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Jean Imbs, Professor at the Paris School of Economics, and Research Director at National Centre for Scientific Research (CNRS), is one of the 40 economists who has backed the proposals of François Hollande, Socialist Party’s presidential candidate. Noopur Tiwari, Resident Editor in Europe for New Delhi Television, asks him, among other things, how saying “no to austerity” and “yes to growth” is meant to work for Europe. Edited excerpts:
How can economic growth be preserved in the face of necessary fiscal consolidation or “austerity”?
In my view, this is about sequencing policy changes. Firstly, right now in Europe, it is crucial that each country establish credibility in its commitment to take care of the fiscal crisis domestically. That means policy steps must be taken to lower deficits. Only under such conditions will other European parties consider a negotiation of having some of that debt mutualised, or a discussion on the role of the ECB (European Central Bank).
To start with, saying “Europe should take care of the European debt crisis” is sure to create a deadlock and ultimately worsen the crisis. In fact, we have witnessed some of this mechanism in the past. For instance, earlier this year the ECB started lending to banks once it had some institutional reassurance that the fiscal issues of each member countries were first and foremost going to be tackled domestically.
Given such credibility, and given such fiscal consolidation, what are the “growth enhancing” options of European governments? Clearly, a classical Keynesian expansion is out, as it is not affordable. But re-directing some government spending towards education, or R&D, lifting some restrictions on the job market and the creation of innovating small firms would all help. Similarly, a re-modelling of tax laws would be welcome — perhaps less labour taxes, more capital taxes, and a closing of loopholes would help financing government spending, so that it would not have to shrink.
Is the stiff competition from emerging markets a serious issue for Europe today?
I don’t view this as an issue for Europe, nor indeed for any country. Yes, hourly wages are higher in Europe than in the emerging world. But hourly labour productivity in Europe is still among the highest in the world. As long as they are more productive, it is efficient to pay workers a higher wage. What matters are ‘unit labour costs’, not wages per se. Problems arise when wages cease to reflect labour productivity, which is arguably at the source of Greece’s problems. But ‘global competition’ is not the reason for these issues, wage rigidities are.
In my view, global trade is mutually beneficial, though it does create some changes in the structure of what is produced where, and thus can put some people out of a job. In other words, globalisation requires some redistribution, and social safety nets, as well as having access to continuing education, and to a flexible labour market.
Can the European welfare state survive this crisis?
This is an important and as yet unresolved question. But the question extends much beyond the current crisis. The current crisis is caused by diverging fiscal policies within a monetary union. Economics 101 tells us this is a bad idea, irrespective of the existence of a welfare state. My view is that the survival of the welfare state ultimately depends on the ability of Europe to reform it’s labour markets and stimulate innovative firm creation. The debt crisis may actually provide the shock that will make such reforms more likely.