Give recovery a chance
- credits : StockMonkeys.com
By OFCE (Sciences Po) in cooperation with IMK (Germany), ECLM (Denmark) and AK Wien (Austria)
The independent Annual Growth Survey (iAGS) brings together a group of internationally competitive economists to provide an independent alternative to the Annual Growth Survey (AGS) published by the European Commission. The iAGS is published simultaneously with the Annual Growth Survey of the European Commission at the start of the European semester.
The iAGS seeks to irrigate and inform the public debate on economic strategy in Europe. Sustainability of public debt, fiscal adjustment and exit strategies from the recession will be fundamental concerns in years to come. These issues are complex and cannot be addressed with off-the shelf or one-size-fits-all expertise. Instead, an open and in depth analysis of hypotheses, empirical evidence, options and foreseeable consequences of possible policies is required.
Short presentation of the 2015 Issue
The ongoing recovery of the Euro Area (EA) economy is too slow to achieve a prompt return to full employment. Despite apparent improvement in the labour market, the crisis is still developing under the covers, with the risk of leaving long-lasting “scars”, or a “scarification” of the social fabric in the EA. Moreover, the EA is lagging behind other developed economies and regardless of a relatively better performance in terms of public debt and current account, the current low rate of private investment is preparing a future of reduced potential growth and damaged competitiveness.
So far, the Juncker Plan has not achieved the promised boost to investment. The internal rebalancing of the EA may fuel deflationary pressure if it is not dealt with through faster wage growth in surplus countries.
Failure to use fiscal space where it is available will continue to weigh down on internal demand. Monetary policy may not succeed in the future in avoiding a sharp appreciation of the Euro against our trade partners’ currencies. Such an appreciation of the real effective exchange rate of the Euro would lock the EA in a prolonged period of stagnation and low inflation, if not deflation.
A window of opportunity has been opened by monetary policy since 2012. Active demand management aimed at reducing the EA current account combined with internal rebalancing of the EA is needed to avoid a worrying “new normal”. Financial fragmentation has to be limited and compensated by a reduction of sovereign spreads inside the euro area.
Active policies against growing inequalities should complement this approach. Public investment and the use of all policy levers to foster a transition toward a zero carbon economy are ways to stimulate demand and respect the golden rules of public finance stability.