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IMF looks to bounce EU into fiscal union

EU economy | IMF looks to bounce EU into fiscal union Anthony Harrington

Just a day or two before ECB president Jean Claude Trichet sketched out how the embryonic European Systemic Risk Board could be a kind of halfway house to fiscal union (see my previous blog on the EU economy for further analysis), the managing director of the IMF, Dominique Strauss-Kahn launched an even more vigorous proposal. What Strauss-Kahn wants is nothing short of “broad reforms” – transparently thin code for a much sharper progression to fiscal union. The risks of inaction and procrastination, he told his audience, could well be “the unravelling of Europe’s social model”.

After stellar growth through the 1980s and beyond, Europe’s standard of living has hit a roadblock and growth is at a standstill. “Today, Europe has a serious growth problem – a problem magnified by the earthquake of the global financial crisis… It is time to renew the founders’ commitment to ever-greater openness and ever closer integration,” he comments.

The “dark side” to Europe’s problem today is chronically high unemployment and persistently low employment participation – "especially among women, older workers and the young,” he points out. Strauss-Kahn pulled no punches. The future for Europe if it does not cure its ills is harsh…

“Fundamentally, Europe is discarding too many of its people. We must never forget the immense human costs of joblessness—long-lasting income loss, worse health, higher mortality, lower children’s educational attainment, and faltering beliefs in institutions and democracy. We face the very real prospect of a lost generation, distanced from the labor market, and marginalized from society.”

The European dream of health and prosperity for all is sliding away. What is needed is “closer integration”. How is this to be achieved? By addressing the real root of the problem, the absence of fiscal union:

"The euro area suffered from a deeper recession than elsewhere in the world—even the United States, the epicenter of the crisis—and is slower to bounce back. Inadequate governance in the euro area only made things worse. Close financial integration has brought great benefits, but it means that a problem with banks or sovereigns in one part of the euro area quickly becomes a problem for all. The area’s institutions were simply not up to the task of managing a crisis—even setting up a temporary solution proved to be a drawn-out process…”

The solution lies in banks lending more to small businesses and in Europe as a whole moving to “credible medium-term fiscal consolidation”. A good first step, he suggests, would be the launching of “a Single Labour Market” across the EU. “The euro area cannot achieve its true potential with a bewildering patchwork of segmented labour markets.” A second step would be spending much more public and private sector money on research and development. A third step would be a more open migration policy, pulling in young workers from emerging markets to offset Europe’s ageing population. (With the UK frantically installing caps on immigration of skilled workers, this suggestion will go down a treat…).

How is this bold vision to be realized? You guessed it. Through much more centralized policy making. “Changes on this scale can only be solved in a collaborative manner,” he warns. “When the agenda is left with nations, things stall.”

Quite tellingly for the oversight model of all by all proposed by the ECB’s Trichet, Strauss-Kahn points out that “peer pressure has not served Europe very well” thus far. The solution lies with the centre:

"The center must seize the initiative in all areas key to reaching the common destiny of the union, especially in financial, economic and social policy. Countries must be willing to cede more authority to the center. Mechanisms must be redesigned to give them the incentives to reform.

Progress is being made on a number of fronts, but we are still some distance away from an effectively functioning economic union—the missing “E” in EMU!”

With hindsight this speech may well come to be seen as the opening salvo in the next stage of the battle to forge Europe’s nation states into a Central European Super State. You can just see the Eurosceptics reaching for their sabres, but as Strauss-Kahn notes, without this, the road ahead looks rocky indeed.

Further reading on the EU economy and the ECB:

Tags: banking , Dominique Strauss-Kahn , ECB , EU , EU economy , European Union , fiscal union , IMF , Jean-Claude Trichet , regulation
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