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Europe’s growth v/s austerity debate has been very divisive, and we’ve seen austerity protests take centre-stage in Spain and Greece.In his latest note, George Magnus, UBS’s senior economic advisor says the eurozone suffers especially in this regard. This is because none of its problem countries are creditors like Japan, because it doesn’t have the “currency and capital market privilege” of the U.S., and mostly because it lacks political union.
Magnus says the fiscal compact is a good idea in as much as it calls for a framework that manages debt and deficits, but he says it isn’t the answer to Europe’s debt crisis.
Mere chatter about introducing “growth” policies in the fiscal compact, or the use of EU structural funds and the European Investment Bank (EIB) to help finance infrastructure and energy projects might ease some rhetoric against the fiscal compact. but isn’t enough.
Magnus says the fiscal compact would need at least five crucial things to be approved;
- Changes in macro behaviour and demand policies of Germany aimed at lowering its savings and balance of payments surplus.
- Higher German inflation as the quid pro quo for debtor countries that are looking for less disinflationary policies, leaving the aggregate eurozone inflation rate stable.
- The extension of debt restructuring and relief to countries other than Greece.
- A wider ECB mandate to offer bridge financing for countries as well as banks.
- 2 integration initiatives a) an initiative that identifies a path for common debt issuance b) an initiative that takes away the power that governments have over the banking sector and gives it to an effective European Banking Authority.