The third mistake is one of omission: As ECB President Mario Draghi recently said, Europe has a fiscal compact, but lacks a growth compact. To be sure, there are no quick fixes: Headline-grabbing initiatives often fail to measure up to the challenge of reviving growth. Nevertheless, serious discussion is needed concerning how to use the EU budget to enhance economic performance, rather than for redistribution only; how to foster pro-growth reforms at the national level; and how to boost investment in the periphery countries’ tradable sectors.
A credible growth compact would help to overcome immediate hurdles. After all, the post-war Marshall Plan was so successful not because of its size, but because it helped to counteract zero-sum games and self-fulfilling pessimism. That is a lesson to keep in mind today.
However, austerity is not the only dimension of the debate. Developments over the last two years have exposed the weaknesses of a bare-bones monetary union based only on a single monetary policy and fiscal discipline. While reforms enacted in the wake of the Greek crisis have equipped the eurozone with crisis-management capabilities, more is needed to restore confidence, ensure financial stability and ward off financial fragmentation.
A key characteristic of the European crisis has been the strong correlation between banking stress and sovereign distress. Time and again, banks’ woes have affected governments’ borrowing costs, and concerns over governments’ solvency have affected banks’ balance sheets.
This major potential threat to financial stability has been alleviated, but not eliminated, by the ECB’s large-scale provision of liquidity. The recent re-emergence of concerns about Spain has shown that the problem has not gone away.
Systemic reforms to resolve the problem all involve significant further integration: Joint issuance of government bonds that play the role of safe assets in banks’ portfolios, a “banking union” with a common regime for deposit insurance, supervision and crisis resolution — or both. Either one involves risk-sharing among eurozone members.
In France, the Netherlands and elsewhere, many citizens view Europe as a threat to their way of life. Telling them that the euro is an unfinished construct that requires even more commitment is a hard call for politicians. The question for the coming months is whether European leaders will have enough political capital to embark on further reforms and make the case for them to an angry public. If not, it is to be feared that they will agree only on platitudes and hope for the best.
Jean Pisani-Ferry is director of Bruegel, an international economics think tank, professor of economics at Universite Paris-Dauphine and a member of the French prime minister’s Council of Economic Analysis.
Copyright: Project Syndicate