The debate had started with the presentation of the independent Annual Growth Survey presented by Xavier Timbeau. Just out of jealousness: if you look at the team of collaborators of the project, you'd want to be in it - I do not often see projects of this size which nearly employ a whole institute. Anyway, there are two stunning figures in the report:
- Growth in Europe measured at the regional level was converging before the crisis. This has stopped. (well, the leverage of a few regions in the regression may be very high, but it looks like it's about true)
- Inequality within countries is stable, but in the EU as a whole it has increased. (again, here the difference may be sensitive to a few idiosyncratic swings and in absolute terms isn't that big)
Despite the reservations, I say that these - related - findings can be regarded as stylized facts. For instance, in the convergence/divergence report we did for Eurofound, we also registered convergence in working conditions before the crisis. In the WALQING project (soon to be published in a Palgrave book) we found convergence in the structure of employment. In the CAWIE project, we found some wage convergence. So the story seems robust: all of this has come to an end, or at least a turning point has been passed with the onset of the crisis.
Now there may be some disappointment that the convergence stopped. After all, nominal convergence is a prerequisite for a monetary union. However, this positive pre-crisis trend is more often framed as an internal economic imbalance. Indeed, the liberal monetary policy of the 2000s caused the overheating of the southern economies. So if the debaters plea for common economic policies, are they actually implying this should happen again? And again? In my view we were running in circles and the wonderful seminar with likeminded people lacked a bit of criticism.
Let me now skip two steps at once. The options today are either (further) quantitative easing, or public investments - neither of which I find reasonable. Quantitative easing through low or negative interest rates has not resulted in the banks handing out more money for investments. There is a lack of consumer and producer confidence for that - probably because of the austerity measures. Public investment should come from a 316 billion euro fund, for which it is entirely unclear who will support it (member states, private partners?). There is also no clear idea on the coordination of the fund. I cite dr. Rauh from Cambridge: "Who says it will not be used for highways leading nowhere?" Xavier Timbeau replied that failed investments should be budgeted within the SGP check, but I believe more in the out-of-the-box proposition I made in my previous blog entry.
We do have a common policy, which is price stability. For this, we employ one, maybe two, weapons: the interest rate and the buying of state bonds. The first is not a very effective weapon, the second is a little smarter. However, it will not cure the demand shock and the deflationary risks. Therefore I believe that wages should be taken out of the budgetary discretion, and become part of the monetary policy. This has actually already been done for the wrong reasons: to promote internal devaluation in search for competitiveness, and ultimately to have nominal convergence. To this avail, either collective agreements or debts had to be waived, and it turned out to be the first, as Josef Niemiec, president of the ETUC noted sharply. Still it is through this channel, but in the other direction, that the EU can reconcile growth and social progress.
I see three options: a European minimum wage, the institutionalization of collective bargaining, and increasingly progressive taxes. To begin with the minimum wages, this is a good idea. Minimum wages do little harm and prevent poverty. I hope to do more research on this in the near future, but the evidence points in this direction. However, when median wages fall and the minimum wage is within a relative margin, its level may fall as well. To my astonishment, unless I misunderstood, Xavier Timbeau argued in favour of a European minimum wage, with checks for productivity. Low productive economies should then have lower minimum wages to increase competitiveness. That is not unlike any policy from the OECD or the IMF from the 1990s. Moreover, it is already the case: the countries with low productivity have low minimum wages. We are a long way from the creative destruction Erling Barth has written about. I believe in steadily increasing minimum wages, but I don't believe that would be a good anti-crisis measure. What Germany did was smarter: invoke a minimum wage, but allow social partners to settle an agreement at any level in the first period. This gives oxygen to collective bargaining and it eases the introduction of the minimum wage.
The other two options are more effective and I let the reader choose between either one of them or a policy mix, because they are functional equivalents. Either trade unions are recognized and promoted, so that they govern the wage inequalities, claim the added productivity and restore purchasing power through a higher consumption quote (after all, wages are spent mostly in the local economy - and certainly within the EU), or we organize more progressive taxation, redistributing from the Cayman Islands (as Frank Roels from Ugent remarked) to the grocery around the corner. This increases demand, and ignites inflation. As Matteo Laruffa questioned: fiscal policy needs to accompany monetary policy, and currently it does not. Maybe in both cases the a price to be paid for the maintenance of social relations and no deficit spending is increased flexibility, which has to be guided by social protections from the associational institutions or from the state in the second case. It has been successful in Denmark, and the technological evolutions (Uber, AirBnb, Mechanical Turk) are of the kind that it is probably unavoidable.
To wrap up: the EU may not have a social policy - and it should maybe restrict social policy to mere guidelines respecting national sovereignty, but social policies should be regarded as a fundamental part of economic governance. To consider the EU as a closed economy is wise and, as Frank Vandenbroucke argued, quoting Jeffrey Sachs, this is what should allow us to tackle the internal imbalances - not the underbidding. The coordination of fiscal policies is an essential element, but it needs enlightened politicians. In the other case it is time for the unions to step up to the supranational forum.
