Abstract
After the double crisis that hurt the Eurozone (with the two recessions in 2008–2009 and 2012–2013), the financial situation has improved, especially thanks to the battery of unconventional measures undertaken by the European central bank. However, even in the recovery period, real economic growth has been weak and uneven in the euro area; above all, the general economic and social situation is still unsatisfactory. In some peripheral Eurozone countries, the fall in aggregate demand and the collapse of investment (especially public investment) are far from being recovered.
A possible solution is therefore—waiting for the reforms needed for the “completion” of the European monetary union—the realization of a Grand European Investment Plan, along the lines proposed by Marelli and Signorelli (2017a) and by Della Posta et al. (2018). This plan can stimulate both current and medium term GDP growth; moreover, it can contribute to the stabilization of both public debt as a ratio of GDP and interest rates. It might even help in the restoration of a pro-European sentiment, which lately has been fading away because of the growth-depressing fiscal austerity policies followed in many euro area countries and the consequent dreadful social conditions.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
For a more complete account, see Marelli and Signorelli (2017a), among others.
- 2.
That is the temporary European Financial Stability Facility and the permanent European Stability Mechanism. Notice however that big countries like Italy or also Spain would be, in any case, both too big to bail out (because of the limited size of the mentioned funds) and too big to default (their failure would almost certainly cause a systemic crisis and the likely collapse of the euro).
- 3.
The acronym was first used by English media, sometimes with the aim of accusing the lax and spendthrift behavior of Southern countries and with implicit denigratory intentions. This is the reason why Della Posta (2018b) explicitly avoids adopting it and uses instead the expression “euro area crisis countries”.
- 4.
The previous Securities Market Program (SMP), adopted in 2010–11, was more limited in size, duration and it was targeted to specific countries.
- 5.
This was most evident in the case of Ireland, Portugal, Spain (besides the UK), where in 2007, before the financial crisis, the private debt was from three to seven times the GDP (while in Greece and Italy, the two countries with the highest public debt, such ratios were between 1 and 2). In the former countries, in the new century there was, before the crisis, a sort of “drugged” growth, caused by low real interest rates, investment booms (especially in constructions), favorable credit conditions and burgeoning foreign direct investments. As a consequence, the “sovereign debt crisis” should be better renamed “euro area crisis”.
- 6.
The countries considered in the table are the three major Eurozone countries and the economies hit by the sovereign debt crisis; in addition, the two major EU countries outside the euro area: the United Kingdom and Poland; finally, the two largest non-European countries with a market economy: USA and Japan. For comparative reasons, the average values of the entire Eurozone (at 19) and the EU (at 28) are also shown.
- 7.
Contrary to the recent Eurozone’s experience, high GDP growth might well be a solution to the debt sustainability problems (see Della Posta (2018a) for a deeper analysis of the role played by GDP growth in the euro area crisis).
- 8.
The Main Refinancing Operation (MRO) rate reached exactly 0 per cent in 2016; the rate on overnight deposits, negative since 2014, reached the lowest level (−0.40%).
- 9.
It consisted in purchases, on the secondary market, of public and private bonds, worth 60 billion euro each month for the whole Eurozone; it was augmented to 80 billion/month from March 2016 to March 2017, then reduced to 30 billion from January 2018; and to 15 billion euro from October to December 2018, then it will cease.
- 10.
As an alternative to a generalised fiscal stimulus, as suggested also by Eichengreen (2012), Germany should play the role of “engine of Europe” (similarly to the USA, that have been the engine of the world in the past, thereby accepting to experience large current account deficits). As a matter of fact, the crisis has also been aggravated by a lack of macroeconomic coordination: tight austerity has been especially imposed on debtor (Southern) countries, while creditor (Northern) countries continued to follow balanced-budget policies, with huge trade surpluses in the case of Germany (see De Grauwe 2013).
- 11.
Moreover, the methodology used by the EU Commission to estimate output gaps tends to underestimate the magnitude of the economic cycle by assuming pronounced hysteresis effects. This procedure produces wrong policy implications by attaching too much importance to structural policies with respect to aggregate demand management; in addition, it entails too high structural deficits, thus requiring an excessive budgetary adjustment.
- 12.
Following the international markets: in the US they already reached 2%, after 3 years of increases. In June 2018, however, Draghi announced that they will remain at the current (zero) level at least until September 2019.
- 13.
European Commission (2017a), Reflection Paper on the Deepening of the Economic and Monetary Union.
- 14.
- 15.
See also the critiques in Marelli and Signorelli on the “Reflection paper” (European Commission 2017b).
- 16.
This is also a drawback of the proposed instrument, since as Minenna (2017) puts it: “The lack of risk-sharing therefore leaves the door open for spreads to widen again in times of stress”. A limited moral hazard is instead implied by the PADRE (Politically Acceptable Debt Restructuring in the Eurozone) plan (see Pâris and Wyplosz 2014).
- 17.
The third pillar of the banking union, i.e. a common insurance scheme of bank deposits, is still missing. Again, the requests of Germany and Northern European countries to substantially reduce the non-performing loans and also the weight of domestic debt in the budget of private banks reveals the priority given to risk-reduction compared to risk-sharing; those requests should be adequately contrasted.
- 18.
Beyond the unconventional measures envisaged by President Draghi, such as the OMT plan and the QE.
- 19.
According to Pisani-Ferry (2012) to make the euro less vulnerable, it is appropriate to eliminate at least one condition of the following “trinity”: the prohibition of monetary financing of deficits, the lack of co-responsibility on sovereign debts and the interdependence between banks and debts sovereign.
- 20.
- 21.
Only in well defined big shock situations, causing a recession, a higher deficit should be permitted.
- 22.
The decreasing direction has to be compulsory, however the speed of this tendency should be negotiated also taking into account the cyclical conditions.
- 23.
For instance, eurobonds at 10 years could be issued at a low interest rate (probably lower than 2%).
- 24.
See the Document “A Stabilization Function” within the Roadmap set in December 2017 (European Commission, 2017a): the proposed “European Investment Protection Scheme” could get, in this proposal, some limited annually budgeted grant support from the EU budget; this budget can also provide some guarantees for issuing loans to provide the stabilisation function. The principle to stabilize investments over time and to protect them (including infrastructure and skills development) in the event of large asymmetric shocks is suitable, but the hypothesised procedure is cumbersome and probably ineffective.
- 25.
According to De Grauwe and Ji (2016), an investment plan has a greater growth impact compared to structural reforms.
- 26.
A more specific example could be helpful: Italy, that represents 17.5% of Eurozone’s economy (this is the weight in ECB’s capital), should pay 1.75 billion euro of interests each year, in front of 87.5 billion euro of new investments (to be realized within 3 years).
- 27.
The risk of new political equilibria in the European Parliament, after the 2019 elections, are also large.
- 28.
The delicate equilibrium between democracy and populism emerges also in Rodrik’s trilemma (Global Markets, National control, Democracy): in order to regain national sovereignty and democracy, the global dimension (or EU’s) may well have to be abandoned. So, if Southern countries feel that their national control is lost, they may want to regain it and leave the EU: Brexit can be interpreted along these lines (see for example Della Posta and Rehman 2017).
References
Acocella, N. (2016). Signalling imbalances in the EMU. In B. Dallago, G. Guri, & J. McGowan (Eds.), A global perspective on the European economic crisis. London: Routledge.
Baldwin, R., & Giavazzi, F. (Eds.). (2015). The Eurozone crisis: A consensus view of the causes and a few possible solutions (VoxEU eBook). London: CEPR.
Baldwin, R., & Giavazzi, F. (Eds.). (2016). How to fix Europe’s monetary union: Views of leading economists (VoxEU eBook). London: CEPR.
Beker, V., & Moro, B. (Eds.) (2016). The European crisis. World Economic Association Books. Conference Series, Bristol.
Bénassy-Quéré, A., & Giavazzi, F. (Eds.). (2017). Europe’s political spring: Fixing the Eurozone and beyond (VoxEU eBook). London: CEPR.
Blanchard, O. J., & Leigh, D. (2013). Growth forecast errors and fiscal multipliers. American Eco nomic Review, 103, 3.
Blyth, M. (2015). Austerity: The history of a dangerous idea. Oxford: Oxford University Press.
Brunnermeier, M. K., Langfield, S., Pagano, M., Rees, R., Van Nieuwerburgh, S., & Vayanos, D. (2016). ESBies: Safety in the tranches. European Systemic Risk Board, Working Paper Series, September 21, 2016.
Cappellin, R., Baravelli, M., Bellandi, M., Ciciotti, E., & Marelli, E. (2017). The role of investment and innovation in a program of economic recovery in the EU and in Italy. In R. Cappellin, M. Baravelli, M. Bellandi, R. Camagni, S. Capasso, E. Ciccotti, & E. Marelli (Eds.), Investimenti, innovazione e nuove strategie d’impresa: Quale ruolo per la nuova politica industriale e regionale? Milano: EGEA.
Costa Cabral, N., Gonçalves, J. R., & Cunha Rodrigues, N. (Eds.). (2017). The euro and the crisis. Perspectives for the Eurozone as a Monetary and Budgetary Union, Abbildungen in Farbe. Cham: Springer.
De Grauwe, P. (2013). Design failures in the Eurozone: Can they be fixed? (LSE ‘Europe in Question’ Discussion Paper Series, 57).
De Grauwe, P. (2017). Making the Eurozone sustainable. In A. Bénassy-Quéré & F. Giavazzi (Eds.), Europe’s political spring: Fixing the Eurozone and beyond. VoxEU eBook. London: CEPR.
De Grauwe, P., & Ji, Y. (2016). How to reboot the Eurozone and ensure its long-term survival. In R. Baldwin & F. Giavazzi (Eds.), How to fix Europe’s monetary union: Views of leading economists. VoxEU eBook. London: CEPR.
Della Posta, P. (2018a). Fiscal austerity and monetary easing: Which one is to be praised for ending the euro area crisis? The European Journal of Comparative Economics, 15(1), 165–189.
Della Posta, P. (2018b). L’integrazione monetaria in Europa: origini, crisi, istituzioni e teorie economiche. Pisa: Pisa University Press.
Della Posta, P. (2017). Structural divergences, institutional fragilities and foreign debt in the euro area crisis. Politica Economica/Journal of Economic Policy, 32(2), 189–222.
Della Posta, P, Marelli, E., & Signorelli, M. (2018). A market-financed and growth-enhancing investment plan for the euro area. In Presented at Eaces Conference, Warsaw.
Della Posta, P., & Rehman, S. (2017). Brexit: Origins and future perspectives. In N. Cabral da Costa, J. R. Gonçalves, & N. Cunha Rodrigues (Eds.), After Brexit – Consequences for the European Union (pp. 11–34). Basingstoke: Palgrave Macmillan.
ECB, European Central Bank. (2014). Unemployment in the Euro area. Speech by Mario Draghi, President of the ECB, Annual central bank symposium in Jackson Hole, 22 August 2014.
Eichengreen, B. (2012, August 10). Europe’s summer reading list. Project Syndicate.
EU. (2012, June 26). Four presidents’ report: Toward a Genuine Economic and Monetary Union. Brussels: EU.
EU. (2015, June 22). Five presidents’ report: Completing Europe’s Economic and Monetary Union. Brussels: EU.
European Commission. (2016). Investment Plan for Europe – State of play. Brussels: European Commission.
European Commission. (2017a). Reflection paper on the deepening of the Economic and Monetary Union. Brussels: European Commission.
European Commission. (2017b). White Paper on the future of Europe. Reflections and scenarios for the EU27 by 2025. Brussels.
European Commission. (2018). Spring forecasts. Brussels, European Commission.
Eurostat. (2017). Smarter, greener, more inclusive? Indicators to support the Europe 2020 strategy. Brussels: Eurostat.
Fadda, S., & Tridico, P. (Eds.). (2017). Inequality and uneven development in the post-crisis World. London: Routledge.
Holland, S. (2016). Beyond austerity: Alternatives for a democratic Europe. Spokesman: Nottingham.
Krugman, P. (2010, July 7). Self-defeating austerity. The New York Times, The Opinion Pages, The Conscience of a Liberal.
Marelli, E., & Signorelli, M. (2017a). Europe and the Euro. Integration, crisis and policies. London/New York: Palgrave/Springer.
Marelli, E., & Signorelli, M. (2017b). Young people in crisis times: Comparative evidence and policies. CESifo Forum, 18, 2.
Micossi, S. (2016). Balance-of-payment adjustment in the Eurozone. In R. Baldwin & F. Giavazzi (Eds.), How to fix Europe’s monetary union: Views of leading economists (VoxEU eBook). London: CEPR.
Minenna, M. (Ed.). (2016). The incomplete currency: The future of the euro and solutions for the Eurozone. Wiley: San Francisco.
Minenna, M. (2017, April 25). Why ESBies won’t solve the euro area’s problems. Financial Times.
Pagano, M. (2017). Perché servono gli European safe Bond. www.lavoce.info, 1 giugno.
Pâris, P., & Wyplosz, C. (2014). PADRE: Politically acceptable debt restructuring in the Eurozone. Geneva Report on the World Economy, Special Report No. 3, 2014, CEPR.
Pisani-Ferry, J. (2012). The euro crisis and the new impossible trinity. Bruegel Policy Contribution, 1.
Rodrik, D. (2018). Populism and the economics of globalization. Journal of International Business Policy, 1–22.
Stiglitz, J. E. (2016). The Euro and its threat to the future of Europe. London: Allen Lane.
Stiglitz, J. (2017, December 5). The globalization of our discontent. PS On Point. https://www.project-syndicate.org/bigpicture/populist-grains-of-truth.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2019 Springer Nature Switzerland AG
About this paper
Cite this paper
Posta, P.D., Marelli, E., Signorelli, M. (2019). An Immediate Solution for the Euro Area Crisis: A Grand European Investment Plan. In: Paganetto, L. (eds) Yearning for Inclusive Growth and Development, Good Jobs and Sustainability. Springer, Cham. https://doi.org/10.1007/978-3-030-23053-1_8
Download citation
DOI: https://doi.org/10.1007/978-3-030-23053-1_8
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-23052-4
Online ISBN: 978-3-030-23053-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)