What Europe needs is a Growth Compact

Overspending by governments, we have been told, triggered this crisis. The cure thus lies in immediate austerity – forcing governments to balance budgets and reduce indebtedness. Hence last month's German-led push for a Fiscal Compact and the UK's pursuit of policies that are similar in all but name.

The blind pursuit of such policies, as demonstrated by the on-going experiences of Greece, Portugal and Spain, leads to biting deep recessions and worsens public indebtedness. The IMF acknowledged so much last week. Implementing the provisions of the Fiscal Compact on an accelerated time table will tantamount to the EU committing hara-kiri, lemming style.

No matter whether policy-makers seek to increase welfare, create jobs, or more narrowly, reduce public indebtedness, a focus on growth, not austerity, is the correct answer.

With the economy expected to worsen before (if) it gets better and high private indebtedness, consumers are repaying debt and firms are building rainy day funds. People aren't spending and firms aren't investing. Increases in economic activity now must necessarily come from the public sector.

More public investments

When EU leaders next meet on the first of March, they must adopt a binding pledge to increase growth-enhancing public investments in the EU outlining a firm strategy for funding these – a Growth Compact.

First, this Compact must seek to protect levels of public investments and increase them where possible. Reducing these undermines growth today by shrinking the level of economic activity and also jeopardizes the potential for future growth.

Investment in both hard e.g. transport and soft e.g. education infrastructure is essential as illustrated by the heavy price Portugal is paying for past underinvestment in education. Every Euro of cuts today could result in many Euros of lost growth.

Second, the focus of efforts to reduce public indebtedness, where needed, be on increasing tax revenue not cutting spending. Increasing consumption or employment taxes may be counterproductive when consumer spending is depressed and unemployment high, but other taxes have a less negative footprint on growth, even in the short-term.

The taxation of property, land, wealth, carbon emissions and the under-taxed financial sector needs to be increased across the EU. Allocating this revenue between public investments, deficit reduction and lowering income taxes for low wage earners would boost both growth and employment.

Crack down tax evasion

Third, EU Member States need to redouble efforts to crack down on tax evasion and avoidance. Greece and Italy (which have large black economies) as well as France, Germany and the UK have enacted recent measures to increase tax compliance. The results are mixed as domestic measures that have squeezed the tax-avoidance balloon one end have inflated it the other. London, a haven for rich rascals, is now adding Southern Europeans to its mob of Russian oligarchs but Greek and Italian money is also flooding into Germany. Companies too are shifting profits to avoid paying taxes.

Sharing and implementing the most effective anti-tax avoidance/evasion strategies across all EU countries and an agreement to help other EU members enforce their domestic measures would multiply the revenue from such crackdowns. Urgently renegotiating the EU savings tax directive, that at present captures less than one per cent in annual tax revenue on untaxed wealth transferred to other EU members, would also provide a big boost to revenues to fund public investments.

Fourth, EU member states must use its status as the largest economic area in the world to aggressively negotiate under the banner of the EU and strike much better deals with tax havens so tax losses can be minimized and past unpaid taxes clawed back.

The UK-Liechtenstein and German-Swiss bilateral deals, on the fate of untaxed UK and German money in these tax havens, have been rightly criticized as being very weak. The US has used its weight as the largest economy in the world to negotiate a much better deal for its taxmen. This is what the EU must do. Also, the US, under its Foreign Account Tax Compliance Act, obliges EU banks to share data on accounts held by US citizens. The EU must immediately push for reciprocal arrangements.

Strengthen the Investment Bank

Fifth, doubling the capacity of the European Investment Bank, which has an excellent track record of making investments in infrastructure and providing credit to the employment intensive SME sector, would need less than 40 billion Euros of up-front cash from the whole of the EU and generate investments that are ten times that amount.

Time for it to embark on an ambitious program of growth-enhancing investments in telecommunications, green energy and transport, then!

Continue liberalization of services

Sixth, EU governments such as the UK, Germany, Denmark and the Netherlands, that are able to borrow at negative effective rates of interest, must sharply increase their levels of public investments. What better time to borrow to invest in the improvement of shambolic infrastructure in the UK, for example? This borrowing and the expansion of the EIB's borrowing program would also satisfy the demand for safe assets for the deleveraging private sector to put its savings into.

Finally, the on-going structural reforms in crisis countries must continue and the liberalization of services in the single European market must be accelerated. These policies will help boost future growth but work best in a growing not shrinking economy.

Without such a Growth Compact, the economic, social and employment crises in Europe will only get worse. With it, we have a fighting chance to emerge stronger.

Der Entwurf der Autoren für einen „Europäischen Wachstumspakt“ ist auf der Website des Thinktanks Re-Define, http://re-define.org, abrufbar.

E-Mails an: debatte@diepresse.com

("Die Presse", Print-Ausgabe, 09.02.2012)