Growth is on the agenda after the election of Socialist Francois Hollande as France's new president. But what does growth mean and how should the economy be boosted?
Economies are shrinking and unemployment is rising in many of the European Union's southern members. They are cutting back government spending to restore budgets and keep to deficit limits. This is what the EU countries, and especially the 17 of them that use the euro, have repeatedly pledged to do to protect the common currency. During the election campaign, the new French president, Francois Hollande, denounced these austerity measures and announced new economic programs. But on Friday (May 11) Hollande announced in Paris that he would comply with the budget goals agreed upon with the EU Commission and keep the deficit down to 3 percent of gross domestic product.
'Growth pact' to complement decisions
Hollande wants to ratify the EU fiscal pact only if it is supplemented by a growth pact. In late April, before Hollande was elected, German Chancellor Angela Merkel announced she now also supports a growth pact. She can point to the decisions made at the EU summit in March 2012, where growth was the topic. Most important for achieving growth in EU countries are structural reforms of the labor market and in education that do not cost more money.
The President of the European Commission, Jose Barroso, said in the debate over economic stimulus plans: "For growth to happen, we need fiscal consolidation, structural reform and investment."
Project bonds to promote growth
Several months ago, the European Commission proposed common bonds in the euro countries for special projects related to energy supply. During his presidential campaign, Francois Hollande promoted common eurozone bonds, which Angela Merkel sees only at the very end of the reform path. The President of the European Parliament, Martin Schulz, a German Social Democrat, has also advocated a European master plan for growth. On May 23, a further special meeting of the European Union, which the new French president will also attend, will discuss the growth strategy.
More cuts in south, more consumption in north
Economist Guntram Wolff of the Brussels-based Bruegel think-tank told Deutsche Welle that the states of the eurozone would not be able to avoid making cuts to consolidate their public finances. "What we need to understand in the euro area is that we have to make a structural adjustment. The south of Europe must adapt structurally. But the north of Europe also needs to adapt. The question is, how do we get through this adjustment process?"
The south especially needs to cut spending, Wolff said. Conversely, however, the North must consume more. "I think we have seen some encouraging signs from German Finance Minister Wolfgang Schäuble, who has called on employers and unions to reflect the strong labor market situation in higher wages. This will help generate higher demand. We need more income and less saving in the north to prevent a recession in the euro area as a whole."
No stimulus packages on credit
The General Manager of the Association of German Banks, Michael Kemmer, says it makes sense to promote public and private investment in Europe. But how to bring about such investments requires careful thought: "What makes no sense is to continue pushing credit-financed spending programs. These provide only a very short-term stimulus to the economy while seriously undermining investor confidence," Kemmer said in a radio interview. Such stimulus programs could only be financed by new borrowing, he said. And Chancellor Merkel has already rejected credit-based stimulus programs in several interviews.
Unstable banking sector creates uncertainty
Wolff says the lingering banking crisis in Europe is a major impediment to investment and "poisonous" for growth: "We must understand that economic policy coordination is still not sufficient. Particularly in the area of banks, we need a much, much stronger European authority," Wolff told DW. "We need a common supervisory authority that can address the real problems in the banking system anywhere in Europe."
The measures to be taken to support the economy in Europe are collected in the European Commission's "Agenda 2020." The package was approved by the leaders of EU states last year and was reaffirmed in March 2012.
Author: Bernd Riegert / sgb
Editor: Timothy Jones