The current debt crisis that has hit Greece, Spain and Ireland has exposed the limitations of the Stability and Growth Pact that underpins the existence of the euro as the common currency of 16 EU nations. This pact needs to be re-engineered to balance the current bias in favour of monetarist and fiscal orthodoxy with more high-investment, high-growth strategy needed to instil new life in EU economies.
We have become accustomed to thinking that the eurozone countries are immune to bankruptcy. Many argue that if a country were to be at risk of defaulting, the rest would come to its rescue. But with countries like Greece, Spain, Ireland and Portugal already in deep trouble, and Italy possibly joining this distressed list in the short term, such unstructured rescues may prove to be more difficult than many analysts and politicians admit.
The French economist Jean Pisani-Ferry writing in the European Voice last January says: "The euro area has built a firewall but lacks a fire brigade, as Greece's economic problems may be about to show. The problem is that the euro area was built for calm waters and has relied on the power of preventive mechanisms to ward off crises. The building of a firewall does not mean that one can do without the fire brigade."
The Stability Pact was designed to avoid a debt crisis before it happened, not to mange it once it occurred. With so many eurozone countries in deep trouble, it is time to address this issue. The risk of contagion is too high to resort merely to political rhetoric to reassure the markets that members of the euro club will indeed rescue any member in distress.
Countries like Germany and France may still find it difficult to stomach the prospect of mutualising eurozone countries' debt, but it could be one way of avoiding a major crisis if any country using the euro were to default. It is ironic that while governments worldwide have been credited with avoiding a much worse economic crisis by using taxpayers' money to rescue failing banks, they are still inhibited from agreeing on IMF-style rules to rescue a country that faces an economic meltdown.
The tight fiscal rules that underpin the Stability and Growth Pact may also lead to further economic stagnation and low growth in many eurozone countries. While price stability is undoubtedly a crucial success factor for encouraging investment, without a counterbalance of economic policies that encourage aggregate demand, namely total investment and consumption, many economies including those of Greece, Ireland and Spain could enter a vicious circle of debt-deflation, rising unemployment and crumbling social cohesion.
The lingering enthusiasm for orthodox monetarism and tight fiscal policies that persists in the ECB has merits, but its concentrated dose is also putting at risk economic growth in the euro area for many years to come.
Monetary policy on its own can never address the fundamental issue of instilling confidence in consumers. The ECB's declared intention to start withdrawing quantitative easing sooner rather than later does not bode well for resumed strong economic growth that will create jobs and prosperity to millions of households in Europe.
There is a worrying disconnect between global finance and the real economy that ultimately is the catalyst for the creation of jobs. Stock markets may be booming and banks may well be recovering, partly through the alchemy of short-term speculation. But the prospects of strong economic growth in the real economy are still weak. It is such a shame that banks that have been rescued by taxpayers' money have used this money to mend their balance sheets, rather than help businesses to grow and employ more people.
To avoid a return to a bubble economy of boom and bust the EU must encourage its institutions to adopt more long-term investment-friendly strategies. The EU institutions, including the European Investment Bank, should adopt policies that encourage long-term investment in the infrastructure, improvement of educational programmes, and research and development to mitigate the excessive concern surrounding the deteriorating debt and deficit ratios of some countries. This change of emphasis in the Stability and Growth Pact is of vital importance because our present and future economic prosperity depends so much on the return of investmentfriendly strategies that encourage economic growth.
jcassarwhite@yahoo.com