EU policy guru: ‘Austerity plans risk stifling growth’

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Austerity measures to cut public debt and rein in speculation on the euro are threatening to kill the fragile economic recovery, warned policymakers ahead of a summit aimed at strengthening budget discipline in the European Union. Maria João Rodrigues, former special advisor at the European Commission and an economics professor, spoke to EURACTIV in an interview.

Maria João Rodrigues was a special advisor to the European Commission on the Lisbon Strategy for growth and jobs. She currently teaches European economic policies at the Institute for European Studies at the Université Libre de Bruxelles (IEE-ULB) and at the Lisbon University Institute (ISCTE-IUL).

She was speaking to EURACTIV Editor Frédéric Simon.

To read a shortened version of this interview, please click here

EU leaders are meeting on Thursday to agree on the Europe 2020 agenda for growth and jobs. What do you see as the main advances of the new strategy compared to its predecessor, the Lisbon Agenda?

There was an effort to update the strategic priorities taking into account the extent of the challenge. The group of challenges is wider today than in 2000 because we are confronted with competitors from all around the world. There are lots of emerging economies, not just the United States and Japan. On the environment, the central challenge now is climate change and regarding demographic trends, the ageing problem is now deeper. 'Europe 2020' made an effort in coping with these challenges.

But these challenges have already been known for a long time. In what way does the new strategy address them differently to the Lisbon Agenda?

Basically, the central ideas of the Lisbon Agenda have been kept. European competitiveness should be based on advanced competitive sectors, education and innovation and not on low-wage standards. So this choice is fully kept.

The other important point is that there is recognition that the current growth model is no longer sustainable and that we need to move to a greener economy and reform our welfare systems to make them sustainable, even while keeping a high level of social protection because this is the European tradition.

So regarding the strategic objectives, there is no radical change. The main point at stake now is whether Europe can overcome the difficulties in implementing the new strategy. And the difficulties from my viewpoint have to do with the lack of financial and political means that will make a credible strategy for the next ten years. For me, this is the central test. And I am worried about it. I think these means are still missing.

I am worried because there is a contradiction between the EU 2020 ambitions on the one hand and the financial and political means which are identified to implement this strategy on the other. First of all because we are having a shift towards austerity and this is, from my viewpoint, in contradiction with launching an ambitious strategy for a new growth model. Because if you really want to move to a new growth model, you need to invest much more.

There is a debate going on about linking the growth objectives of the ‘Europe 2020’ plan with the Stability and Growth Pact by allowing budget deficits to slip if public spending is geared towards the objectives of the strategy – so-called 'good debt' – while continuing to sanction 'bad debt'. Is it something that you see happening in this 'Europe 2020' plan?

No, and I think this is the central issue. So far I don't see solutions being adopted to move in this direction.

Let me be clear: I am criticising the shift towards austerity but I think that we need to make an effort of fiscal consolidation because it is true that public debt and public deficit levels are too high. We know why they are very high, because the governments had to take exceptional measures to bail out the financial system. Otherwise, we would have had a financial meltdown with terrible implications.

So some austerity is needed?

No, we need fiscal consolidation but not austerity, for me there is a difference. We need fiscal consolidation and structural reforms such as postponing the retirement age in order to make our social protection systems more sustainable in the long run. I really think this is fair for the next generation.

So we need this fiscal consolidation and structural reform but we also need investments in job creation. And so far, the combination between fiscal consolidation and growth is not good enough, because growth is being sacrificed to the benefit of fiscal consolidation.

And this is a mistake because it is much easier to achieve fiscal consolidation with a higher growth rate and with more investments and job creation. Without that, it will be extremely difficult to re-balance our budget. So we run the risk of making a big political mistake in the next European Council.

Which countries are blocking such initiatives?

This is well known. Germany is taking the lead for this approach on fiscal consolidation. But I think this is a very narrow vision about the possibilities of a real economic and monetary union. Because our level of interdependence is so high now that we need to coordinate not only for fiscal consolidation but also for growth.

So we need to have stronger coordination also for growth policies. And so far Germany does not want to discuss this. I think Germany is right when it is saying that we need to stick to fiscal responsibility because the euro is a common European public good and all members of the euro zone are responsible for the credibility of the single currency.

….which is understandable because German taxpayers are the ones who ended up footing the largest part of the bill for the Greek rescue.

Yes, but this is only one side of the coin. The other side is that we need to strengthen the coordination for growth policies too. This means, for example, having coordinated structural reforms. For instance, we should have a similar retirement age. But we also need to coordinate our budgetary policy and our economic policies in general to make sure that all members of the European Union can make the best from each others' growth potential and create a virtuous circle effect so that when an economy is growing, the others benefit from it. And so far, these positive spill-overs are not being used.

The European Commission proposed to have a peer review of national budgets before they are approved by national parliaments in its blueprint to reform the euro zone. Do you believe this is a good idea?

Yes, although we need to fine tune to make sure that national parliaments are respected in their competences.

How can this be done?

We should have an exchange of information on the main features of the national budget, not all the details but the main features regarding key indicators. By key indicators I mean not only public deficit and debt levels but also growth and current account balance, competitiveness and unemployment. In order to make sure that we have a win-win game in Europe before each state adopts its national budget. This kind of prior discussion can be extremely useful for each member state but also for Europe as a whole.

But critics say such a process raises a democratic issue because national parliaments are largely bypassed at the early stage of discussions. Do you agree with that criticism?

No, I don't agree. I think it is an illusion to think that we can be masters of our own future within the limits of our national boundaries. This is no longer possible.

The only way for European citizens to have an influence on their future is to participate actively in the discussion at European level regarding the priorities for economic policy in order to influence the debate at national level.

Our scope for choice at national level depends now completely or strongly on the choices we make at European level. So we need to understand that our national sovereignty will be stronger if we are more active at the European level of sovereignty. There are two levels of sovereignty, not only national but European.

You said Europe lacked political and financial means for the 'Europe 2020' plan. What financial means do you have in mind?

When I say we miss financial means, I have in mind several ideas. The first is to state clearly that member states which redirect their budgets towards the key investments identified in the EU 2020 strategy should be allowed more time to reduce their deficit and debt levels. There should be positive incentives.

Let me clear, there should also be sanctions for those that don’t comply with the rules of the Pact – they are already there by the way. But we also need to have positive incentives for investments in the 'green' or 'smart' economy. Member states should have more room for manoeuvre to invest.

A lot also depends on taxes, on the revenue side of the budget. Otherwise, there is no solution to square the circle of combining growth with fiscal consolidation.

Could new sources include a tax on financial transactions?

I am in favour of new sources of taxation because we cannot increase taxes on labour, which are already too high in Europe and this would be inappropriate when unemployment is rising. New sources would include carbon taxation and financial taxation, including taxation on financial transactions. But of course, we have to coordinate these moves because it is very difficult for a member state alone to introduce these kinds of taxes.

And finally, I think there is a third financial innovation, which has to do with the issuance of public bonds in order to reduce the cost of public debt. Otherwise it becomes very difficult to support these key investments that we need to support the implementation the 'Europe 2020' strategy.

Again, this is a very controversial idea and some countries, including Germany, are resisting it…

Yes, so that's why we need to fine-tune this instrument in order to make sure that there is no opportunistic behaviour and that these bonds are issued to finance the investments of the future, not to bail-out the debt of the past.

Would that be enough to convince the sceptics and put Eurobonds back on the political agenda?

Many governments are supporting the idea although some are against. We need to understand that what is at stake here goes beyond the issue of some member states financing the debt of others – of course, we should make sure that this does not happen. 

What is at stake here is to develop an effective financial system, which is able to support the public and private investments that are needed in Europe to support this growth strategy. I believe Eurobonds will be useful to decrease the costs of public debt and to decrease the interest paid by companies when they are issuing private bonds. Because we should not forget that public bonds influence the price of private bonds. And companies need to be supported because they need to invest and banks are now reducing their lending capacity.

So we need to mobilise savings in Europe and all over the world and for that we need to have an attractive instrument such as a Eurobond.

Returning to the ‘Europe 2020’ plan, do you see progress on specific national targets for example on R&D spending, poverty, education and so on? Germany argued that the EU should have no say on education for education for example. Do you see a breakthrough on those issues?

Well, this is a more positive story. After difficult discussions, it was possible to come up with a consensus. It was recognised that education is a central indicator and that Europe was lagging behind some key international partners. The need to increase the share of the population in higher education but also to fight against drop outs in secondary education was recognised and accepted by all member sates so I think we can have a final agreement with these targets in the next European Council.

On poverty, there were complaints by some Eastern EU countries that a target would not work because poverty is sometimes not even measured…

Again, after difficult discussions, it was possible to accept that tackling poverty should be a central priority of the 2020 strategy. There was a discussion about indicators which now take account of differences in income but also to material conditions and the impact of unemployment in the household. So it is a richer concept of poverty and I think the discussion we had over the last three months were very useful. 

We have heard very little personal involvement of EU heads of states and governments on this 2020 strategy. Do you see this as a worrying sign?

Yes, it can be seen as a worrying sign because we need the personal commitment of leaders to implement such a strategy which is a very horizontal and ambitious one. This was one of the lessons of the Lisbon Agenda, the leaders need to be involved strongly and regularly in the design and implementation of the strategy.

Now, heads of states are preoccupied with fiscal consolidation and maintaining growth which is their central problem. But the two things are completely connected. That is why we need to strike the right balance between fiscal consolidation and growth otherwise the 2020 strategy will not be credible.

The other lesson we should draw from the Lisbon Agenda experience is about the governance structure to implement the strategy. If you want to have an effective implementation, you need to commit all the relevant actors. This means having a very active European Commission taking the lead on making proposals and a strong European Council taking the central responsibility.

And from my viewpoint there is no contradiction between the two, this is not a zero-sum game. All formations of the Council at ministerial level should also be involved – economy, research, education, energy and so on. We need to increase the ownership of these Council formations. And let’s not forget that thanks to the Lisbon Treaty there is now a General Affairs Council. So these bodies should be fully responsible for the implementation.

And last but not least, civil society should also be involved – social partners, NGOs and of course the regions. We need to empower these actors for the implementation of the strategy. Again, I am a bit worried because I don’t see very clear language about that in the current drafts.

This participation is really needed because we are on the eve of a very important innovation in governance. For the first time, the national reform programmes will be prepared in parallel with the national budgets – they will be aligned in their timing. And I am clearly in favour of that because this means we can have a more consistent discussion about objectives and means to attain them.

Do you see this as a consensual point? Synchronising these debates at national and EU level would make the strategy a lot more political, as Chancellor Merkel pointed out rather critically.

Yes, this may be the case but frankly, I think we should move from a process which was a bit technocratic in the past to one which is more political and makes the relevant actors more responsible for the decisions and their implementation.

And you see a consensus building on the need to do that?

I hope so. This is not accepted by everybody but I think there is a majority in favour of it, who understand the advantages of having a more consistent policy-making.

Returning to the 2020 strategy, the Commission is preparing an innovation plan to be debated by EU leaders in October. What would you like to see in this plan?

I welcome this initiative to have a summit focusing on innovation because from my viewpoint it should be the central priority of the EU 2020 strategy. We need innovation which is not only technological but also in organisation and management; innovation which is not only about products but also about services, not only about things but also about people. The central element of innovation is creative people and this is one of the major assets of Europe.

And then, we need stronger between innovation, industrial, employment and education policies in order to build new competitive sectors. If you take for example the car industry, it there is a future for the car industry in Europe, it is greener, smarter and safer cars. But for that we need to take the lead in technological innovation but also in preparing people for these new jobs. So this means a lot of coordination between industrial, research and education in upcoming policies. And so far, we don’t have this.

So if I can suggest something for the next innovation plan, it is to have a European platform for each of the main sectors to coordinate innovation, research, education and employment policies. This means involving decision-makers not only in governments but also in the corporate and academic sectors to make sure that there is quicker employment in the areas of the future.

In China, for example, they have powerful tools to redeploy the economy towards future growth areas. And Europe is lagging behind.

What China also has, like the United States, is the financial might of a huge country, which allows them to throw money at very big and ambitious projects. In Europe, we are confronted with a fragmentation of national budgets which are tiny in comparison….

Absolutely. At the end of the day, what is at stake today is whether the European Union can behave like a big global player. Because there is this paradox: we are a big economy but we don’t see ourselves as such. We have very strong points but sometimes we are driven by a eurosceptical way of thinking which undermines our possibilities. There are intellectuals in Europe who believe that the most interesting way of being intelligent is to explain why problems cannot be solved. I don’t agree with this approach, I think the most interesting way of being intelligent is to identify how we can solve the problems in spite of the difficulties.

Let me emphasise one more thing about what is at stake at this summit. It would be a mistake to have a summit just to reply to what is understood as the short-term pressure of financial markets. Some of the analyst and decision-makers want a shift towards austerity. I don’t agree at all. What financial markets want is investments to be recovered and to ensure there is no default. But they also want a good return. So they want fiscal consolidation but they also want growth. They want to believe that Europe is moving towards longer term growth.

And for that we need to have a clear message which is not only economic but political. On the economy, we have to say that we are going for growth with this ambitious strategy, with financial means to support it, and with a good combination between growth and fiscal consolidation. 

And we should not be afraid to say that we are not only a monetary union but an economic union and a political union. So the test we face at this European Council is not an economic test, it is a political test. It is a test to our political will to behave like an economic union and a political union.

This is a decisive moment and we have many possibilities to have a strong restart for the European Union. The other choice is to have a kind of flop.

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