An economic plan for Europe (November 2011)
 

Thomas Colignatus
November 10 2011 
 

The European Union has a wide-range agenda to tackle the economic crisis. The plan presented here provides a comprehensive alternative that is fundamentally different because of its innovations in economic theory.
 

The "economic plan for Europe" that I presented in September still stands solid (Colignatus 2011abcd, Stavrou 2011). It builds upon an earlier report in a Vox-EU column (2009). The EU was not convinced and rather caused the sovereign debt crisis. Always willing to help I extended the analysis with a part on central banking and money. The current EU plans for Southern Europe will not work, see Baldwin (2011), and severe unemployment and poverty there threaten. My advice for Southern Europe in short notice is to reduce working hours by 20% and reduce VAT to 1% so that incomes remain fair, effective tomorrow. It is important to keep people in jobs because the technology frontier keeps advancing. The following lines then are for the structural solution.

To my knowledge my plan is the only comprehensive alternative to the present EU agenda. Of course the EU agenda is large, with debt relief, growth initiatives, plans for the European Investment Bank, and so on. What is important is the system. Common alternative proposals tend to concentrate on some aspects and then lose sight of the whole system, so that the discussion seems rather fragmented. The key notion in the plan is that we want the system to work: and hence the innovations are selected that allow this to happen. Don’t just innovate but concentrate on what is vital for a workable European economy.

Kanzler Merkel’s strategy is apparently to keep a continual crisis. The current treaty on the euro has no effective way to force Greece and Italy to adapt their economies. The only way to force them to change their economies is by high rates of interest in the market place. Europeans are getting tired of all this and apparently the Kanzler hopes that they at one time will relinquish more of their national sovereignty to create a European fiscal union. The Economist (2011) reports that Merkel is willing to adapt the German constitution. The EU thus muddles through with sticks and carrots, but the price is extremely high with unemployment and poverty in Southern Europe, and it creates anti-EU resentment. 

The European Redemption Pact (ERP) proposed by the German Sachverständigenrat (Bofinger et al. 2011 and the Annual Report 2011) considers solidarity between strong and weak nations versus accountability of all. There is the moral hazard between lender and borrower that when the loan is squandered then it cannot be recovered. The ERP is similar to the conditional eurozone bonds suggested by Muellbauer (2011). Instead of a permanent joint guarantee for all debt below 60% there is a once-only redemption process for what is now over 60%. This is relevant reasoning on a single aspect but when seen by itself it is also the wrong diagnosis since we need the whole picture. The ‘solution’ to one single aspect can be counterproductive as well. The ERP comes with strings attached (rules 12-15) such as embedding debt-brakes into the constitutions of member states (as also the EU intends). In the United States we see how such debt ceilings create havoc, both last Summer with a hairline default and now with the Supercommittee. Of course the US suffers from a severe case of political deadlock but the principle is the same.

The full analysis of the EU crisis requires at least two other points that are difficult to face up to, both for German economists themselves but also for economists from countries that depend upon German loans and who do not want to seem ungrateful. (1) The German export surplus would have to disappear via more homeland investments and higher wages for the skilled workers, and more employment for low-skilled workers via a differential wage and tax policy with for example a reduction of VAT to 1%. (2) The European System of Central Banks would have to be adapted to a proper Central Bank for the EU. Der Spiegel (2010) shows some awareness of this but Germany should rather focus on it. The Sachverständigenrat (2011:9, point 23): "In Europe Germany must become the central generator of strategic visions and projects." If this concerns self-criticism then it is laudable. In my impression the Sachverständigenrat intends well with the ERP proposal but these good intentions would really begin to sparkle when it would start studying.

A key innovation in political economy is the suggestion to extend the Trias Politica – with its checks and balances of the Executive, Legislative and Judiciary branches of government – with an Economic Supreme Court. If all member states of the EU have their own national Economic Supreme Court, then we do not need debt brakes and many regulations from the center, but then we can rely on local knowledge to guide economic policy making. 

A key innovation in economic theory is the analysis on the tax void and the dynamic marginal rate. See Colignatus (2011c) for how stagflation can be tackled.

A key innovation is the diagnosis of the current crisis as a case of "repressed stagflation bursting into the open". Stagflation was a problem in the 1970s and seemed unsolvable till President Reagan came to power with his neoliberal agenda. This seemed to work but only repressed stagflation. For the last 30 years we have had a huge Keynesian stimulus, not quite via government expenditure but via the creation of financial means and the inflation of assets. Innovation in the economy has been fueled not only via deregulation but also by the overabundance of available funds created by the deregulation in the financial markets. Re-regulation brings stagflation into the open again. Policy makers however are hesitant to fully re-regulate for fear of mass unemployment. But stagflation can be tackled.

It is a key innovation in economic analysis that we need national investment banks to reduce imbalances over time and space. Reagan’s experiment with Keynes is too costly and there are more rational ways to achieve better results. We need investments in Greece and indeed also in Southern Italy (Magna Graecia). The Sachverständigenrat suggests that indebted countries transfer part of their gold as collateral for the redemption fund. This is financial thinking from a barbarian period when gold was important. Why not transfer money and if you really need gold then buy it on the market – but then use it for something useful ? Instead, we need jobs and investments. Here Southern Europe can provide ‘collateral’ by creating the conditions that are favourable for investors, for example like creating investment zones like Hong Kong once was.

When Germany discovers this analysis, it will be a rather special and sobering thought that these innovations have been available since the fall of the Berlin wall, see Colignatus (2011d). The integration of Eastern Germany was much costlier than necessary, and this was known to some economists at that time. The Trias Politica fails, at high costs. Now Southern Europe starts suffering a worse treatment than Eastern Germany, see also Steingart (2011). There is an alternative.
 

References

Colignatus is the preferred name of Thomas Cool in science. He is candidate for President of the European Union for the Dutch Sociaal Liberaal Forum.

Baldwin, R. (2011), "EZ rescue or recession: Fallout of the October 2011 package", http://www.voxeu.org/index.php?q=node/7176

Bofinger (Peter), Lars P. Feld, Wolfgang Franz, Christoph M. Schmidt, Beatrice Weder di Mauro (2011), "A European Redemption Pact", http://www.voxeu.org/index.php?q=node/7253

Colignatus (2009), "The current economic crisis: A solution that "lies buried and obscured in a mass of false theory"", http://www.voxeu.org/index.php?q=node/3087

Colignatus (2011a), "High Noon at the EU Corral. An economic plan for Europe, September 2011", http://mpra.ub.uni-muenchen.de/33476

Colignatus (2011b), "An economic plan for Europe", Sunday October 23, 2011, http://ekathimerini.com/4dcgi/_w_articles_wsite3_1_23/10/2011_411466

Colignatus (2011c), "Definition & Reality in the General Theory of Political Economy", 3rd edition, http://thomascool.eu/Papers/Drgtpe/Index.html

Colignatus (2011d), "The ghost of the Berlin Wall of 1989 and the crisis of 2011", memo, http://thomascool.eu/Papers/Drgtpe/Crisis-2007plus/2011-10-16-Ghost-1989.html

Der Spiegel (2010), "'Lies, Damned Lies and Greek Statistics'", http://www.spiegel.de/international/europe/0,1518,678205,00.html

MuellBauer, John (2011), "Resolving the Eurozone crisis: Time for conditional eurobonds", http://www.voxeu.org/index.php?q=node/7081

Sachverständigenrat (2011), "Assume responsibility for Europe", http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/an2011/chapter_one_2011.pdf

Stavrou, Protesilaos (2011), "Chaos in Europe, the G20 in Cannes and the need for constitutional changes – Interview with Thomas Colignatus", http://protes-stavrou.blogspot.com/2011/11/chaos-in-europe-g20-in-cannes-and-need.html

Steingart, Gabor (2011), "If I were from Greece", http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_28/10/2011_412321

The Economist (2011), "Wake up, euro zone", http://www.economist.com/node/21533392