On 16 September 2015, at the Chamber of Deputies in Rome, there was a
seminar on “Greece, the Euro, Alternatives for Italy”. After papers by Giulio
Marcon, Mario Pianta and Marica Frangakis there were two sessions on “Can Economic Policy be Changed?” and “Can Politics be Changed?”. In the
first session I took the view that European economic policy can be changed, without
necessarily having to change the treaties, and presented seven specific proposals
and a general proposition. The real problem is whether political forces would support
such economic policy changes.
We could (and should):
1. Remove public
investment from government deficit computation. Any constraint on the fiscal deficit, averaged
over a number of years and not applied to its current level, should exclude debt-financed public investments
because they do not entail an intergenerational transfer. This is widely and
authoritatively recognized: ”The current fiscal stance should not be confused
with the capital account… Computing the maximum deficit/GDP ratio as the sum
of the current and capital accounts is misleading.” (J. H. Drèze-A. Durré,
Louvain 2014). At present only the national co-financing of the so-called Juncker
Investment Plan is formally excluded; the principle should be extended to all public investment.
2. Remove from
the computation of government deficit any borrowing incurred to finance the
payment of government arrears owed to enterprises, taxpayers, as well as the particularly
scandalous arrears owed to pensioners. Such borrowing does not result in
additional debt but only in a change of creditors: the loans incurred to
liquidate arrears cancel out with the liquidated arrears.
Thus it should be recognized that public debt is actually
higher than it looks, for it should include not just the cumulated excess of
actual payments over receipts but also the accumulation of payment arrears
towards enterprises, taxpayers and pensioners. But since the payment of arrears
leaves unchanged the amount of total public debt, it should not be included in
the government deficit which by definition should be equal to the increase in
government debt.
3. Revise the
calculation of a country’s structural deficit by the European Commission, which
determines the maximum fiscal deficit that a government is allowed. At
present this is following a particularly restrictive methodology and should be
converted to standard OECD procedures, which would allow a modest but
significant broadening of fiscal space.
4. Tighten the
existing rule that a EU member country should not exceed a trade surplus of 6%
of GDP, restricting it to 4% in line with the limit set to a country’s maximum
trade deficit, and actually enforcing it, for instance imposing an
equivalent minimum fiscal deficit on the trade surplus country, in place of a
token fine. This would stop the surplus country (e.g. Germany at 7% of GDP)
forcing its Southern partners to incur higher deficits.
5. Convert the
pension system, recently reformed from a PAYE system (Pay As You Earn, i.e.
re-distributive, defined benefits) to a fully funded system (capitalized,
defined contributions), wholly or partly back to PAYE.
Both systems are potentially viable and capable to
deal with population ageing (the capitalized system promotes financial markets
but is more vulnerable to economic crises), but the transition from PAYE
to a fully funded system makes a pension debt, which is conveniently hidden and
buried, unnecessarily surface, equivalent to the present value of current
employees’ contributions no longer available to finance current pension
payments. (A country’s PAYE pension debt should only include the present value
of that part of pensions – if any – which exceeds what can be financed out of
pension contributions).
The reversal of such policy, as exemplified in the
recent experience of Poland and Hungary, restores a country’s fiscal space to
the full extent of the emerged pension debt.
6. Insure member
countries against the risk of growth under-performance with respect to the
average.
J. H. Drèze and A. Durré (Louvain, 2014) suggest an ingenious scheme whereby a European Agency like the ECB could costlessly provide such an insurance. Eurozone governments would issue bonds indexed to the growth rate of their country’s GDP. The ECB would purchase a balanced stock of such bonds, thus earning a total rate of return equal by definition to Eurozone average growth. Thus the ECB could compensate below-average growth countries for their under-performance, out of the extra-interest earned from countries that record growth faster-than-average. No cross-subsidization among member countries (Transfer Union) would be involved. (Warning: this scheme would work on condition that no member country defaults on such bonds).
7. Mobilize the
present value of the ECB Seigniorage – estimated by Willem Buiter to be of the
order of €3,400 bn (sic!) – to gradually withdraw government bonds issued by ECB
shareholder countries in proportion to their shares, thus avoiding a transfer
Union. Again, no Transfer Union would be involved.
See P. Paris and C. Wyplosz (2013 and 2014), on their P.A.D.R.E.
(Politically Acceptable Debt Reduction for the Eurozone) scheme: the ECB would
use seigniorage to pay interest on perpetual bonds issued to replace and retire
outstanding Eurozone debt.
I proposed a similar scheme (on my blog Transition),
envisaging Eurozone bonds retirement directly financed by the ECB by securitizing future seigniorage.
8. A
general proposition. Finally, and
more generally, economic policy changes require the recovery of quantitative
instruments of economic policy, in place of dubious, possibly
counterproductive, so-called structural reforms (a euphemism for the
destruction of the Welfare State). We need to recover
- monetary policy, which first was delegated
to an independent national central banker, then transferred to the ECB in
Frankfurt;
- fiscal policy, i.e. the level and
structure of taxation and public expenditure, now constrained by the recessionary
straightjacket of EU fiscal austerity rules (Maastricht, the Growth and
Stability Pact, the Fiscal Compact);
- the price and investment policy of
state enterprises, now largely privatized or in the process of privatization;
and even
- direct controls, now abandoned in
favour of market forces.
The instruments are there and we know
how best to use them. The problem is the lack of political will.
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