that fiscal consolidation was to be given priority above all else
The conclusion of the EU summit was that fiscal discipline needed to be balanced with measures that support growth and that fiscal consolidation must continue in a growth-friendly and differentiated manner. Structural reforms that enhance growth, while at the same time improve fiscal sustainability, were to be given particular attention. Some heads of government tried to give the impression that this is nothing more than making use of the flexibility afforded by the existing Growth and Stability Pact rules.
In effect, it is a change of course, which was seen as inconceivable up to 12 months ago. In establishing the five overarching principles as part of the EU’s strategic agenda for the Union in times of change, reference is made to stronger economies with more jobs. On the other hand, no mention is made to fiscal consolidation. Unemployment is described as the EU’s highest concern.
The statement also makes reference to what is meant by structural reforms. They include increased action to reduce the tax wedge on labour, reform of product and services markets and public administrations, improvement in the business environment, better access to finance, enhancing the functioning of network industries and reform of the education systems.
They are all reforms that will help the economies of the 28 member states to function more productively. Again nothing is said about reforming public finances.
The document of the European Council then speaks of the initiatives that are expected to generate economic growth. Mention is made of the need to fully exploit the potential of the single market; the promotion of a climate of entrepreneurship and job creation; the need to invest in the infrastructure to prepare the economies of the member states for the future; making the EU more attractive within a global economic context; and strengthening the economic and monetary union.
It is worth highlighting that to implement these initiatives, there cannot be a policy of fiscal rigour. It does not mean that governments can become wasteful once again. However, it does mean that governments need to allocate financial resources for these purposes. A policy of fiscal rigour would scupper all these initiatives.
It may well be the case that the EU has recognised that both the UK and the US got themselves on a path of economic growth before the eurozone because it adopted a bolder monetary policy, generally referred to as quantitative easing, and a bolder fiscal policy by focusing on job creation while becoming less wasteful.
The results achieved by these two countries may well have forced the EU, and especially the eurozone, to change course.