The Future Trends in the European Economy
1. What short term reforms can bring fast effects? What do we usually mean by reforms?
We mean measures which increase employment and reduce unemployment; measures which increase competition and thanks to that increase productivity and innovation; or measures which reduce excessive spending, which usually means social spending, part of which discourages people from working and saving. These measures are called either structural reforms or, if you reduce current spending, then they are called fiscal reforms.
Most people think that these reforms are necessary but they can produce beneficial results only in the long-run. I call these effects which they have in mind structural or longer term effects. But properly structured reforms also produce shorter term effects which I call confidence effects.
A fiscal crisis is due to the fact that creditors lose confidence in a government and this is reflected in much higher interest rates they demand. And if the interest rates are very high and if they continue that way then the country would become bankrupt.
But how do you go about restoring confidence? You cannot do it artificially – words are not enough. Actions speak louder than words. Creditors must see that the government is serious: it is doing something that will improve economic performance and this can restore confidence in a government. Restoring confidence is reflected in falling interest rates. So, you can save billions of dollars. This has happened in countries which have launched sufficiently broad reforms like in the Baltics and in Bulgaria.
There are also differences among the countries of the eurozone which have problems, for example in Greece the required interest rates are very high but in Portugal or in Ireland they have fallen.
There is no good substitute for proper reforms which on the one hand would increase economic growth in the longer term and in the shorter term they would restore confidence of the financial market in a given government, which helps to maintain growth in a shorter term.
2. What are the different economic experiences of the group of countries known as PIIGs (Portugal, Ireland, Italy, Greece and Spain) and the one that you have named as BELL (Bulgaria, Estonia Lithuania and Latvia), and what can we learn from them?
It is useful to compare these two groups because they have one common feature: neither of them has engaged in nominal devaluation. If you are in Greece you cannot have the Greek euro, it’s just the euro.
A similar story happened in the BELL countries because they adopted what is called a euro- based currency board. So, their currencies are pegged to the euro and these countries have maintained the peg. They are in a similar situation to Greece and this is the main rationale why one should compare them. This comparison is very useful because, first, it shows that the BELL countries have suffered very deep recessions especially in the Baltics in 2009 as they allowed a huge credit boom to develop. If you have a boom then usually you suffer a bust.
There was a very deep recession in the range of minus fifteen percent in Latvia, for example, and this was much deeper than in Greece in 2009. Nevertheless, the BELL countries are recovering thanks to drastic fiscal reforms and, if necessary, structural reforms.
Such comprehensive reforms were not launched in Greece so it should not be surprising that Greece is still sliding down in GDP. But there are also differences in the PIIGS group. Portugal and Ireland are doing much better than Greece.
3. In your view, is there such a thing as “a European solution”?
There is a lot of talk about a European solution. The frequent slogan is “We need more Europe”. But what do these people mean by “a European solution” or “more Europe”? I would say there is no European solution for the Italian problems or the Spanish problems but there is an Italian solution for the Italian problems and a Spanish solution for the Spanish problems meaning that they have to cure their own weaknesses, their own diseases and that they can do it. For example, there were rigid labour markets in both countries and also in Greece and Portugal. What they did was they removed these rigidities through labour market reforms. People who say “a European solution” usually either don’t know what they mean or they mean bail-outs. So, the European Central Bank should print money in order to allegedly solve the problem but I already said that this is not a solution. In my view this is a medicine which is worse than the disease. So, be sceptical about these slogans.
This is not to say that I am against Europe, I am very much for it. However, I am against obscure thinking. What is most important in the European Union? A single market meaning that we don’t have barriers to the movement of people, capital and goods. This is by far the most important economic achievement of the European Union, but also for the individual human beings. Let us protect this before we try to build something new. And let us extend it where it is not completed, i.e. in services.
4. Are there some more personal lessons to be learnt regarding our approach to money from the euro crisis?
This crisis has nothing to do with human nature even though there is a lot of cheap talk which somehow links it to human nature like greed etc. What does it mean, this word “greed”? Does it refer to behaviour or to what psychologists call “dispositions”, i.e. character of the people? People don’t usually jump from the second floor of a house but if there is a fire downstairs you would jump which shows that differences in the situation matters very much.
The present crisis was not caused by human nature but rather by the of errors committed by central banks and governments which stimulated excessive borrowing and lending. This has contributed to the credit bubble, excessive growth of houses pricing and then to the collapse.
So, instead of blaming human nature let us look at the root cause of the crisis and draw the policy conclusions. My impression from empirical literature is that there were serious errors in the public policies. For example interest rates set by main central banks especially in the US, were too low before the recent crisis. They influenced the rates at which credit was extended. If you can borrow cheaply, you borrow more and then you have the bubble. And there were other wrong policies, including the official regulations.
Privately, I am very sceptical of preaching as a way of influencing other people behaviour. Preaching should be reserved to good preachers and there are not many. Economists and policy makers should focus on incentives, which includes the elimination of such arrangements that made individuals to engage, say, excessively risky behaviour.