I stressed the need to boost aggregate demand in the core countries as a key requirement for solving the debt problems facing the periphery. It is interesting to see the developments over the past few days in which many senior European politicians have begun to stress the need for pro-growth policies. As I stressed in this Vox-EU article from February, it is still not too late to make the Fiscal Compact less restrictive.
Earlier today, I completed my latest briefing paper (titled “Macroeconomic Imbalances in the Euro Area”) for the European Parliament’s Committee on Economic and Monetary Affairs.
I write these papers as a member of the “Monetary Experts Panel” that provides the committee with papers prior to their “Monetary Dialogue” meetings with the ECB President. The way the process operates is that staff from the Parliament contact the members of the panel and ask us to write a paper on a topic they have chosen. Here‘s the committee’s website including links to past briefing papers from the panel. You can also find my previous papers by clicking on the Monetary Dialogue tab at the top of the page.
In this case, I was asked to write a paper on the new Macroeconomic Imbalances Procedure (MIP) which was part of the “six-pack” legislation and is now being operated by the Commission. Here‘s a link to the webpage describing the MIP including the recent Alert Mechanism Report designed to operate as a leading indicator for macroeconomic imbalances and an Occasional Paper from the Commission describing the “scoreboard” for macroeconomic imbalances that is Alert Mechanism is based on.
Here’s the abstract from my paper:
The Euro crisis has been most profoundly felt in countries such as Portugal, Greece, Ireland and Spain that have large private and public sector debt burdens. These can only be reduced if these countries move towards large and persistent current account surpluses. With an average inflation target of two percent for the Euro area, the pace of progress for these countries towards the size of current account surpluses required is going to be slow and the adjustment extremely painful. The Commission’s Macroeconomic Imbalance Procedure provides an important opportunity for the EU to acknowledge that imbalances have two sides, that policies to actively reduce surpluses in countries like Germany are just as effective in restoring balance as policies aimed at increasing competitiveness in the European periphery. However, the new alert mechanism scorecard has an asymmetric focus on reducing deficits at the almost-complete expense of any focus on steps to affect large surpluses. It represents a missed opportunity to deal with the Euro area’s problems in a balanced manner.
I usually wait until the Parliament officials have put up my paper on their website (usually takes a week or so) before putting on my own site. However, I have just read Martin Wolf’s latest column and it fits so well with my own thoughts on this issue (which of course partly reflect having read many of Martin’s previous columns) that I thought it might be a good idea to back them up with a more extended version of this argument.