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Have eurozone monetary and fiscal policies helped or hindered growth and jobs?

The right balance between the goals of economic growth, reducing unemployment, keeping down inflation and budgetary discipline was at the heart of a debate on Wednesday on the performance of the eurozone.

ECB President Jean-Claude Trichet, Commissioner Joaquin Almunia and Nobel-Prize winning economist Joseph Stiglitz were among those joining the annual meeting of MEPs in the Economics Committee with national MPs from across the EU. Opening the debate, Jean-Paul Fitoussi of the Institut d’Études Politiques de Paris and Philippe Aghion of Harvard University both argued that growth would have been higher if fiscal and monetary policy in the euro area had been more counter-cyclical, as in the UK and the US. Both said the inflation target to be pursued by the European Central Bank should be set by political authorities rather than the Bank alone.

A high price for focus on inflation?
Joseph Stiglitz, who is Professor of Economics at Columbia University, stressed that, unlike the ECB, the US Federal Reserve’s mandate was aimed at growth and employment as well as low inflation. „Europe has paid a high price for its focus on inflation,” he said, adding that „mechanistic inflation targeting” had had negative effects in Europe and elsewhere. He was not convinced that lowering inflation was the way to higher growth: „The evidence is overwhelming – as long as inflation is under around 8 to 12%, it has almost no effect on growth or any other real variable.” The focus of macroeconomic policy, he said, should be on real issues like employment and living standards. This also applied to the Stability and Growth Pact: „What matters is not whether you borrow but what you do with the money. If you invest, you can become a richer society,” he said.

Euro – a great success story, says Trichet
Jean-Claude Trichet, President of the European Central Bank, said that opinion surveys consistently showed the European public wanted the ECB to keep inflation low – and indeed should do better even that it was doing in meeting that goal. He said the creation of the euro had been a great success: 12 million jobs had been created in the euro area since its birth, compared to 3 million in the same countries in the preceding eight years. „It is difficult to deny that Economic and Monetary Union contributed to this achievement,” he added.

Stability Pact „essential” – structural reform the way to growth
The Stability Pact, said Trichet, was essential to a large currency zone without the stabilising effect of a federal budget like that of the US: it was intended to ensure there was protection for all against one country behaving badly, and also to make sure there was room to absorb asymmetric shocks at national level. To improve long term growth prospects, Trichet said the focus needed to be on structural reforms: notably completing the single market, including services and network industries, and enhancing labor market flexibility – and labour and capital mobility. Economic and Monetary Affairs Commissioner Joaquin Almunia painted a positive picture of increasing growth, improving productivity growth, favorable credit conditions and the prospect of 7 million jobs being created in the next three years. There was increasing consensus among policy makers, both on budgetary issues and on the structural reforms of the Lisbon Strategy, he added. He did call for more political coordination within the Eurogroup, and said national governments needed to overcome their „tunnel vision” and act responsibly in favor of the euro area as a whole.

How independent should a central bank be?
Returning to the debate, Professor Stiglitz reflected on how far independence of central banks should go. He noted that while the Federal Reserve was independent, it acted within a framework established by the Congress. While purely technical matters could be passed to a technocratic body, no parliament would delegate decisions on rates of tax. Issues such as the trade-off between inflation and unemployment were of a similar order, he suggested.
He was also cautious about calls for reform and labor market flexibility: „everyone must be in favor of getting rid of bad, inefficient structures, but the debate is on what kind of changes to make. Will there be a race to the bottom in fiscal and social competition? Labor market flexibility sounds good, but Keynes showed us that if wages are lower that can mean lower demand and lower output.
The aim is not just to increase GDP – that is just a number – but the well-being of society. Reforms that make most people worse off should be considered very carefully.” Trichet countered by asking, if there were real doubts raised about the Fed’s independence, „what kind of additional risk premia on all interest rates in the US would be added by the markets?” There was an overwhelming consensus that central bank independence was a good part of the mix for achieving price stability, he said. (EP Press)