Wednesday, April 4, 2012

European Left Proposes Way out of Crisis

Social-Dems Unveil Pro-Growth "2020 Strategy"

Because sovereign indebtedness is about a country's Debt-to-GDP ratio, there are two ways a country can reduce indebtedness. One way in to reduce the its debt. This is the way favored by the European right with respect to the current debt crisis, who have even called for "severe and unflinching cuts" as expressed by ECB director  Draghi, and undertaken by David Cameron.

Nevertheless, this way is seen by Social Democrats as a strategy to be avoided because of implication for living standards, growth and employment.While tight fiscal policy may have a short-term effect, true long-term recovery requires structural change. Tight fiscal policy does not address unemployment and if the fiscal tightening creates lack of confidence in the economy for consumers and investors, it will endanger the recovery.

The other way is to overcome indebtedness by simply outgrowing it. This of course calls for an agressive, multifaceted economic strategy.

The 2020 Strategy
FEPS, a Brussels-based think-tank with affiliation to both the PES and the S&D group has unrolled a long-term growth strategy designed around four key points. These are:

  1. Improve European Education and Productivity: The underlying idea is the improved education is the basis of increased productivity. In fact this is a point which is borne out by microeconomic theory.
  2. Green Growth: This is the type of infrastructural growth which will increase the GDP int he short-term. Also, its better to get green infrastructure built sooner rather than later. 
  3. Reduction of Social Inequality: This point focuses primarily on reducing the male-female earnings gap in Europe. This issue will be via active labor market policy and via active social policy. 
  4. The Financial Transactions Tax: This will help to stabilize the financial markets while also serving as a source of revenue, thus stabilizing the sovereign debt issue. 

2020 Strategy EU-27 GDP Growth Projection

Implementation of the 2020 strategy is projected to have positive implications for growth and unemployment figures in the EU-27. This should come as no surprise -the strategy calls for the creation of infrastructure, increases of ALMPs, and making sure that women get better pay- The question of whether it can be sustained will hinge on how well the strategy is implemented and whether it will yield growth dividends.

 2020 Strategy EU-27 Unemployment Projection 

The EU recommends that 24 out of the 27 EU countries tighten fiscal policy. Some countries have tightened fiscal policies already in 2010 and some countries have decided on more ambitious consolidation plans than recommended by the Commission. Macroeconomic model calculations show that it will have large consequences for both GDP growth and the development on the labour market if all 24 countries tighten fiscal policy at the same time. If only the 5-8 countries with the largest budget deficit tighten fiscal policy the negative effects on the European economy will not be as harsh.

A second path is to introduce reforms. Tightening fiscal policy might improve the budgets in the short run, but in the medium and long run, an economic upturn in Europe requires structural changes in the form of reforms that change the underlining structures. Model calculations show that a strategy based on investments in green growth, increasing productivity and the education level, fighting social inequality and introducing a FTT-tax can create almost 6.5 mil-lion jobs over the next 20 years.


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