On the 9th of June, ECFIN held the 2016 edition of the Brussels Economic Forum, which brought together key policy makers from all over Europe.
After an introductory speech by Marco Buti (Director General of ECFIN), Mario Draghi delivered a keynote presenting an overview of the state of play of the economy, the challenges ahead and the assorted policy measures. Four high level panels followed, looking at the present and future of the Euro, structural reforms for inclusive growth, lessons learned from economic adjustment programmes, and investment as an engine for growth.
From COFACE’s point of view, the main issues discussed were the following:
Nearly all speakers pushed the idea of necessary structural reforms to rekindle with growth, even if these were painful. The emergence of euroskepticism or skepticism in globalization were pinned on the lack of proper explanation of such reforms to the population.
Although reforms may be necessary, not all reforms are “equal”. As Euclid Tsakalotos, Greek Minister of Finance, underlined, “reforms” in the 60s and 70s used to mean progress in terms of pension rights, labour rights, etc. Nowadays, they often mean the opposite.
Furthermore, the effort which are being asked on EU citizens do not seem equally distributed. Labour protection laws are being watered down, wages are under pressure, pension age is being pushed forward, yet it is unclear how these “structural reforms” affect the different segments of society. The benefits and rights of policy makers themselves, for example, do not seem affected or put in question, making it all the more harder for citizens to swallow the bitter pill of austerity. On the contrary, policy makers should lead by example and show that they are equally sharing the burden of necessary structural reforms.
The timing and prioritization of reforms is also up for debate. Should we first reform the labour market or crack down on tax evasion, following up on the Panama Papers scandal? The choice of priorities tells a lot about policy makers’ sensitivity to issues such as wealth inequality, social justice etc, which inevitably lead to a lesser or greater acceptance of their policy strategies and choices by citizens.
Sequencing of reforms can ease the burden on citizens by making sure that necessary adjustment measures are associated with measures that help the affected citizens get back on their feet. The Greek Minister of Finance gave the example of the liberalization of pharmacies in Greece which was necessary because of their unsustainable numbers. But parallel measures to help develop cooperative banking and other areas of employment needed to be taken at the same time to ensure that the people who have lost their job due to liberalization could quickly find another job.
The rejection by citizens of certain reforms is clearly linked to social questions such as rising unemployment, a shrinking middle class, a rise in inequalities between the rich and poor, a perceived priority given to saving banks instead of saving citizens. This has translated in a political backlash with votes against more EU integration and nationalist policies.
While many speakers have rightfully identified the dire need to address the challenges listed above, very few have provided clear solutions or proposals for addressing them. Only Euclid Tsakalotos and François Villeroy de Galhau (Governor of the Banque de France) pressed the point while other offered wildly unconvincing suggestions such as Alexandre de Croo (Deputy Prime Minister) who cheekily summarized the process of climbing up the social ladder through better education and certainly not “taxing the hell out of people”, even though Belgium has a dubious track record of investing in education.
Euclid Tsakalotos and François Villeroy de Galhau had for their part some concrete proposals to put forward:
Even with 0% interest rates, the private sector is shy in terms of investments and needs an impulse from the public sector. The public sector must also engage in strategic investments like rebuilding its infrastructure. The low interest rates period is the perfect time for such investments. As the economy starts moving again and interest rates rise, this window of opportunity will close.
At present, “Social Europe” is only “social” by its name. Instead of focusing on indicators such as strict budget controls and fiscal deficits as a condition for loans or investments, we should find alternative indicators such as the impact of an investment strategy or structural reform on the GINI coefficient.
Higher equality in society and higher salaries provide a much stronger incentive for increasing productivity.
We have invested a lot of effort in the banking union, now the capital markets union, but we should also move towards an economic union, starting with a fiscal union and a full EU budget.
Institutions with a mandate are more important than rules without institutions.
Special attention needs to be given to fostering investment, notably in human capital, increasing productivity and boosting innovation across the EU economy.
Investing in human capital was a key concern and mentioned across several panels throughout the conference. At the same time, little concrete proposals were put forward as to how such an investment should occur. Some pointed to the fact that risk aversion has lead most investors to cut back on investment and instead, turn to savings, which prevents companies from getting the financing they need. Others emphasized the role of institutions like the European Investment Bank to provide financing to the economy.
But perhaps the problem and solution is to be found elsewhere. A study published in 2013 by the University Lille1 examined the cost of capital, which basically showed that paying out dividends to shareholders sucked up most of companies’ profits, with little left to reinvest in human capital. This, in turn, accentuates inequalities as shareholders are mostly the wealthiest and workers (the human capital) the poorest. Breaking out of this trend and making sure that companies can adopt long term economic development strategies as opposed to short term margin squeezing to please shareholders is an absolute necessity if we are serious about investing in human capital.
While Europe may seem behind in terms of innovation, this should not always be seen as a “bad” thing. Yes, there are more American “unicorns” then European ones, but the US market basically allows companies to use the market and consumers as guinea pigs to test “new” and innovative products, often with very high externalities and consumer detriment. In Europe, many innovative startups are incubated inside European Universities, developed under strong ethical standards with oversight and advice from leading academics and entrepreneurs. At the same time, public education including universities, are suffering from budget cuts. It is time to put our money where our mouth is.
Digitalization may also be an answer to innovation and enhanced productivity, but it is not a panacea. As Minister Tsakalotos rightfully pointed out, to fully reap the fruits of technological advances, these advances need to be managed. This means, among other things, investing heavily in new skills for new jobs, revamping our education systems and ensuring they receive adequate funding. It also means putting policies in place to cope with the potential displacements in the workforce such as obsolescence of certain jobs due to automation. While new jobs might certainly emerge, the transition will not necessarily be “smooth”.
We need more risk reduction and risk sharing to help stabilize the EU financial system. The stability of the banking sector has improved but there is room for improvement, especially regarding non-performing loans and exposure to government debt.
Risk reduction and risk sharing are indeed essential to tick the “prudential regulation” box. However, upon closer examination, such measures are filled with irony. At a time where on the “micro” level, retail financial services are moving steadily towards more individual risk based pricing by harnessing more and more data about consumers, at the “macro” level, we are advocating for a mutualization of the risk. COFACE has called for more mutualization/socialization of the risk in financial services for over 4 years. At present, the most vulnerable families and consumers pay the highest price for accessing basic financial service such as a credit or an insurance, thereby further increasing the gap between the poor and the rich and excluding a part of the population from basic financial products. Mutualization/socialization of risk should not only be applied at the “macro” level, but also at the “micro” level.
Furthermore, the EU Commission’s consultation on Insolvency is ending on the 14th of June, and it is of utmost importance that it is followed up with strong proposals for a minimum harmonization of insolvency rules across the EU. Weak or inexistent insolvency procedures are a major culprit in holding our economies back. Not only do they keep non-performing loans longer on banks’ balance sheets, but they also clearly impede on growth. Unresolved situations of over-indebtedness result in dramatic personal consequences for consumers such as poor health, divorce, or even suicides, which also generates high costs for society. Studies have shown that debt collection companies, which buy non-performing loans at a greatly discounted rate, seldom manage to extract money from consumers to pay the loan since any money extracted barely covers the fees and other administrative costs of the debt collection procedure. Over-indebted consumers, with no hope left for getting out of their situation, often drop out of the labour market for lack of motivation to work, since any revenue is immediately seized. All of this results not only in personal tragedies, but in heavy losses for the entire EU economy.
Economic adjustment mechanisms are depicted as harsh but necessary measures to prevent a systemic meltdown of the entire economy.
Besides the surprise expressed by many participants, that all panelists seem to “agree” on the need for economic adjustment mechanisms, these measures raise a number of questions in terms of democracy, transparency, and legitimacy. Since the neo-liberal doctrine has permeated into most supra-national lending organisms, the conditionalities assorted to any debt relief, bail out or investment are tinted with neo-liberal measures. But they only represent one strand out of a myriad of alternative economic policies.
The whole process of tying loans to conditions further blurs the lines between democracy and something resembling neo-colonial interference with not only domestic politics but sovereignty itself since, as we have seen with the Greek referendum, the will of the people has been blatantly ignored. In Cyprus, the Minister himself admitted to presenting the reforms proposals as being his own instead of a copy/paste from external creditors, which could have jeopardized the stability of his government. How long will governments be able to shove ideologically driven austerity measures, imposed from the outside by institutions accountable to no one, down the throat of citizens before a major social upheaval? We may have the answer sooner than we think, looking at the social unrests in France and strikes in Belgium.
In conclusion, while the conference shined on addressing the “macro”, stabilizing financial markets, balancing budgets and reassuring investors, it did little progress on tackling the ever growing social inequalities and offering concrete solutions to the ordinary citizens other than “once the market is stable, the market will provide”. Clearly, there is a need for more proactive policies, breaking from the current trend of lazy economics which consists in tweaking macro-economic indicators via monetary policy or capital injections and waiting for the private sector to “wake up” and do the rest. One thing is certain: if you try nothing, you won’t risk failure. And this seems to be the leitmotif of most policy makers, preferring low key “laissez faire” policy making to bold, innovative, risk taking initiatives which confront growing social inequalities head on.
As one speaker pointed out, economic policies shouldn't be about winning votes but about making the right decisions.