40th International Working Party on Labour Market

Segmentation

Düsseldorf, September, 9-10 2019

Re-inventing Europe: reforms for EMU survival

Annamaria Simonazzi

Sapienza Università di Roma

Outline

Beyond the short run: the structural causes of the crisis

The process of Europeanization

Two shocks: China and Eastern enlargement

Reiventing Europe

1. EU macroeconomic responsibility

2. Reverse the policy mix

3. Fiscal harmonization (stop internal dumping)

4. Quality of demand: industrial policy to steer investment towards social needs

Last opportunity to avert disintegration?

Diversity and its implications

The EU has become more diverse and unequal in recent years

(Matsaganis 2019)

• The enlargements (in 2004, 2007, and 2013) rendered the EU ever

more heterogeneous.

• The Eurozone crisis widened the divergence in living standards

– In Southern Europe, living standards fell significantly during the crisis, and in

spite of the recovery (more energetic in Spain and Portugal, more sluggish in

Italy and Greece) they are still below their pre-crisis peak relative to the rest of

Western Europe

• Migration and the refugee crisis made European populations more

mixed, ethnically and religiously, but also more divided and anxious

• The emotional distance separating Europeans led to national

stereotypes coming back with a vengeance.

– The contrast between the quiet despair and humiliation palpable in Naples or

Athens, and the confident prosperity of Munich or Rotterdam augurs ill for the

future of the Union (or Milan and Mecklenburg-Pomerania).

Beyond the short run: the structural roots of the crisis

There are many explanations of what went wrong in the crisis

• Important to understand the distant causes of EU fragility

• Reforms must take account of

– Interdependence between countries

– Different levels of development

Reinventing Europe: From dependency to interdependence

: within the EU and

vis-à-vis the rest of the world

• convergence: widen the domestic market and the productive

capacities of countries at different levels of development

• EU-wide responsibility for growth

• Reversal of the policy mix

• EU-wide industrial policy: social engines of growth (technology,

innovation, and social objectives)

The structural roots of the crisis

The “European way” to global finance and monetary integration:

One size does not fit all

• 1970s- 1990s: Restructuring, LDCs’ competition, disinflation, financialisation

and forgone devaluation: premature de-industrialisation

• German disinflation. Different costs: labour market (Crouch 2008); price

elasticities; inputs content

• Industrial policy re-defined as competition policy. Different effects of

liberalization policies depending on the level of development:

- Late-comers: state aid, public enterprises, soft loans and subsidies

to private firms ready target of the competition arm of the EC

- Core countries: Coordination of the system of production (thick

network of firms, research agencies, public institutions, local

development banks) IP active «under the radar»

The structural roots of the crisis (2)

- US financialisation: financial markets’ discipline (and unruliness)– Privatizations of public firms: construction of «private monopolies» in public utilities and

reduction in investment and R&D expenditures (mostly made by public enterprises)

– Industrial profits diverted to finance and services

– Booms and busts: bubbles in the South: a creditor-debtor affair

Free trade between unequal partners, within a deflationary macroeconomic

environment feeds divergence (cumulative causation)

between and within countries

Italy: North: export oriented and linked to the core; South: dependent on public

transfers (clientelism)

Two shocks:

China: market (Germany) and competitor (Southern periphery)

East-ward enlargement. Redirection of German FDI and trade to

Eastern countries

• Are Italian wages set in Berlin… or in Bratislava?

– Competition (dumping?) between East (low wages and labour conditions) and

South (domestic devaluation):

– Lower wages, fiscal subsidies, lower taxes on profits (Leaman 2009)

Lower imputs costs for German firms

Threat of delocalization puts pressure on German wages

Plus: “domestic” shocks Fiscal heavens (Ireland, Netherlands…)

Can a common market survive with wage and fiscal dumping within

its borders?

Imported intermediate inputs by sourcing countries

Germany - transport sector (1995-2011)

Shares over total intermediate inputs used in production

Increasing dependency:

1. Peripheries

Wither domestic demand in the whole EU area

• In the South, austerity killed demand, production, and income

The Eastern periphery is basically a «global production platform» (or

enclave): trickle down effects to the domestic economy are still very

limited

With domestic demand subdued, both peripheries (better, some of

their regions) have become dependent on German (export) industry

An extremely effective trade multiplier (in downturns): transmission

of the German cycle to the whole EU area.

Increasing dependency:

2. whole EU area

Vulnerability of export-led policy: the German economy (and the

whole EU area) increasingly dependent on world demand

Self-inflicted wounds

• Germany in late 1990s: the sick man of Europe. Its success since the early 2000s

was also the result of the other member states’ ‘profligacy’

• By destroying the domestic market of the EU, austerity policies have destroyed the

buffer represented by domestic demand

Expansionary policies of countries with ‘fiscal space’ is not enough

to bring growth and convergence:

– It increases dependency

– Does not expand the EU domestic market

Fragility of the whole EU, at the mercy of international evolution

Germany’s dependence on export markets

Reinventing Europe

1. EU’s responsibility for (common) growth

A macroeconomic policy for growth, based on domestic

demand

The EU should take responsibility for the area’s growth and

employment

Expansionary austerity has proved a fallacy: Only if the EU is in

charge for growth

- the single states can be asked to respect the fiscal rules for

their budgets

– Labour cost competition between Eastern and Southern

peripheries can be avoided

– The whole EU area can free itself from international conditioning

EU unemployment insurance as a first step?

2. Reverse the policy mix

Monetary policy. QE

• Ineffective in increasing demand for investment (uncertainty and expectations on

future demand more important)

• Depreciates the exchange, reinforcing the export-led model

• Increases divergence between export-prone (more dynamic and developed) areas

and less developed ones, more dependent on the domestic market (e.g., South of

Italy)

In a deflationary environment, it is essential to respond to the solvency

problems of banks and sovereigns, created by the flawed institutions and

policies of EMU.

However, this could be taken care better by growth of income.

• Supplemented by a EU deposit insurance scheme

Fiscal policy: A EU Budget with fiscal autonomy

Tobin tax, Carbon tax, Digital tax (on MNCs)

3. Fiscal harmonization

Competition policy vs. Industrial Policy: shifting the focus from cost

reduction to capacity creation

Austerity impels generalized competition policies aimed at reducing

costs (race to the bottom)

• Social and fiscal dumping

negative spill-overs across countries and regions

ineffectual to sustain development (dead-weight)

exit of marginal firms reduction of productive capacity

Deflation

Long-term economic and social costs. It destroys the connective tissue

and reduces the productive basis, jeopardising, rather than favouring,

long-term growth

4. Quality and composition of demand

Not generic support of purchasing power (or demand): An extensive tax

and transfer system as in the US does not find much political support in the

EU

Hence: reconversion and up-grading of supply

an Industrial Policy capable of

favour growth to self-sufficiency in countries and regions left behind

Govern the technological transformation (huge reconversion costs; e.g.,

auto industry)

Reorient change towards social needs

Safeguard employment (level and quality)

The rediscovery of industrial policy

Altmeier’s (and Macron’s) way: more of the same thing?

– Industrie 4.0 plan for Germany: to consolidate Germany’s technological

leadership in the manufacturing sector

vs.

A coordinated and inclusive project?

Peripheral countries: absorptive capacity of the new technologies

guide the sectoral and geographical allocation of investment

Solve the conflict with fiscal compact (e.g., Golden rule for public investment)

Prioritize most deprived regions (Prodi and Sautter 2017)

Three conditions:

– sufficient funding

– ensuring that latecomer countries can participate on an equal footing and

– coordination across all levels

A Marshall Plan for European Recovery

Long-term plan of investment, approved by the European Parliament

– Social and physical infrastructures

– Environment, energy; innovation and knowledge; health and welfare

– Cross-cutting policies and institutions: education, R&D, legal system

Signals priorities to firms’ private investment

• focuses private investment incentives on these priorities (e.g., Guarantee Fund,

long-term financing)

• Public procurement to ensure demand

• Provision of patient capital. Long term horizon. Need for persistence of policies.

Financing: EU + development banks + social bonds, ECB?

Multiplier effects:

High domestic content

Synergies with innovation policies

Responds to new social challenges

Spurs new waves of innovation

Concrete measures:

Budgetary Instrument for Convergence and Competitiveness for the euro area to

support Member States’ growth reforms and investment.

• full use of the flexibility allowed within the Stability and Growth Pact.

Complete the Banking Union European Deposit Insurance Scheme

an action plan to fully implement the European Pillar of Social Rights.

– A fair minimum wage

– a European Unemployment Benefit Reinsurance Scheme

Tax fairness

– taxation of big tech companies (digital tax)

– A common consolidated corporate tax base

– Carbon Border Tax

Technological sovereignty

– Jointly defined standards for the new generation of technologies that will

become the global norm.

a New Pact on Migration and Asylum

full co-decision power for the European Parliament

away from unanimity for climate, energy, social and taxation policies.

A dream book or TINA?

• “A Union that strives for more” Ursula von der Leyen’s Agenda

Is a change of strategy likely? Conditions are changing quickly.

Challenges or opportunities:

Export-led growth is unsustainable in the long-run: both world-wide

and within the EU

Huge compelling needs/opportunities for domestic investment

A supportive EU parliament? (sovranist forces have been contained)

The dream of de-politicizing society and the economy proved to be just

a costly illusion.

It’s time to stress that “There is no alternative” to re-inventing Europe, if

it is to survive.

“The prospect of a world economy divided among a sclerotic Europe, a

nationalist US and an authoritarian China is a gloomy one” Adam

Tooze, NYT Sept. 5, 2019

To avert implosion:

• Rebalancing can only work if the focus turns to domestic demand

• The fiscal compact can only work if the EU takes care of demand

and employment at the EU level

• A more balanced European economic integration requires a

common undertaking to stop chasing emerging and member

countries’ economies on low wages.

• Regulated financial markets: free the states from the grip of the

markets, and separate State’s and banks’ ratings: A European

Ratings agency

• A EU fiscal budget. European bonds

• IP must fit the needs of countries/regions at different level of

development and focus on the technological and social challenges

“The German locomotive”