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Time to recast economic policy

May 31, 2012

THE European economy is in the doldrums. The countries on the periphery are already threatened by sky-high youth unemployment, stricken banking systems and economic stagnation — all before a possible break-up of the euro that would make matters still worse. Even countries at the centre are being impacted by loss of confidence and fear of the future.

What we need from European leaders and policymakers is to seize the moment — not just to stabilise the euro but to use the opportunity to recast the whole framework of economic policy so that it permits member states to put their public balance sheets behind their banking systems, reframe innovation and investment policy and redesign their social contracts so they offer crucial security — but also more flexibility. This is a moment to act.

Perhaps the worst aspect of the current crisis is the way it is killing faith in the notion of European integration — that Europeans acting in concert can make their economies and societies stronger rather than weaker. Political leaders in both France and Germany genuflect to the idea of more Europe — but with no agreement about what more Europe could mean.

There is well-meaning intent but no intellectual content that goes beyond national agendas — in Germany the well-known commitment to budgetary discipline and in France, under its new leadership, to government-inspired “growth”.

What is needed is a common analysis driven by practical realities and intellectual energy, some joint giving of ground and then decisive action in the name of Europe.

Firstly Germany must begin to recognise that asking all eurozone countries to commit to incredible economic policies, especially in the wake of a financial crisis and overhang of enormous private debt, is simply unrealistic.

Financial markets do not believe that Greece can stay in the euro if the price is mass unemployment and privation, even if to a degree the Greeks are the architects of their own ruin. Nor do they believe that Spain can solve its banking crisis with no support from the rest of Europe, even if again Spain is in part the architect of its own folly. Credibility is not served by incredible policies.

Begin with the eurozone rules. One of the follies of American neoconservatism was the proposition that capitalist economies and businesses could manage existential risk without the support of the government. After the financial crisis we know differently; the long-standing European view, that business and the state are co-dependent, has been proved wholly right.

If the eurozone is going to express the particularities of European capitalism it has to permit states a degree of freedom to use their balance sheets and their tax base to co-generate wealth.

Instead, German anxiety to impose iron discipline across a continent is fusing with American neoconservative notions that nothing more is needed to stimulate enterprise than a free market and a minimal state.

Rather, what is needed is the creation of a 21st-century European social market economy in every member country — but respecting its particular institutions.

The main elements are clear. The European Central Bank should be able to support national central banks which buy any class of financial asset that has created new jobs, new lending or new investment. — The Guardian, London