This is the longer English version of my article which appeared on front page of La Repubblica on August 15, 2014.
The Eurozone economy is back on the front pages: 0% growth compared with the first quarter. Italy back in recession (did it ever leave?), and French and German output less than expected. While the German authorities are blaming the weather, for sure the biggest problem is the lack of equal competitiveness across Europe, which means falling demand (and even war) in some countries, affecting sales in others. But while Draghi is right to worry about the “weak, fragile, and uneven” recovery, the problem is that the diagnosis on what causes competitiveness is still the wrong one. Wrong diagnosis, wrong medicine. Making the sick, and even the temporarily healthy, worse off.
When the financial crisis hit in 2007, European countries were struck in different ways and to different degrees. Those that had failed to invest for decades in key areas that increase economic growth – such as education, human capital formation, and Research and Development– experienced the hardest knock. Indeed, the countries that Goldman Sachs infamously called the PIGS (Portugal, Italy, Greece Spain), stand out as the near lowest spenders in all the areas above. And as the financial crisis became a full-blown economic crisis, it is these countries that experienced the worst sovereign debt crisis and crisis of ‘competitiveness’. And things are getting worse.
Worse because worldwide austerity is in fact proving self-defeating in trying to get debt/GDP levels down, since cuts are hurting both consumer demand (due to falling wages and crippling public services), and eroding the confidence of businesses to invest. This is deepening recessions, as the Italian data has shown us this month. Different governments are also embarking on ‘structural’ reforms, aimed at loosening rigidities in the labour market, battling corruption and nepotism, and increasing transparency, important to the ‘ease of doing business’ indicators. So the big question is: will the different types of ‘structural reforms’ (even when they are done, as Mario Draghi would very much like) ALONE induce growth of the periphery? NO, without major boosts in private and public investment, they wont. And unfortunately the least movement (in the weakest countries which everyone is worried about) is on such investment strategies, not the structural reforms.
Weak countries must increase not decrease their investments in key growth inducing areas like education, training and research, as well as the creation of public institutions that provide the crucial linkages between science and industry (prevalent in the USA, Germany, Denmark). They must also create the kind of patient long-term committed finance, that—as I describe in detail in my new book LO STATO INNOVATORE — has been essential to the Silicon Valley miracle, the growth of the most innovative German firms, and the rising status of China in the international innovation economy.
Most of all we must have more faith in the EU tools at our disposal. But using EU tools differently requires a different diagnosis of the problem in Europe. This requires EU leaders (especially the German ones that continue to dictate terms) to admit that the Euro can only work when the Eurozone is less skewed in its ‘competitiveness’. Competitiveness means the ability to produce high quality low cost goods that the world wants to buy. Once it is admitted that different levels of competitiveness across the EU come not only from the usual culprits (bureaucracy, labour market rigidities) but from radically different levels of private and public levels of investment, we must kick start every investment tool available, both nationally and transnationally. This includes the EC budget for innovation (Euros 80 billion!), EC structural funds aimed at innovative projects with proper viability scenarios, and of course the European Investment Bank (EIB). The money is there!
In the same way that the KfW has been crucial to German industry’s success, and China’s state investment bank (CDB) to China’s emerging innovative firms (e.g. Huawei in telecoms, Lenovo in IT, and Yingli in renewable energy), Europe must learn to us its public financial institutions to direct investments in this way. This is because even if the ECB finally becomes a proper central bank ( lender of last resort needed to calm fears from speculative financial markets), quantitative easing alone does not work: the money (as we have seen) simply ends up in the coffers of banks that don’t lend. Money creation must be ‘directed’ in productive areas in the real economy, and it is through such public institutions that directionality has taken place in the most successful countries in the world. Indeed, both Obama’s stimulus programme and China’s 5 year plan (the latter spending $1.7 trillion on 5 new sectors from environmentally friendly technologies to new engines), are largely directed towards ‘greening’ all sectors. Why does Europe not give an equally ambitious mandate to its public institutions? Because it is hiding in fear not courage.
When the financial crisis hit, the European Investment Bank (EIB) played a critical role in sustaining counter-cyclical investments to promote growth and employment in Europe. EIB loans were expanded from €47.8 billion in 2007 to €57.6 billion in 2008 to €79.1 billion in 2009 – a 65% increase from the pre-crisis level. However, later, mainly due to worries about the bank’s AAA credit rating, as well as a lack of consensus between EU countries on how active the EIB should be, the investments fell to €72 billion in 2010, €61billion in 2011, and €52 billion in 2012. This reduction was a mistake because the crisis was far from over. Indeed, after the bank was recapitalized in 2012, investments in 2013 rose to €75 billion in 2013. If the EIB is to play an active role today, it must be further recapitalized, using unused structural funds, as well as co-financing of EIB bonds with European Central Bank (ECB) bonds. And most crucially, total annual investments should, until the crisis is really over, rise above what they were in 2009. But this requires the EIB to be viewed as an important instrument to get productive investment happening in the periphery countries. Of course such investments must also be managed properly on the ground. National ministries and national firms receiving the loans must be governed in ways that meet common European standards. It is these types of standards and ‘conditions’ that should govern both the bailouts and loans, not fiscal compact conditions based on austerity, which cause only a vicious cycle of no growth->bailout->austerity conditions->no growth->bailout. And perhaps the biggest danger: the loss of solidarity across Europe, fuelling conservative forces, and more fear.
© Mariana Mazzucato