“Austerity vs. Growth – A False Dilemma?”, OECD FORUM, 28th May

29/05/2013 by

A debate on whether the world in general and Europe in particular needs more or less austerity was held yesterday in the context of the 2013 OECD Forum. Below, you can find my answer to the moderator’s question regarding what alternatives there are for the Eurozone to more or less austerity. (For a list of participants, scroll to the end.) But first, a brief comment of the PEW survey’s main finding, presented by Bruce Stokes (of Global Economic Attitudes), that a large majority of Europeans favoured paying down debt to more stimulus:

A brief comment on the Pew survey findings:

 Had a poll been taken in the midst of Europe’s Black Death pandemic, a majority of Europeans would have blamed the plague on prior sinful living and would have, most likely, accepted the established view that deliverance from the disease demanded self-flagellation and collective punishment. While we should always be keenly interested in public perceptions, we should not allow polls to cloud our judgment.

Turning now to the Eurozone’s alternatives to austerity-vs-stimulus, here was my main point:

  • If after the Fall 2008 the State of Nevada had to
    • salvage its own banks,
    • refinance its primary deficit caused by the downturn of the real estate market, and
    • provide unemployment benefits to its unemployed,

no matter how much stimulus Mr Obama put into the economy, and regardless of Mr Bernanke’s QE, Nevada would have become a failed state!

  • Soon, most American states and their banking sectors would sequentially fall off the cliff of competitive austerity. Just as it happened in the EZ.
  • So, Europe’s fixation with competitive austerity is not so much an ideologically driven policy choice.
  • It is rather the result of a badly designed Eurozone and of the denial that we have a systemic crisis in our hands.
  • Now, to those of you who think that the solution is to federate, to create a United States of Europe, my message is: Think again! Federation is neither politically feasible nor desirable as a crisis-fixing device.
  • So, what is the alternative? The alternative is to use existing institutions to rejig the Eurozone in a manner that stops its disintegration without New Treaties, and without a single euro transferred from the German to the Periphery’s taxpayers.
  • Is this feasible? It sure is!
  • First, without a banking union, the ESM in collaboration with the ECB could take over failing banks, recapitalise some, resolve others, and sell off immediately the cleansed banking assets – at a profit for the European taxpayer.
  • Secondly, the ECB could act as a go between member-states and money markets, helping them to service the Maastricht Compliant portion of their debt at low interest rates. It can do this without printing one euro or buying a single bond. It just acts as a go between.
  • Thirdly, the EIB should be given the green light to embark upon an investment-led recovery program in collaboration with the ECB. A European New Deal could then be financed 50% by the EIB’s own bond issues, and 50% by ECB backed bonds to be redeemed from the projects themselves on purely banking principles.
  • With investment, bank reform and public debt largely Europeanised, balanced budgets can be imposed on all member-states while the Eurozone as a whole receives a major growth stimulus and debt falls everywhere.
  • I call this rather modest alternative Decentralised Europeanisation. Without fiscal transfers, without jointly and severally guaranteed euro-bonds, without a Federal Treasury, without Debt Buybacks, without Treaty Changes – it would liberate Europe from the ridiculous dilemma between bone-crushing, self-defeating austerity and inefficient stimuli effected at the national level.

Session details: “Austerity vs. Growth – A False Dilemma?”, Tuesday 28 May (15h15-16h45), OECD Forum, Paris

Moderator: Paul Taylor, European Affairs Editor, Thomson Reuters

Pew survey presentationBruce Stokes, Director, Global Economic Attitudes, Pew Research Center


  •  Robert Johnson, Executive Director, Institute for New Economic Thinking (INET)
  • Felipe Larraín, Minister of Finance, Chile
  • Adam S. Posen, President, Peterson Institute for International Economic
  • Philip Stephens, Associate Editor, Financial Times
  • Richard Trumka, President, AFL-CIO; Trade Union Advisory Committee to the OECD (TUAC)
  • Yanis Varoufakis, Professor of Political Economy, University of Texas at Austin, United States

Closing Remarks – Pier Carlo Padoan, Deputy Secretary-General and Chief Economist, OECD

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