Returning to Growth: Easier Said Than Done

Over the last few months, the European policy debate has moved toward the necessity of overcoming austerity and implementing policies aimed at restoring growth that have a faster impact than slow-acting structural reforms. This shift is motivated by the negative macroeconomic performance recorded over the last three years and has gained momentum in the aftermath of European elections.

However, if the need to move away from austerity permeates the debate, the practical achievement of a reversal of austerity finds dauting hurdles in the very structure and constraints of the Economic and Monetary Union. In fact, the overall project of creating a common currency area and a central bank to manage the single currency was based on a specific political and economic vision capable of justifying the functionality of such a construction. By looking at the proceedings of the Delors Committee, it is clear that the founding principles and structures of the Economic and Monetary Union permeate the whole edifice, prescribing a whole set of policy stances.

Thus the European Central Bank is put in a position of absolute independence and impartiality vis-à-vis European and national decision-makers, monetary policy having the stability of the currency as sole objective. From this follows that monetization of government debt is ruled out in all cases; even in the event of extraordinary difficulties any form of bailout is forbidden. At the same time, public debt is framed in simplistic terms as a "problem" than needs to be managed, while discretionary fiscal policies are actively discouraged, by imposing nominal restrictive fiscal rules (i.e. the well-known Maastricht parameters).

The fundamental assumption was that the combination of common market, single currency, monetary stability, and judicious management of public finances would produce a spontaneous convergence in macroeconomic performance among the various economies of the eurozone, while at the same time yielding maximum growth for all.

When the economic and financial crisis hit the market for government debt issued by the GIPSI (Greece, Ireland, Portugal. Spain, Italy), thus threatening the very survival of the euro, European decision-makers opted for austerity, the policy choice most coherent with original architecture behind the Single Currency. Today, re-orienting economic policy around the formula "policies for growth" poses the problem of whether the current institutions of the Union are able to coordinate renewed public intervention in the economy. How and where can 18 governments coordinate their economic actions? How to prevent national initiatives from clashing with each other? And last but not least, will monetary policy be able to accommodate a plurality of different fiscal policies?

In conclusion, absent a profound renewal of the Economic and Monetary Union, the rocky road taken with austerity policy three years ago could well remain the only path available.