Andrew Watt is head of unit for European economic policy and deputy director of the IMK. Here he answers 3 questions on economic policy in Europe and the independent Annual Growth Survey (iAGS).
iAGS stands for independent Annual Growth Survey. It is an annual report produced, since 2012, by the IMK alongside the OFCE, Paris, the ECLM Copenhagen and the AK, Vienna. It is commissioned by the Socialist and Democrats group in the European Parliament. The aim of the reports is to offer an alternative view on economic developments and economic policies in Europe to that provided by the European Commission in its Annual Growth Surveys.
No. Substantial progress has indeed been made since the nadir in 2012/13, both in terms of the economic situation and the institutional framework. The unemployment rate has fallen considerably and new institutions, such as the Macroeconomic Imbalance Procedure and a partial banking union have been established. However, the euro area is still far from having achieved stability. The scars of the crisis are deep and not yet fully healed. A renewed economic downturn or adverse political developments – such as a parliamentary majority for anti-euro parties in the Italian elections this spring – could quickly raise new and dangerous tensions. It is clear that much remains to be done to irrevocably put the euro on a stable footing.
There is no shortage of reform proposals for the common currency. The reform debate is complex, among other things because there are tensions between what makes sense in economic terms and what is politically feasible. In order to get one’s bearings it can help to lift the perspective from individual proposals – an EU finance minister, a scheme for European unemployment insurance, or, from the liberal camp more “market discipline” for Member State public finances – and ask the question: what has to happen for all Member States to be lastingly convinced that the common currency is conducive to the wellbeing of their citizens? First the Euro Area as a whole needs to be kept on a path close to its supply-side potential. In other words monetary and fiscal policy must, working together, steer aggregate demand so as to avoid booms and, especially, damaging slumps. Secondly steps must be taken to ensure that competitive tensions and imbalances between the Member States are kept within limits. Different institutional set-ups can serve these two basic requirements. In my view such policy coordination cannot, though, be assured by asking and enabling the financial markets to sanction supposedly “irresponsible” budgetary policies at national level. That would be a recipe for even more instability. In the longer run a considerable deepening of economic policy integration between the Member States will be needed. A stable Euro cannot be achieved if each Member State sets economic policy according to its own whims and perceived interests. Chapter 3 of this year’s iAGS report contains some ideas on how to move forward toward the needed deepening of integration.