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What will get Europe's economy rolling again?
What's behind Europe's sluggish recovery and high jobless rate? What can central banks and governments do to get things going?The European Central Bank convened prominent economists this week to probe those questions at the Penha Longa golf resort amid steep, densely forested hills near the town of Sintra, Portugal, a few miles from the Atlantic Ocean
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What's behind Europe's sluggish recovery and high jobless rate? What can central banks and governments do to get things going?
The European Central Bank convened prominent economists this week to probe those questions at the Penha Longa golf resort amid steep, densely forested hills near the town of Sintra, Portugal, a few miles from the Atlantic Ocean.
Much of the discussion was highly technical. Equations and charts flashed in quick succession on the conference room screen. But here are some of the more memorable utterances, no math background required.
European Central Bank head Mario Draghi started things off with a sharp call for pro-business reforms by governments.
Such reforms "are about unleashing an untapped potential for substantially higher output, employment and welfare," Draghi said. "In the current environment, this would play a crucial role in ensuring that the ongoing cyclical recovery becomes a stronger, structural recovery. "
Draghi avoided most details, but such measures could include things like reducing the paperwork needed to start a business. It could also mean less restrictive rules governing hiring and firing, and reducing the gap in legal protections between established workers who are hard to lay off and younger workers who remain stuck with short-term contracts at low wages.
Draghi said governments should take advantage of the breathing space afforded by ECB stimulus measures, which include rock-bottom interest rates and a 1.1 trillion euro (US$1.2 trillion) monetary stimulus in the form of bond purchases with newly printed euros.
Europe's economy ticked up in the first quarter, showing growth of 0.4 percent. Yet the 19 European Union nations that use the shared euro currency are still struggling to get past a crisis over too much government debt in some countries. Greece, Ireland, Portugal and Cyprus needed bailout loans from other countries, and spending restraint has held back growth.
Unemployment remains stubbornly high at 11.3 percent, and at 50 percent for young people in Greece and Spain.
"There is no way the central bank all on its own can solve all of Europe's problems. There has been a tendency for policy makers to sit back and let the ECB do it all, and that is both unreasonable and unconscionable," said Dennis J. Snower, president of the Kiel Institute for the World Economy in Germany.
Snower advocates active measures to help people get back into work, such as retraining workers whose skills don't fit employer needs or subsidies to companies that take on the long-term unemployed.
"Find the disadvantaged people and give them maximal incentives to get into the labor force, and give employers maximal incentives to hire them," he told The Associated Press.
Several economists challenged Draghi's pressure on governments, saying non-elected central bankers had no business making political proposals. Paul De Grauwe from the London School of Economics ' a former member of the Belgian parliament ' said the central bank put its legitimacy at risk.
He said restrictions on layoffs existed "because people want them."
"And when a central bank then comes out and says we should do structural reforms, it really says we should break down this system of (government) protections. And in doing so the central bank sets itself outside the democratic process," he said. "The danger is that people will reject such a central bank."
Patrick Honohan, governor of Ireland's central bank, cautioned that some reforms aimed at easing employment rules might make things worse in the short term.
"We need to get out of this recession. We are still ' many, many euro countries ' well below the peak of output or employment. Will some structural reforms get us out faster?" Honohan said. "Yes, some of them might and some of them might not. There are some job-destroying reforms, at least, destroying in the short run."
Efforts to restrain spending have sometimes hit public investment that would have reaped outsized benefits to growth, said Catherine Mann, chief economist at the Organization for Economic Cooperation and Development, an international organization representing richer countries.
"Public investment is one of the first things to be cut, even though from a multiplier standpoint, it has some of the highest multipliers," she said. A high multiplier means more euros of growth for every euro of spending.
Former U.S. Treasury Secretary Larry Summers warned against premature declarations of recovery in financially troubled European countries such as Spain, dubbed the periphery to distinguish them from the so-called "core" of France and Germany.
"I think the greatest danger in periods of long-term stagnation is premature declaration of victory," Summers, now a Harvard professor, told journalists at the meeting.
"I think there is very much a risk of complacency and premature declaration of victory with respect to the European periphery. I don't think the European periphery is out of the woods."(+++)
