A common fiscal policy for the eurozone, the prospect European politicians have staved off for years, may become a reality – at least in part – sooner than people think, HSBC’s senior global economist Karen Ward told The Sunday Times.
The key variable in all my long-term work is education
In her breakfast presentation to the business community on Wednesday, Ms Ward proposed her own solution to the long-drawn eurozone crisis. The key lay in a common fiscal policy, and a eurozone treasury to monitor countries’ behaviour.
Canary Wharf-based Ms Ward recommended good behaviour be rewarded with low interest rates, debt relief, and infrastructure bonds from the European Central Bank.
“Most people say politicians will never agree to a common fiscal policy because they would lose control,” she explained afterwards. “But much of what is being asked of governments in terms of fiscal policy, regulatory change and labour market reforms must take place whether countries stay in the eurozone or not.
“Two major things have happened in the last 20 years. Our populations are ageing rapidly and we have to face up to the fact that we are going to struggle to afford pensions and healthcare – eurozone members or not. It is just that monetary union is forcing governments to take decisions more quickly. And, we are all competing with China.”
Why would investors establish companies in Europe, Ms Ward asks, when countries like France offer 90 per cent unemployment benefits to people who lose their jobs? Levelling the playing field is the only way to put the eurozone on a stronger footing.
Ms Ward, who last week addressed her fourth annual business breakfast in Malta, believes austerity has done little for Europe other than deliver deeper recessions.
A more appropriate response to mapping austerity is designing a five-year plan of all the reform that was required and making it public so that populations understand what the future holds. This is where the ECB and the eurozone countries have to play a higher role and reward countries for their efforts.
The continuing lack of foresight and the shocking social consequences of austerity have the eurozone in the clutches of a vicious circle – hurried Sunday night decisions being made so politicians have something to tell the markets on a Monday morning.
The political crisis is hindering the formulation of a plan, but the situation could be more promising after this weekend with the results of today’s French election. Italy goes to the polls in a few months, and with a new set of people around the table, Europe’s leaders might show some more forward thinking.
Earlier last week, Ms Ward warned that the eurozone crisis was nearer its start than its end but she is confident the euro will survive. The former analyst for the Bank of England’s Monetary Policy Committee says prospects for each eurozone country look brighter in the monetary union than outside it.
“Remember, many populations voted for governments who promised change,” Ms Ward stressed. “They know successful economies are not built on debt or housing bubbles. People underestimate the consequences of devaluating currencies. If countries buy most of their food and energy from elsewhere in the world, devaluation will not help at all. Imagine if Italy were to revert to the old days of ‘devalue and inflate’.”
If Italy, for example, were successful in its labour market reforms, the country would be in for a “fantastic” decade: the productivity increases it would reap would be phenomenal, Ms Ward explained.
On her visit last year, Ms Ward produced the results of a study, ‘The World in 2050’, in which she showed exactly how rapidly the emerging markets would catch up with the developed world. She has since published an update and factored in new emergers alongside Brazil, Russia, India, and China. The Philippines, Indonesia, Peru, Vietnam and Nigeria – “there will be as many people in Nigeria in 2050 as there are in the US” – will be forces to be reckoned with in the next few years.
As China moves up its value-added chain and becomes more domestically- and service-oriented, there is an opportunity for the developed world to satisfy its demand. The demand from all other emergers will provide businesses in Europe and the US with new consumers. The shift is happening so rapidly that Ms Ward believes the rebalancing that was originally thought to span 25 years could take place as quickly as five years.
Societies, economies, and politicians on this side of the world had better get face the fact that they are affected by the rest of the world, not only by ensuring that they are a step ahead but by bringing the low-skilled back into the workforce.
“As a society, we either make sure the section in society which is struggling to compete is brought back into the job market through education – or face life on benefits. The social cost of that is extremely high.
“The key variable in all my long-term work is education. There are huge population economies that are paid much less than us, which are becoming more sophisticated, and aspire to be among the largest economies in the world. We need to get a move on.”