Generating Growth in Times of Austerity
AICGS’ 30th anniversary symposium, “Measuring Expectations and Capabilities: The State of the German-American Dialogue,” took place in Berlin on June 12, 2013. Politicians, policymakers, business leaders, academics, and journalists addressed a crowd of 250 people at the Allianz Forum on Pariser Platz, focusing on one of today’s crucial questions: how to generate growth in times of austerity. Keynote speeches by Parliamentary State Secretary Steffen Kampeter (German Federal Ministry of Finance), Vice Chancellor and Minister Philipp Rösler (German Federal Ministry of Economics and Technology), and Ambassador Philip D. Murphy (Embassy of the United States in Germany) reaffirmed the importance of the German-American relationship and transatlantic trade.
Panel 1: The Role of Central Banks: From Managing the Crisis to Spurring Growth – An Experiment
With the onset of the 2008 financial crisis—and subsequent euro crisis and recession—a key concern has been how to generate growth in times of austerity. Central banks have been pushed to play an out-sized role in answering this question.
Is there a difference between “crisis” and “normal” monetary policy? No. Rather, there is a difference of intensity. The crisis has changed—and even created—the range of instruments that central banks use to try to spur growth. But central banks must nevertheless operate within their mandate and protect their credibility. Thus, if the European Central Bank (ECB) wants to have the ability to react in the short term, it must also have a clear long-term objective (for example, inflation below 2 percent). Without credibility, the Bank loses its short-term capability. Any non-standard measure or tool must stay within the Bank’s price stability mandate, and must not finance member state governments’ deficits.
Central banks do not operate in a vacuum; they require sound economies, stable politics, and solvent governments to be effective. In the twenty-first century, European markets remain fragmented across generations, countries, and industries. In the current recession, the fragmented markets are moving even deeper into the economic fabric; monetary policy alone cannot encourage market integration. Europe needs sound financial supervision and regulation to manage risk. In this crisis, central bank independence has been threatened as publics see monetary policy as redistributive. That is not the case; monetary policy restores neutrality.
The events of the past five years have called into question the basic tenets of financial institutions. In a stable system, banks can put in place conditions for sustainable growth, such as price stability and low inflation. Lower interest rates or involvement in bond markets, as the ECB has done, are only short-term tools. Reducing interest rates can risk inflationary concerns. The bigger problems in the euro zone are structural (e.g., lack of competitiveness). Central banks can “buy time” for governments to pay the way for growth, but parliaments must be the ones to enact reforms.
Fed Policies versus ECB Policies
The Fed buys assets while the ECB lends funds to banks. Central banks are essential to the welfare of an economy. Today, central banks are asked to solve issues they were not designed to solve upon their inception. In 2008, central banks were asked to provide liquidity in a time of crisis; today, their balance sheets are too high. Although U.S. unemployment is at 7.5 percent—only 4.5 percent above the full employment rate—the Fed has been tasked with reducing unemployment and improving growth, an unrealistic demand. Rather, a central bank needs to provide stable levels of value through interest rates. High unemployment in the European Union, such as the 52 percent youth unemployment figure in Spain, is a result of economic policy (trends in the labor market, public debt, and pensions), not monetary policy. Recent reforms are not enough to combat this trend in Italy or Spain, but this is not a problem for the ECB to tackle.
Comparing growth in the U.S. to growth in the EU, the U.S. is achieving 2.5 percent growth, while the EU is in a recession. The Fed’s mandate to ensure price stability, combat inflation, and ease unemployment makes monetary policy easier in the U.S. The Fed has successfully kept the U.S. economy in balance, with no inflation. At the state level, governments’ obligation to balance the budget has led to contraction and austerity. Consequently, Fed Chairman Ben Bernanke has signaled a potential change in Fed policy in order to avoid surprise and ensure transparency.
Central banks are affected by politics and their institutional context. This shapes the banks’ choices and defines their room for maneuver. The Fed is independent within the federal government, accountable to Congress, and part of a political union. The ECB, because it is not part of a full political union, is more independent but must also straddle differences among member states. It cannot rely on a single government counterpart to act in crises. A stronger European fiscal union would allow a better response and subject the ECB to less risk.
The Case for Monetary Union
Monetary or banking union is vital for European integration, but must be done very carefully. The ECB needs to have three mechanisms: supervisory, recovery, and resolution. The Bank’s supervisory role is the first mechanism on the agenda, but the German government will find it difficult to decide on a supervisory mechanism without knowing the Commission’s position. The difference between the U.S. and EU is one of environment and infrastructure. In the U.S., the FDIC is a depoliticized body with the authority to close insolvent banks (and did so in the 2008 crisis); no comparable institution exists for the ECB.
The state of European financial integration is back to its 2000 level. Provision of credit is key for the euro zone, but mid-sized companies who would spur growth are unable to get credit. The void in this component for growth makes it difficult to be optimistic about the EU. Debt has grown in Europe while it has declined in the U.S.
Moving forward, Europe must decide who will pay for reforms to spur growth: investors or taxpayers? Governments lack a sense of urgency for reforms; the longer we wait, the more difficult it will be to come back to an ideal growth rate. Adjustments in European economics must be financed, not from the markets, but from inside the EU. Are European countries really ready and willing to commit to a true banking—and transfer—union?
Panel 2: The Transatlantic Trade and Investment Partnership: Justified Hope or Misleading Hype?
We need growth on both sides of the Atlantic. Monetary policy has been unable to spur growth—interest rates are already at historic lows—and so trade must be used to stimulate both economies. The Transatlantic Trade and Investment Partnership (TTIP) is being promoted as the best tool to stimulate not only free trade, but also investment across the shores of the Atlantic. The remaining barriers to a TTIP agreement are the most difficult to overcome, and are primarily regulatory.
Is TTIP Different?
Experts disagree on whether TTIP will be successful. There is cause for optimism, given the bigger political commitment to transatlantic trade in both the U.S. and EU. The political side appears to be smoothly paved, but the bureaucratic side could still encounter stumbling blocks. All regulatory issues, including financial services and energy issues, must be included, as well as a better streamlining of the mutual recognition process.
Conversely, TTIP can be seen as a process of “talk and procrastination.” Two key criteria must be met on both sides of the Atlantic to achieve an agreement. First, there must be enough economic interest to push against the vested domestic forces. Second, the political leadership must be willing to be deeply involved. Political leadership must be willing to make the big bargains; negotiators are too focused on specific components of the agreement.
The business community sees TTIP as an opportunity to eliminate inefficiency and waste, which should foster growth. However, TTIP will not address a significant roadblock to growth: a diminishing middle class. On both sides of the Atlantic, the middle class—essential to creating growth and jobs—is being squeezed. Businesses look for countries to invest in that are adding to their middle class; the EU and U.S. are doing the opposite.
Support for TTIP across the Atlantic—and across the Aisle
Europe has the biggest economic interest in TTIP and needs more growth. The U.S. leadership is interested, but has other opportunities at the table, including a trans-Pacific partnership. Thus, the push for TTIP will have to come from the EU and, within the EU, Germany must play its role as the heavyweight and galvanize others to act. The European process is delicate, however, and Germany is reluctant to push its partners too far. Still, the sense in Germany is that TTIP is “too big to fail.” Germany can lead in a positive way.
Domestic interests in the U.S. are often vocal in trade negotiations. In the case of TTIP, labor and wage concerns are a non-issue. Because it is seen as a deregulatory measure, TTIP enjoys support on both sides of the political aisle. Agriculture market access is a big topic in the negotiations, and phytosanitary concerns remain. Although many Americans do not see the connection between jobs and European investment, politicians see the value of TTIP for growth and job creation.
Although not the only path to growth, TTIP is still seen as a beneficial agreement for the U.S. and EU. Furthermore, it is viewed as beneficial for the global economy as a way to reinvigorate the World Trade Organization (WTO), to be an example of how to settle disputes not within the umbrella of the WTO, and as a way not only to boost free trade, but also domestic investment.
Made possible by the support of Allianz SE, Carl Siebel, Daimler, Deutsche Bank, German Academic Exchange Service (DAAD) with funds from the German Foreign Office (Auswärtiges Amt - AA), Lufthansa, Roland Berger Strategy Consultants, Skadden, Arps, Slate, Meagher & Flom LLP, The German Marshall Fund of the United States