The Growth Compact

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The President of the European Central Bank (ECB) was in heavily fortified Barcelona, Spain today. I believe it is the first time in the history of the ECB that it has had to be shielded from the general public and, in particular, protesters, in such a dramatic way. The police presence was a symbolic reminder of how important and controversial the institution has become. The Spanish economy is under severe stress, but mild mannered Mario Draghi, the head of the ECB, basically told Spanish journalists that pain was unfortunate yet unavoidable. He also clarified what he means by the need for a ‘growth pact.’

He said that “there is no contradiction between a growth compact and a fiscal compact.” To reap the benefits of the significant fiscal adjustments undertaken, euro zone member countries need to stay the course. Growth should come thanks to structural reforms “that are different for different countries.” One of his overarching themes is the completion of the single market and increased competition. According to him, the European labor market needs to be more flexible, allow higher mobility and be equitable. Draghi stressed how labor markets today are heavily imbalanced against the young.

Member countries should also invest in infrastructure (here Draghi bowed to the more traditional Keynesian approach), but only by more effectively allocating European structural and cohesion funds, as well as strengthening the European Investment Bank (EIB). Is Draghi advocating significant fiscal stimulus and abandoning “German austerity”? Not at all: Draghi reminded his audience that uncontrolled public expenditures produced high inflation and no growth in the seventies (stagflation). Instead of spending money that they don’t have, governments of peripheral countries (including his own Italy) should put the emphasis on “a reduction of public expenditure rather than just increases in taxes.”

Overall, Draghi reminded European politicians that what is needed now is a road map, a path for the future. He cited the nineties, when it was clear why adjustments were undertaken by member countries. At the time the ultimate prize was the Euro. The head of the ECB is right. Today we have just fear (of a Euro breakup and its consequences) but no hope. That needs to change.