The fiscal treaty euro zone leaders finally agreed on this week adds a solemn touch to their oft-repeated promises that the days of financial insouciance are over. But most of the treaty’s content had already been passed in EU legislation in October, and all monetary union members were already well on the path to stricter budgets anyway. Now that yesterday’s problem has officially been solved, the euro zone has to tackle the challenge of boosting long-term growth, while two of its members – Greece and Portugal – threaten to turn into economic deserts.
The conventional wisdom calls for patience about slow-working “structural reforms” – now very much a hackneyed formula. In any case, the euro zone faces the conundrum of creating growth without finance: traditional Keynesian stimulus has been ruled out by the German master, and money is lacking in most countries for the big investment projects that might help push economies forward.
In reality, the crude form of the German recipe for growth is faulty. Clamping down on labour costs, firing teachers and policemen or cutting their pay, and forcing even more pain on weaker countries, simply won’t resuscitate moribund economies. Large doses of unadulterated austerity eventually eat into a country’s fabric.
The euro zone will need stronger institutions and more investment. Funds are available, but governments need to pool their resources, reform budgetary procedures, mobilise and leverage unused EU cohesion and structural funds, and adopt a pan-European instead of a country-by-country approach. The “Marshall plan for Greece” of July, 2011 has gone nowhere.
This requires all countries, first of all Germany, to move from discipline-for-everyone to solidarity-for-all. And it calls for leaders who don’t obsess about the short term and understand that the task at hand will take 10 years, not 10 weeks. But general elections will take place in France, Italy and Germany within the next 18 months. The incumbents are rightly scared of voters’ anger over the debt crisis. Yet they will ultimately face the same anger if they can’t show that austerity hasn’t been in vain.