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At the root of the recession in the euro area is a lack of confidence in the ability of individual countries to achieve the necessary economic flexibility required for a monetary union of regions with divergent economic developments and in the capability of EU institutions to manage the present crisis. The restoration of confidence is essential to end the recession and return to economic growth. The question therefore is not whether to give priority to fiscal austerity or economic growth but to find the optimal degree of austerity and structural reforms for the maximisation of confidence.
Europe is adopting a new approach: economic policy coordination in the EU and the eurozone has undergone fundamental reform over the last two years. Now it is conducted via three pillars that address general economic policy, fiscal policy and macroeconomic imbalances. However, disruption is still caused by exemptions, conflicting objectives and time inconsistencies. The new rule book will only be able gain a good reputation going forward if it is applied rigorously. The pressure of the capital markets will remain a key driver of reform in this regard.
The ECB’s non-standard monetary policy measures were taken to deal with problems in the financial sector and not to extend monetary policy easing beyond interest rate cuts, as was the case in the US and UK. Hence, these measures should logically only be continued as long as they promote efficient adjustment in the financial sector. The present regime of fixed rate, full allocation refinancing operations tends to ease the adjustment burden in the financial sector of countries with internal and external deficits and to shift the costs of rebalancing the balance of payments of EMU member countries to balance of payments surplus countries. Relative prices are adjusted by pushing prices in the surplus countries up without exerting downward pressure on prices in the deficit countries. With a new fiscal pact and permanent crisis management mechanism in place as of the middle of this year, it is now up to governments to engineer a more symmetrical adjustment. Should the new EMU architecture prove insufficient, governments should take the necessary additional steps and refrain from enlisting the ECB in making up for these deficiencies, in our view.
According to a Eurobarometer survey in 2011 only 5% of account holders had experienced difficulties in switching their accounts during the previous five years – a resounding minority compared with the 88% who said that they did not need to switch their account. A recently published European Commission report now suggests exactly the opposite, with 81% of the test consumers having had problems with switching their bank account. How difficult is it really to switch accounts, and why is this even important?
The high levels of debt and the lack of competitiveness in some southern European states are partly due to inefficient structures of government operation and public administration. Structural improvements in these areas are essential for political reforms and economic stability. Temporary “technocratic” governments in some countries could represent an intermediate stage. The principle which should apply is that it is not necessarily less state intervention that helps to solve problems but more efficient administrative structures. Europe can only remain united in diversity in the long term if the ability to achieve political reforms is guaranteed.
Many western industrial nations are faced with high and rapidly rising debt-to-GDP ratios. This makes it necessary to consolidate public finances even while economic growth is weak. Among economic theorists, however, there is a dispute about how different consolidation measures impact on growth. Keynesian theory predicts negative short-term growth effects, whereas the non-Keynesian view considers positive effects to be possible in the short term as well. It is against this background that we shall analyse the 'Emergency Budget' of the UK’s coalition government.
Surveillance of macroeconomic imbalances in the EU and the euro area is taking shape. On February 14, the European Commission published its Alert Mechanism Report (AMR), for the first time assessing macroeconomic imbalances within the framework of a structured procedure. What should one make of this report?
Greece, Ireland and Portugal require economic growth, increased productivity and more innovations. All three countries have pronounced weaknesses in business innovation activity. The conditions for corporate innovations could be improved via measures such as developing technology centres, ameliorating innovation funding and enhancing entrepreneurial expertise. The regional policy competence of administrative authorities also needs to be upgraded. While Ireland’s innovation system is already well developed, Portugal occupies a lower mid-table position in a European ranking of innovation systems. There is little potential in Greece to leverage the development of fast-growing industries with high productivity levels. Therefore, the upgrading of traditional industries and services is of major importance.