Juncker’s economic policy strategy has added a pillar, consisting of investments in support of growth and competitiveness, to the two existing ones (fiscal discipline and structural reforms)…..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The development is welcome, but does not seem so revolutionary. Most importantly, it is not sufficient, alone, to offer reassurance on the prospects for the European economy. The other crucial need is to avoid the imposition of pro-cyclical fiscal policies, which might be perceived as crucial for the credibility of the European Commission.
In his speech before the European Parliament, the incoming President of the European Commission, Jean Claude Juncker, outlined an economic policy founded on three pillars: structural reforms, fiscal credibility, and investments: the latter represent the additioncompared to the past. The two themes that have dominated economic policy since before the crisis, and most importantly after it, remain in place, namely the focus on fiscal discipline and on structural reforms geared to supporting competitiveness, i.e. on growth driven more by foreign demand than by domestic demand. These two elements had also greatly conditioned the European Union’s response to the debt crisis between 2010 and 2012: the designing of the crisis resolution mechanisms was subordinated to economic reform plans, whereas the introduction of rapid stabilisation mechanisms was resisted at length out of fears of that it could encourage destabilising behaviours. On the other hand, while appreciable corrective measures have been introduced, such as a focus on structural balances, the control system has become stricter (strengthening of the debt rule, balanced structural budget obligation), making no allowance for a pace of the post-crisis normalisation process slower than in the baseline (and overoptimistic) scenario. The innovation represented by the monitoring and correction of macroeconomic imbalances has also been introduced with an implicit recessive distortion, geared to supporting policies aimed at containing demand and at internal devaluation in deficit countries. The paradox is that while the statement is made that growth may only be spurred through supply policies, and that the negative effects of austerity must be accepted, the models used to estimate potential GDP and the cyclical component of the fiscal variables assume that the recession entails persistent effects on potential growth.
To what extent does the Juncker agenda mark a discontinuity compared to the previous strategy? Apparently, a rather small one. Juncker, in any case, said that “the response to the current economic challenges cannot be top-down”. The 300 billion euro investment plan is not aimed at fuelling the growth in demand, but at supporting growth potential growth, balancing a part of the €500 billion gap in capital expenditure compared to 2007. Also, whenhe launched the idea in July 2014, Juncker clarified that the funds would have to have come from current budget allocations, from the EIB, and from the private sector. In truth, even assuming that a package is presented by Christmas, this is unlikely to translate very swiftly into actual spending on energy, transport, or broad band data transmission infrastructures. While there is no harm in this, the package cannot be considered a sufficient response to the risks of a fallback into recession the euro area is presently facing.
Another element of the strategy should be the postponement to more favourable phases of the cycle of further fiscal consolidation, using all the creativity possible to make this choice compatible with the Stability Pact. Understandably, on this point Juncker showed no sign of openness in his speech. The French daily Le Monde speculates that, for fear of losing credibility, the new Commission does not like to start with a plain violation of the SGP; for this reason, it will fight to get more structural adjustment from France and, possibly, Italy. However, it would be astounding, and worse for the credibility of the Eurozone governance, if a restrictive and pro-cyclical fiscal policy were imposed in a period of economic slowdown, and with so much slack to mop up.
Source: BONDWorld.ch
Newsletter
