|The Pavia Declaration:|
A New Deal for a Social and Democratic Europe
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The Pavia Group’s April 2015 meeting took place against the background of a deepening European economic crisis.
The Eurozone crisis has many causes and culprits. However only its citizens are being asked to pay the burden of its costs, especially those in the European periphery. Austerity in Greece and other member states has been submitted to dictates from a Troika of the European Central Bank (ECB), European Commission and International Monetary Fund (IMF) and is contributing to massive hardship which prejudices the commitment of the Rome Treaty to rising standards of living and of its first revision in the Single European Act to economic and social cohesion.
“Europe is not working” either in the sense of assuring high levels of employment or in terms of the commitment to democracy of its founders.
‘Structural reforms’ that induce austerity while reducing social protection cannot be the condition of any assistance to debt distressed countries. The IMF in its April 2015 World Economic Outlook recognizes that employment protection is not found to have any statistically significant negative effect on productivity. An obsession with reducing debt neglects that Europe could allocate surplus savings into productive investments especially because increased public investment raises output both in the short and long term, crowds in private investment, and reduces unemployment with limited effect on the public debt ratio, as supported by the IMF paper (written by A. Abiad, D. Furceri, and P. Topalova) of May 2015.
If the European Union is both to survive and flourish it needs to reassure its citizens that markets serve people rather than people serve markets, as well as that its institutions are working in their interest and adding value to what its member states otherwise cannot do as well by themselves. For some analysts this can only be achieved by new federal institutions, similar to those of the US. But Europe cannot wait for this. Without alternatives now it risks disintegration.
This is the main reason why this Declaration stresses feasible alternatives now. Europe already has the institutions and the decision-making procedures that could enable a recovery of investment and jobs. One of these is the European Investment Bank (EIB), whose lending for investments does not count on the debt of member states. Neither is there any need for national guarantees, for fiscal transfers, or for a “transfer union”, since EIB bonds are serviced from project finance.
Those governments that want a recovery in employment have the power to act through the procedure of ‘enhanced cooperation’, which does not require unanimity, and which could by-pass entrenched opposition by a few member states to a bond-funded investment-led European recovery.
Supply side measures that reduce labour costs neglect the resulting reduction in aggregate demand, while in contrast supply side investment programmes can create aggregate demand.
Investment creating demand was the basis of the success of the Roosevelt New Deal in the 1930s, whereas after the crisis of 2007-2008 many EU member states have committed themselves to balanced budgets. Since then, the risk of depression and persistent unemployment and poverty in key member states and many European regions has mainly been the consequence of European austerity policy, whereas in other world regions and large economies policies have been either investment-led (East Asia) or demand-led (the USA).
The current trends in Europe are decreasing the ratios of labour income and investment to GDP. As an outcome, the crucial missing variable is the lack of aggregate demand. This reflects a private sector investment that still is a sixth below its pre-crisis level.
In European documents there is often an excessive emphasis on export-led growth. But in a large market such as that of the EU, internal demand is often more important than external demand. EU member states trade mainly with themselves. The ratio of extra-European exports to GDP was lower than 10% before the economic crisis and the EU as a whole is broadly in balance with the rest of the world. There is, instead, a vast latent demand for social investments and employment and income generated by these, such as in health, education, urban regeneration and safeguarding the environment.
Great structural economic differences among European countries and regions already existed at the time when the single European currency was introduced. These could not have been eliminated by uniform financial rules in Europe. Such differences increased during the crisis, and backward regions need specific productive investment programs. Structural differences between European countries and regions cannot be eliminated by reducing wages in an attempt to increase price competitiveness, nor by low level Structural Funds. They need a rediscovery of industrial, innovation and regional policies that foster structural competitiveness.
Quantitative easing has been necessary, but it is not sufficient for European economic recovery. This has been recognised by Mario Draghi who has stressed that it is governments that need to act to promote an investment-led recovery. Although bond finance of European investment is ruled out for the ECB, it has been the basis of EIB investment funding since 1958. This can be the key to recovery.
|A Decalogue to resolve the European Crisis|
|The current crisis can be resolved without new financial institutions, without Treaty revisions, without fiscal transfers between member states and without national guarantees for bond-funded investments.|
|Signatories and their institutions in alphabetical order|