Download Jean Paul FITOUSSI, "The International Scene and the Economic

UNIVERSITY OF TRENTO
SCHOOL OF INTERNATIONAL
STUDIES
The International Scene and the
Economic Government of Europe
Proceedings of a Conference Organised by the Department
of Economics, University of Trento, Trento 10 November 2003
Jean Paul Fitoussi
Working Paper 01/2004
1
Founded in June 2001, the School for International
Studies at the University of Trento is an interdisciplinary
institution promoting advanced work in the fields of political
science, international law and economics, sociology and
contemporary history.
The School coordinates a one-year Master's degree, a twoyear specialist degree and a three-year PhD programme in
International Studies attended by students from a wide
variety of national backgrounds. It promotes conferences and
seminars on international themes for the academic
community of the University of Trento.
Further details about the School can be obtained at
http://www.unitn.it/ssi/index.htm, or by email from the
School
administrator,
dott.
Silvia
Tomaselli
([email protected]).
Further information about the Working Papers, including
forthcoming publications, can be obtained from Prof. Mark F.
Gilbert ([email protected]).
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Table of Contents
Introduction.............................................................................................................. 4
The International Scene and the Economic Government of Europe ..................... 6
Discussion: ..............................................................................................................19
Table of Graphs
Graph 1: GDP Growth Rates............................................................9
Graph 2: Unemployment Rates in the US and the EU......................9
Graph 3: The Financial Bubble.......................................................10
Graph 4:Productivity Growth in the United States and the Euro Zone
................................................................................................12
Graph 5: Interest rates, United States ............................................13
Graph 6: Interest Rates, Euro Zone ...............................................14
Graph 7: GDP per Capita at Current Market Prices and PPS, 19502000.........................................................................................15
Graph 8: Euro Area Divergences in Cyclical Positions ...................16
Table of Tables
Table 1: Country Forecasts ............................................................11
Table 2: The Contribution of Consumer Spending to GDP Growth.12
Table 3: The Fiscal Policy Stance in the United States ..................14
Table 4: Growth of Real GDP, Ten-Year Average..........................15
Table 5: Wage Shares in the Business Sector ...............................16
Table 6: Budget Deficits .................................................................17
Table 7: Fiscal Policies in Europe and the United States ...............17
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Introduction
Prof. Andrea Leonardi:
Ladies and Gentlemen, good afternoon
It is with particular pleasure that we start this year’s series of meetings
with the city of Trento, with one of the most distinguished economists in
Europe. This series of meetings is now entering its third year and it would
seem of particular importance to discuss and reflect upon matters that
concern us directly; that concern us as scholars; that concern all of our
students, that concern all citizens.
The faculty of economics, thanks to the efforts of its former dean Enrico
Zaninotto and of its new one Carlo Borzaga has proposed to bestow upon
professor Jean-Paul Fitoussi the Honorary Chair “Bruno Kessler” of our
University. Tomorrow the honorary chair will be officially conferred.
Professor Fitoussi, who at present is in Trento, has accepted our invitation to
give a presentation on one of the topics he has been addressing for years with
particular insight. We are delighted that he has accepted our hospitality and
has agreed to share some of his reflections with the citizens of Trento. He will
be introduced by professor Roberto Tamborini director of the department of
economics of our faculty. Before handing over to professor Fitoussi, I would
like to thank him once more for being with us
Prof. Roberto Tamborini
Good evening everybody, I will briefly introduce our guest and the topic
of this evening. Professor Fitoussi is internationally renown for his
contributions to the theory of macroeconomics and for his elaboration of
economic policies for growth and full-employment. However, he is known
not only to specialists but also to a wider audience thanks to his posts in
various public institutions, both in his country and in Europe, and above all
thanks to his insightful and generous participation in the public debate on the
most pressing themes of European politics. Professor Fitoussi also has special
ties with Italy, in fact, this evening’s conference will be held in Italian. Perhaps
his ties are with Florence in particular, but from now on they will also be with
Trento. His ties with Italy are not only of a scientific nature and consist not
only in having been a point of reference in the education of many Italian
economists, myself included. His brilliant contributions to the newspaper “La
Repubblica” are widely read, but above all he is known for his two recent
books, translated into Italian, on the topic of the construction of the common
European house “Il Dibattito Proibito” (The Forbidden Debate) and “Il
Dittatore Benevolo” (The Benevolent Dictator) both published by Einaudi.
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The two works represent a rare example of sophisticated popularisation,
thanks to which both the scholar and the layman, step by step, and with great
lucidity, are guided through difficult subject matters vital for the present and
future of us Europeans.
What is most striking about Fitoussi’s reflections about Europe, is his
capacity to combine the “cold” –to express it like that - analytical thinking of
the economist with the “hot” passion of the convinced- and why not –
utopian European. Utopian in the sense of the creative utopia which has
succeeded in transforming our continent from a heap of rubble left behind by
two devastating wars into a home of reconciled and united peoples, able to
share a growing part of their cultural, political and institutional identities. The
road towards Europe, travelled thus far, has been long and not without
surprises, and the successive stages are ever more ambitious and replete with
difficulties. While on the one hand Fitoussi’s European passion provides us
with the incitement to continue, his extraordinary capacity for economic
analysis, on the other hand, provides us with the reasons to continue, and with
the critical instruments needed to understand where the obstacles are located
and how to overcome them. Obstacles which he, unafraid of going against the
current also with respect to the mainstream of economic thought, locates with
great clarity as much in the sphere of institutions and of European political
parties as in the sphere of economic institutions and powers, denouncing the
fatal attraction exerted by the status quo and putting us on guard against the
growing temptation to circumvent democratic processes by erroneous
technocratic and bureaucratic shortcuts. In this evening’s conference
professor Fitoussi will paint a comprehensive picture of the international
economic situation within which to place many of the peculiar aspects of the
economic performance of Europe, i.e.: a subdued rate of economic growth; a
stubbornly high unemployment rate; technological innovation which proceeds
at a slower pace than in other parts of the global economy. Are these
weaknesses destined to persist? Can we place our trust exclusively in the
American model and in the American economic locomotive? Have there been
mistaken policies in Europe, and which polices are required? How to place
within the framework of the global economy the great institutional and
political changes Europe is experiencing, i.e. the creation of the single
currency; the new constitution, and enlargement? These are some of the
questions that surely will emerge during the presentation, and on which
professor Fitoussi will surely give us some food for thought. After the
presentation there will be time for some questions from the audience.
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The International Scene and the Economic Government of Europe
(Prof Jean Paul Fitoussi)
Thank you very much. Professor Leonardi and professor Tamborini have
said so many nice things about me that I have lost my voice. I will try
however, and I ask you to excuse my Italian. Be patient with me. First of all, it
is a great honour for me to be here; a great honour to be named honorary
professor of this university. I would like to thank all those who were involved
in this; doctor Zaninotto, Axel Leijonhuvdud and Kumaraswamy Velupillai,
who unfortunately is not present, but such is life.
I will talk about the international economic scene and how it impinges on
the evolution of the European Union. This evolution is characterised by a
paradox; the construction of Europe has required a substantial relinquishment
of sovereignty on the part of the member states, without, however, providing
them with anything equivalent on the level of the Union. Thus the evolution
of Europe privileges a mode of integration that consists first and foremost of
containing the privileges of the member states within the bounds of ever more
constraining regulations. The Union has progressively emptied the seats of
national sovereignty without simultaneously replacing it with European
sovereignty. In fact, the government of Europe resembles more a government
of rules than a government of choices. But the construction of a union implies
the extension of democracy to a wider area and not its restriction at the
national level.
In other words, perhaps the problem is not primarily located in the loss
of sovereignty of the states but rather in the inability to propose to the
populations concerned an alternative to negative integration and policies by
default. In this way the constraints freely accepted by governments in the
framework of European regulations substantially reduce the extent and
significance of electoral competition. If the national democracies agree to tie
their own hands so that the public good becomes European, without the
public good on the European level being governed according to democratic
principles, a democratic deficit emerges both at the level of the member states
and the union. This is the challenge to be faced not only by the European
polity but also by the European economy.
The macroeconomic policies of the Union, that is to say, the instruments
used by governments to provide society with a collective assurance of
economic activity, suffer from a similar defect, even though they are a matter
of fundamental importance. A well orchestrated economic policy can sustain
the growth of employment, may enable the economy to reach new growth
paths determined by technological changes, and can facilitate the
implementation of structural reforms. If conducted badly, economic policies
instead may slow down the growth of the standard of living, aggravate
unemployment, or even hinder structural reforms. For the conduct of its
economic policies the European Union relies mainly on three institutions. The
European Central Bank, the Growth and Stability Pact, and a Directorate
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General for Competition of the European Commission. The European
Central Bank (ECB) is the equivalent of a ministry of economic activity
because setting interest rates has a direct effect on activity in Europe. Hence
the Union disposes of a minister of economic activity, a secretary of state for
the surveillance of the public budgets, and a minister for competition, each of
them equipped with supra-national competencies.
From the point of view of its overall architecture this arrangement
evokes the structure of a federation. That the term federation in practice is
hardy ever used is due to the fact that the governance of the economic model
of the Union resembles more the management of independent authorities
than a political decision-making processes. Is such a situation acceptable in the
long run? I believe not. Because the economic policy stance of the union must
not, at least not in its essential aspects, be detached from democratic
processes. This is unacceptable. In fact, the inability of European voters to
exert influence over the rules that affect their daily lives without doubt
constitutes a limitation of political freedoms. Hence it becomes legitimate to
ask if we are not assisting in the evolution of Europe towards a different
political regime; a political regime that is not the one Europe claims to
embody before the eyes of the world.
The problem is that even though macroeconomic and competition
policies are distant, they are connected, being simultaneously complementary
and interchangeable. They are complementary because, on the one hand, the
structural reforms deemed necessary by competition policy will have much
more chance of succeeding the more favourable the macroeconomic context
is. On the other hand, the efficiency of macroeconomic policies depends on
the structural context in which they are pursued. They can also be considered
interchangeable in the sense that the same goals, for example full employment
or growth, can in principle be achieved using either instrument;
macroeconomic policies or competition policy.
The judgement on the appropriateness of the economic institutions of
the Union will differ according to whether the complementarity or the
interchangeability is emphasised. The first, in fact, leads to an extended vision
of the European policy mix in which instruments are considered strongly
interdependent. This interdependence requires a tighter coordination and a
higher degree of centralisation, probably under the auspices of a common
political authority. The conception of intechangeability of policy instruments
is of a more liberal inspiration and is perfectly compatible with the present
institutional architecture. The fact that the fiscal prerogatives of the member
states have been put in custody, along with the creation of an independent
monetary authority, whose sole mission is price stability, cannot but weaken
the capacity of the institution to intervene; an institution that de facto takes
the place of a European state, namely the council of the heads of state and
government. Competition policy, and its application to the public and social
spheres by means of deregulation, thus becomes the privileged instrument of
the European project. Hence one does not need to be in favour of either one
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of these conceptions in order to conclude that with respect to the way the
member states are governed, the first implies continuity, whereas the second
constitutes a clear break. This is what I will try to show scrutinizing the
international economic scene.
In 2001 all the forecasting institutions of the planet predicted for the year
2002 a rate of growth of 3% for Europe and of less than 2% for America. In
2002, realising that they were mistaken because growth in Europe was 0.8% in
2002 and 2.4% in the United States, they decided to make the same forecast
for 2003 of 2.5% for Europe and the United States; and they were wrong
again because the rate of growth in the United States was 2.5%, as compared
to a meagre 0.5%, or perhaps even zero, in Europe. What we need to know is,
why did this forecasting error occur? What might explain this fact? Is there a
rationale behind this fact? Yes there is, because on the one hand the
malfunctioning of the private sector has been much more pronounced in the
United States, i.e., over-investment; the system of governance; the almost
mafia like practices in US business as revealed by American stock exchanges.
On the other hand, economic policies have been much more reactive than in
Europe. In short, in Europe the policies were wrong: in the US the private
sector malfunctioned.
But since the period was characterised by a proliferation of exceptional
circumstances - stock market crash, two wars, September 11, not taking into
account climate changes - the malfunctioning of public policies was more
important than the malfunctioning of the private sector. Europe now hopes
that the recovery across the Atlantic will pull its economy out of the recession
because nobody believes, that the European economy can recover from the
present phase on its own accord. There is no internal engine, no internal
autonomy in Europe. Hence we expect growth from America or Japan, or
from the rest of the world, but not from ourselves. Is this a reasonable hope?
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Graph 1: GDP Growth Rates
10
8
United States
6
4
2
0
EU 15
-2
-4
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
01
02
Graph 2: Unemployment Rates in the US and the EU
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10
EU 15
9
8
7
6
United States
5
4
3
80
81
82
83
84
85
86
87
88
89
90
91
9
92
93
94
95
96
97
98
99
00
In order to answer this question we need to look a bit at economic
history. When we compare growth rates in Europe and in the United States
(Graph 1) we see that the so-called locomotive does not really pull well. There
have been periods when the United States grew rapidly while Europe
stagnated. This becomes even clearer when we look at unemployment rates
during the last twenty years (Graph 2). Hence, history shows that the
locomotive does not operate automatically. What we know is that the
American recovery is gaining force, but its impact on Europe will depend on
exchange-rate and interest-rate effects It would be terrible for Europe if the
Dollar collapsed and long-term interest rates would rose.
Now lets look at this financial bubble (Graph 3). The problem in the
United States, as I said just a moment ago, was that of the malfunctioning of
the private sector. The key to this malfunctioning was an enormous overinvestment in new technologies. A crisis of the kind that existed before the
Second World War but which had not occurred since. The reason why this
malfunctioning was considered truly serious was that the lesson drawn from
the first and second world wars was that it requires a long time to surmount
an over-investment crisis. But perhaps the correction of excessive investment
in new technologies proceeds much faster because such technologies have a
shorter life cycle.
Graph 3: The Financial Bubble
400
350
S&P500
300
Dow Jones 30 Industrials
Nasdaq composite
250
200
150
100
50
01/2003
10/2002
07/2002
04/2002
01/2002
10/2001
07/2001
04/2001
01/2001
10/2000
07/2000
04/2000
01/2000
10/1999
07/1999
04/1999
01/1999
10/1998
07/1998
04/1998
01/1998
10/1997
07/1997
04/1997
01/1997
If one looks at the forecasts for certain countries, a feeling of sadness
prevails (Table 1). Germany grew by 0.2% in 2002 and 0% in 2003. But
France does not perform any better: If France had a somewhat higher growth
10
rate in 2002 this was because it was an election year. In Italy instead there
were no elections in 2002 and the figures accordingly were sad.
Table 1: Country Forecasts
GDP, volume
Share 2002 2003 2004
Germany
5.2 0.2 0.0 1.6
France
3.5 1.2 0.4 1.5
Italy
3.4 0.4 0.3 1.3
Spain
1.9 2.0 2.2 2.7
The Netherlands
1.0 0.3 -0.6 0.5
Euro Zone
17.3 0.9 0.5 1.6
United Kingdom
3.4 1.9 1.8 2.5
European Union
21.5 1.1 0.7 1.8
United States
22.0 2.4 2.5 3.2
Japan
9.0 0.2 2.5 1.4
China
10.1 8.0 7.5 7.6
Other Asian Countries
13.6 4.5 4.7 5.5
Latin America
8.8 -0.6 1.6 3.6
Russia
4.1 4.3 6.0 4.6
Central and Eastern Europe
2.5 2.9 3.3 4.1
World
100 2.7 3.1 3.7
Thus, as far as the euro zone is considered we can really see that it is not
on a normal growth path. By now we are talking of a slowdown which started
in the second half of 2000, meaning four years of growth below its potential
level. The story in the United Kingdom is somewhat different since here the
annual growth rate is more or less equal to the potential growth rate. In the
United States instead the story is quite different. Japan at the moment seems
to be in a better situation than Europe. Europe instead at present is bringing
up the rear of economic growth.
If we try to explain why Europe has lagged behind the US in terms of
economic growth, the answer is simple. US policies have strongly supported
economic activity. Monetary and fiscal policies have been extraordinarily
expansionary and have had the expected effects. Consumers, realizing that the
state would provide an assurance of economic activity, have been the true
engine of growth. At the same time excess capital is being absorbed. Above
all, the high rate of productivity growth, which was due to the large
investments of the 1990s, seems to continue also in a period of slowdown.
Hence the contribution of consumption to overall growth has been strong in
the United States, 2 percentage points during 2002-2003, whereas it has been
very weak in Europe (Table 2).
Comparing productivity in Europe and the United States, one notes that
what was considered to be an exceptional period, the second half of the 1990s
in the United States, seems to continue and even to accelerate. However, this
is intermingled with the productivity cycle. In Europe there is no sign that
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productivity is increasing. This is no puzzle because investment in Europe was
not strong in the 1990s, and investment is the privileged means for
introducing new technologies.
Table 2: The Contribution of Consumer Spending to GDP Growth
2002
2003
GDP Growth United States
2.4
2.5
Contribution of Consumption
2.2
2.0
GDP Growth Euro Zone
0.9
0.5
Contribution of Consumption
0.3
0.7
But there is also hope, If one compares the development of productivity
during the previous decade in the United States and the European Union
(Graph 4), one notes two things: the first is that productivity growth in the
United states surpassed the European rate only during the second part of the
1990s. Before that is was much weaker. If we look at the whole decade, the
growth rate of productivity was slightly higher in Europe than in America.
What makes the difference is the fact that the industries that employ new
technologies have a much higher growth rate in the United States than in the
European Union. This simply means that the process of diffusion of new
technologies has proceeded faster in the United States than in Europe. This is
normal, because in high growth economies also diffusion is more rapid,
whereas diffusion is slower if growth rates are subdued.
Graph 4:Productivity Growth in the United States and the Euro Zone
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Euro Zone
United States
6
5
4
3
2
1
0
-1
90
91
92
93
94
95
96
97
98
99
00
01
02
03
As far as monetary policy is concerned we see that that the policy
reactivity in the United States has been incredibly strong (Graph 5): In six
months the interest rate went from 6% to less than 2%. If we look at Europe
we see that the response has been much weaker: from 4-4.5% to 2% (Graph
6). But we also see that budgetary policies have responded very forcefully in
the United States; the budget went from a surplus of 1.4% to a deficit of
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4.6%, an enormous 6 points difference (Table 3). And if we look at the
structural deficit the difference is almost five points.
Graph 5: Interest rates, United States
9
8
Long term
7
6
5
short term
4
3
2
1
1994
1995
1996
1997
1998
1999
13
2000
2001
2002
2003
Graph 6: Interest Rates, Euro Zone
10
9
8
Long term
7
6
5
short term
4
3
2
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Table 3: The Fiscal Policy Stance in the United States
2000 2001 2002 2003
Surplus/GDP
1.4
-0.5
-3.4
-4.6
Cyclical Correction
0.9
-0.2
-2.9
-4.0
Source: OECD Economic Outlook, June 2003
The critical question in this summary of the economic situation is: what
will happen to the Dollar? Why has the dollar depreciated by almost 30%
againts the Euro since November 2000? Why? There is a very simple
explanation. The deficit of the private sector is enormous in the United States;
it is in the order of 5%, which is a historically high level. And how is this
deficit to be financed? We have done some computations and the answer is
that the rest of the world will need to increase the share of American assets in
its portfolios by 2% per year. This is huge. Will it happen? My answer is yes.
Why? Because the rate of return on American activities is much higher and
hence it is worthwhile buying American assets.
If we look at the euro zone, we see a completely different growth story.
The euro zone grew by 3.4% in 2000, 1. 4% in 2001, 0.8% in 2002, 0.5% in
2003 and perhaps, perhaps, we don’t know, 1.6% in 2004. Hence the question
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I want to ask is: why does subdued growth seem to be a long-term
characteristic of Europe?
Can this episode help me answer the question? I believe so. First, if we
look at the problem in a long-term perspective from 1950 to the present, one
sees that during the first phase, living standards in Europe approached those
in the United States. This, however, came to an end in 1975 and since then
there is no more catching-up (Graph 7). Japan, instead, which was considered
the sick economy of the world, continued to catch-up with the United States
until 1995. If we look at a more recent period from 1985 to 2004 we see that
until 1994 the euro zone had the worst performance in the world, and was
particularly bad in the last decade (Table 4). Japan, instead which also
performed badly is recovering from this period.
Graph 7: GDP per Capita at Current Market Prices and PPS, 1950-2000.
Table 4: Growth of Real GDP, Ten-Year Average
1985-1994 1995-2004
United States
2.9
3.2
Euro area
2.4
2.0
European Union
2.4
2.2
Japan
3.4
1.3
Other advanced economies
3.8
3.3
In order to explain this difference the debate usually refers to the socalled euro sclerosis, i.e. the lack of sufficient structural reforms in European
economies. However, there is an indicator of structural reforms. This
indicator is the share of wages in GDP (Table 5). Looking at what happened
in the different areas of the world we can see that the wage share dropped
substantially in those areas that performed badly. In the US the wage share
remained constant, it dropped by 6 points in the euro zone but only by 3
points in the EU. The drop has been particularly pronounced in France and
15
Italy, almost 10 points; an enormous reduction of 10 points of the wage share
in a period of 20 years.
Table 5: Wage Shares in the Business Sector
1981-83 1991-93 2003
United States
50.9
49.7 49.5
Euro area
54.0
50.6 48.2
European Union
52.5
50.0 49.5
France
52.3
45.0 42.5
Italy
55.2
51.0 46.9
United Kingdom
50.4
54.7 59.3
Japan
66.4
59.8 55.6
And if we look at the more recent period we see an output gap, i.e. an
insufficiency of demand with respect to supply (Graph 8). Demand is too low
in the euro zone and particularly in Italy. This may be a detail, but we can see
that demand is much lower with respect to supply in the euro zone than in the
United States. Therefore, how can we explain the fact that Europe has
experienced subdued growth during the last twenty years even though there
have been structural adjustments, as can be gauged from the substantial drop
in the wage share? Moreover, it is important to note that this drop has not
come about by means of inflation. The wage share has not been lowered due
to inflation. Thus, how is this situation to be explained?
Graph 8: Euro Area Divergences in Cyclical Positions
The explanation, for the period since the 1990s, is the Stability and
Growth Pact. European budget deficits seemed rather high in the context of
this pact. Yet we need to remember that in the United states the swing in the
budget was in the order 6 percentage points; whereas in France, which had the
most pronounced growth of the public deficit, the difference was less than 3
% (Table 6). In comparison, the figures for Germany are 3.4% and less than
16
2% for Italy. Spain is a special case, which I can explain afterwards during the
discussion.
Germany
France
Italia
Spain
* Estimates
Table 6: Budget Deficits
2000 2001
2002*
-1.3
-2.8
-3.5
-1.3
-1.6
-3.1
-1.5
-2.6
-2.6
-0.3
-0.3
0.1
2003*
-3.9
-4.0
-2.9
-0.2
2004
-3.7
-4.1
-3.2
0.0
Since the deficit figures do not take the economic cycle into account it is
necessary to calculate the discretionary element of fiscal policies in order to
compare the policies in the US and Europe (Table 7). Looking at it from this
perspective we can see that during this period, characterised by a substantial
slowdown of the global economy, the fiscal impulse has amounted to 1.4
points of GDP each year in the United States; compared with 0.2% in the in
the euro zone, seven times lower. In the United Kingdom the fiscal impulse
amounted to 1% per year, 4 percent over 4 years. Therefore the really
important thing when looking at this table is that in the “normal” economies,
if I may put it like this, economic policy has displayed a strong reactivity
whereas this was not the case in the euro zone.
Table 7: Fiscal Policies in Europe and the United States
Growth of GDP
2001
2002
2003
2004
United States
0.3
2.4
2.5
2.9
Euro Zone
1.6
0.9
0.6
1.3
United Kingdom
2.1
1.9
1.8
2.3
Budget Deficit
2001
2002
2003
2004
United States
0.4
-2.4
-4.3
-3.2
Euro Zone
-1.7
-2.2
-2.8
-2.4
United Kingdom
0.5
-1.5
-2.4
-2.5
Fiscal Impulse
2001
2002
2003
2004
United States
0.6
2.9
1.8
0.2
Euro Zone
0.6
0.4
-0.2
-0.2
Germany
1.5
0.2
-0.6
-0.2
France
0.3
1.3
-0.1
-0.3
Italy
0.4
0.3
-0.3
0.1
United Kingdom
1.0
2.0
0.5
0.2
2001-2004
2.1
1.2
2.1
2001-2004
-4.7
-1.2
-3.2
2001-2004
1.4
0.2
0.2
0.3
0.1
0.9
The problem therefore is that the Stability and Growth Pact obstructs
the reactivity of national policies, and negatively impacts on the expectations
of the private sector. The Pact implies that if growth is strong, taxes will be
17
cut, but if growth is weak taxes will be increased. This is an upside down
world which does not provide a rational basis for the private sector on which
to form expectations and thus increases the degree of economic uncertainty.
This is what I criticised at the beginning of my presentation namely that we
have a federal government which operates according to fixed rules and not to
choices This proves that democracy, which is a desirable form of government
in itself, is also desirable for reasons of economic efficiency. And this is easy
to understand because democracy permits governments to respond flexibly
and to correct past errors. This possibility does not exist in a government of
rules, and this means that no authority carries the responsibility for effective
macroeconomic policies. This is so for the following reason: the European
authorities, this federal government that I outlined above, do not have the
democratic legitimacy to respond in cases of exceptional events, and the
national governments no longer have the power to respond. Hence there is a
sovereignty vacuum in the euro zone, a vacuum that leads to bad policies. It
also leads to dogmatic policies, because policies conducted according to rules
that were fixed at a certain moment in time cannot be effective.
This, however, is not the fault of the European authorities. The problem
is that the rules are instituted by means of international treaties, and
international treaties have a peculiar characteristic, namely that they cannot be
modified without unanimity. That is the reason why it is wrong to talk of a
European constitution. What is being created is not a constitution, but an
international treaty that cannot be changed without unanimity. Imagine what
the situation would be, let’s say of France, if constitutions could only be
modified with unanimity. We would never have had another constitution
other than the original one. We would never have had the constitution of
1958, which has allowed France to rebound. This is what must be considered
the essential problem for all those who are sincerely pro-European. There is a
need for democracy. We do not want to have a system that nobody
understands. Only few have understood that these days we are not discussing
a European constitution but an international treaty, which is something
altogether different. And thus there will be few who understand when there
will be two presidents of Europe. The problem is how to arrive at a system
that operates according to the rules of democracy, because I believe that
democracy is more important than economic effectiveness. What my research
allows me to say, however, is that a democratic form of government is always
more effective than a benevolent dictator. That can be observed anywhere,
also in the less developed countries. Thank you.
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Discussion:
Prof. Ferdinando Targetti: First of all I would particularly like to thank
professor Fitoussi for the masterly way in which he combined economics,
economic policies, and the policies of the institutions, apart from being
admirable it is also good to hear. The concluding remarks of professor
Fitoussi, bring to mind something one of my teachers, Nicholas Kaldor, wrote
in the 1940s. Kaldor, in one of his less noted articles, compared the
democratic English economy, which at the outbreak of the war seemed a bit
dilapidated, to the German economy, which was dictatorial under Speer but
seemed to be an extremely effective and efficient economic machine in the
1940. In a detailed and concise analysis Kaldor showed that exactly the
opposite was the case: the democratic English economy was more efficient
than the German war machine.
I would like to ask two questions: one question concerns the issue of
economic policy. Professor Fitoussi tells us, correctly, that seen from the
perspective of a comparison between the US and the EU, this Keynesian
policy, which the Americans pursue, also has long-term growth effects and
not only contributes to the short-term cyclical recovery. In the EU, instead,
we are not able to pursue such policies for lack of appropriate institutions. I
will play the devil’s advocate a bit; there will be few of those around here, and
that is why I take on this role. I would point out that many economists of high
standing, people we value like Krugman and Stiglitz, argue that the twin
deficit created by American policies renders the international macroeconomic
equilibrium unstable because the Chinese central bank will have to reinvest
the entire surplus in dollars in order to avoid havoc. I do not want to
elaborate this, we all know this as it is discussed everyday in the newspapers,
What would be the likely scenario in a future world in which not only the
United States but also Europe pursued similar policies. Desirable, but what
would happen to the international equilibrium?
The second question: Some people argue that the European economic
institutions, at least as far as the supply of public services is concerned, should
be of a more federal character, whereas budgetary policies, i.e. countercyclical
macroeconomic management should not be. Others instead, first and
foremost professor Fitoussi, argue that both the supply of public services and
budgetary policies should be conducted by a federal state. We have a
European Central Bank, but, like the United States, we need to have a federal
budget. At this point, however one wonders through what process we could
arrive at such a situation. I totally agree that the federal European state should
be able to incur debts, and these would be public European debts. What could
the technical mechanism be? What could we suggest, so as to create a
European public debt while at the same time maintaining the goal of public
debt-reduction in member states such as Italy? This is a problem that the
Americans do not have, but we Europeans do.
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Prof. Jean-Paul Fitoussi: Two nice questions. Lets start with the twin deficit.
I am not saying that the present US policies are good policies for the
Americans. Bush clearly pursues right wing policies. American policies could
have been better had they proceeded in a different way. When I say that I
believe in democracy, I mean that a right-wing government should pursue
rightist policies and a leftist government leftist policies, What president Bush
is doing is a policy of the right, but it is a policy that functions. There are
always two possibilities, Fortunately we have this choice otherwise there
would never be any alternations of policies. There are two ways to pull an
economy out of a slump: cutting taxes or increasing spending on public
services. One policy is associated with the Left, the other with the Right. But
both policies are effective. It is not the first time that these kinds of policies
have been pursued in the United States. During the Reagan era the problem
of the twin deficit existed as well. Also then many Europeans were sceptical,
predicting that the US would starve within five years. But it did not happen.
Second part of the question: If Europe constructed a federal state then
there would be no twin deficit in the United States because the current
account deficit would disappear. The current account deficit is also the
consequence of the fact that the US growth rate is higher than that in Europe.
If we assume for a moment a world with only two countries, the United States
and Europe, then the current account deficit will reflect the growth
differential between these two countries. If 'Europe grows at the same rate the
problem disappears and only the public deficit remains. But the public deficit
does not pose a problem of sustainability because productivity growth in the
economy exceeds 2.5 %. This means that economic agents are very solvent
because their income grows by at least 2.5% per year. There is no problem of
solvency when people grow much richer. This for the first question.
The second question is the really difficult one. How to proceed? I do not
know, but I believe that the first step is to recognize the nature of the present
situation. In the end, our national governments, who are constrained by the
Stability and Growth Pact are like provincial governments. Those who for us
are prime ministers, or presidents of the republic, in reality are but governors
of provinces because they no longer have powers, due to the fact that they
operate under constraints similar to those in a federation. They are only left
with the semblance of power, and this I think is dangerous because people
believe that they do have power whereas they don’t. People have expectations
concerning their power but national government cannot fulfil these
expectations and hence we need a bit of federal power. How to do it? It is
very easy: one needs to decide. One needs to convene a true constitutional
assembly, and not a constitutional assembly that strikes compromises in order
to satisfy Poland, or Spain or France or Italy etc. We find ourselves in a
peculiar situation in Europe in the sense that the truth is no longer spoken.
When the heads of state meet in the European Council they tell lies, because
everybody knows that it will not be possible to arrive at a deficit of less than
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3% in 2004 or 2005. But they say so, nevertheless, and that is the European
problem. If no one speaks the truth anymore, nobody will be able to
understand the situation. We need to make a qualitative leap, and we cannot
wait for the 25 members states to agree on the process of the democratisation
of Europe, because it will not happen.
Perhaps there are other ways, like strengthening cooperation between a
subset of member states. For example lets turn Italy, France and Germany
into one single country. Why not? Two presidents will lose their job, but that
is not a serious problem. That would be an alternative road, but who believes
that this road will be taken? The problem in the present framework is that
each country that is not under a fiscal constraint at the time, such as Spain,
will point the finger at other countries thus reinforcing the influence of these
rules. Rules, which, as someone you know said, are stupid. Someone said it
whose task it is to implement rules he considers stupid. The rules must be
intelligent; one cannot accept stupid rules. I am not sure if I have answered
the question.
Prof Enrico Zaninotto: The view you have expounded is extremely
fascinating and very important, but it also seems to me that there are other
views, and other comments which present a different perspective. Only
yesterday in the newspaper Il Sole 24 Ore Mc Faden expressed a point of view
that is the opposite of yours. He argued that Bush’s policy of lowering taxes
has only had a secondary effect on American growth, whereas the primary
effect is due to flexibility and the capacity to reallocate resources. And that, I
believe, in reality is a problem in Europe, and in Italy in particular. I am not
sure if the reduction of the wage share is an indicator of structural reforms, or
if it only depends on the downward pressure exerted on wages due to the fact
that flexibility does not improve. Thus wages are kept low while labour market
mobility does not increase. That is to say that a more appropriate indicator of
structural reforms would be the increase in variance instead of the reduction
of the average. In Italy we are witnessing a strange phenomenon, which is that
during the economic crisis the number of people employed is increasing while
simultaneously unemployment is falling and productivity drops dramatically.
Hence we are seeing factor substitution effects but no reallocation of
production.
Question from the floor: May I ask a very small question: How is this
indicator of wage share of GDP calculated? For example is non-dependent
labour included or not? This would seem important because one of the great
changes has been the transition from stable forms of employment, or in any
case dependent employment, to other forms of employment in many
countries of the euro zone.
Question from the floor: I would also like a clarification on the wage share
indicator. I did not understand if you attribute this reduction to the effects of
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structural reforms in Europe, to budgetary policies, and thus more narrowly to
tax policies, or to the low growth rate?
Prof. Jean-Paul Fitoussi: It is easy to explain what has increased labour
market flexibility, namely the low rate of growth which has created mass
unemployment. In a situation of mass unemployment in several countries,
wage earners no longer have the bargaining power to resist wage cuts or
stagnating wages. Let me give you some figures. From 1983 to today, i.e.
during the last twenty years, wages in France - and I believe the situation is
worse still in Italy - have increased by 15%. This means 0.8% per year. At the
same time the composition of the labour force has changed substantially
because the level of education today is much higher than it was twenty years
ago. Correcting for this effect, I would say that wages have stagnated during
the last twenty years. This implies a great flexibility because growth did not
disappear during this period but instead amounted to 2% per year.
As for the statistical question: These are figures from the OECD that
have been corrected for independent wage earners so as to allow for longterm comparisons.
Concerning flexibility and McFadden’s view: There is an argument, with
a long tradition, according to which more flexibility and more inequality are
better for the economy. But this argument has never been proven. There have
been thousands of empirical and theoretical studies that have tried to make
this argument but they have been able to demonstrate only truly minor effects.
I will strengthen my point because this is a question that I will also discuss
tomorrow. I recently participated in an international meeting in New York
were Steven Nickell, who is one of the experts in this field, was also present.
Nickell presented a paper that purported to show that the increase in
European unemployment is entirely the result of rigidities. Hence he
presented an empirical model correlating variables of structural rigidities, like
unemployment benefits with unemployment, showing that all the independent
variables were statistically significant. I was asked to present a paper
commenting on Nickell. I redid all of Nickell’s computations. The problem to
be explained was an increase in unemployment by 400% but all the indicators
of structural rigidities managed to explain only 3% out of 400. What I want to
say is that they did not explain the phenomenon at all, even though they were
considered the cause of the phenomenon. At that point I made the following
argument: It was the 5th of October 2002 and hence only a short while after
September 11. President Bush had recently proposed to extend the duration
of unemployment benefits. I argued that in ten years when the scientists do
their computations, they will argue that unemployment has increased because
unemployment benefits were extended. Exactly the opposite was the case.
We need to realise that our labour market institutions are not exogenous.
They are not the creation of a politician who wanted to be generous. Labour
market institutions are endogenous. Hence, even if I do understand the
flexibility argument, I do not understand how an entire profession can adhere
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to such a view without any proof of its validity. But, as far as the
macroeconomic argument is concerned, we have proof in abundance, and
very robust at that. Better still: Why did the most flexible economy require a 6
points swing in the budget in order to stimulate growth. If flexibility were the
answer it would not have required such policies. But they were pursued. Why?
Prof Roberto Tamborini: Given that there are no more questions from the
floor I would like to return to the question of a lack of appropriate
institutions. Recently I have tried to reconstruct the doctrines which have
informed the construction of the governance structure of the European
Union’s economy. I have also called this “the Brussels Consensus” in order to
draw analogies with what is known, also in the press, as “the Washington
Consensus”. The Washington Consensus is, so to speak, the book of etiquette
of good policies. The Washington Consensus is global in outlook and takes a
positive view of globalisation, liberalisation etc. After ten years’ discussing the
European constitution, we have now arrived at a Brussels consensus, i.e. the
book of etiquette of good European policies and good economic institutions.
Over the years I have noted a change in accent. During the first years this
book argued – concerning the most emblematic case discussed by professor
Fitoussi - that having a single big Central Bank and many small independent
states with individual fiscal authorities – the ECB Snowwhite surrounded by
fiscal dwarfs – was a good thing exactly for the reasons advanced by the vision
criticised by Prof. Fitoussi. Which is to say, many small fiscal authorities
constrained by a pact and by a big Central Bank can cause little or no harm to
the good conduct of monetary policy. By now this vision has changed
somewhat. In the most recent document a different, less markedly ideological
vision emerges, namely the following one: “Indeed, perhaps it is true that in
order to govern a big economy well, not only a central bank is needed but also
a federal fiscal authority. But, it is not the technocrats who oppose a federal
fiscal policy; not those who have written the Maastricht Treaty. Instead the
governments of the member states do not want to relinquish additional slices
of their power in order to create a federal fiscal authority. The federal
European government, to put it like that, might be on the agenda but if the
governments oppose it, it will not come into being.” The reasons why national
governments do not want it are diverse. For example, they do not want to
relinquish part of the control they have over domestic resources, or they do
not want to have to come to terms with a big centralised power in Brussels.
Hence, from this perspective the conflict is not one between technocrats and
democracy. So what is it? A lack of will and courage to complete the work on
the part of the governments? And whence could this courage come from? Or,
if we wish to put it in economists’ terms, what incentives need to be created in
order for the governments to transfer more power and more prerogatives to a
centralised fiscal authority in Brussels?
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Prof. Jean-Paul Fitoussi: I never thought of it as a conflict between
technocracy and politics. The technocracy only has as much room of
manoeuvre as the politicians are willing to accord it. The problem lies in the
semblance of power. It is very difficult for national governments to accept the
loss of also the semblance of power. Moreover, a bit of power they still have,
like the power to fill posts. It is very difficult to voluntarily accept this loss of
power. But there is another more important, element, which is the absence of
a truly European public space. Thus we know where we need to go but we
also know that the road will be long, because it will take more time than I
initially thought to create this European public space. In the mean time one
should avoid doing stupid things like pursuing restrictive policies when the
economy is in a slump; or fighting inflation tooth and nail when there is no
inflation. Thus how to proceed towards the European political space, the
construction of which will take at least ten years? Earlier I proposed to give
some more room to democracy. I have also proposed to subtract public
investments from the public deficit. In addition I have proposed for the
European parliament to define the inflation target of the European Central
Bank such as to make the Bank accountable to a political authority. Therefore,
I propose more than cosmetic changes, changes instead which try to prevent
dogmatism when dealing with problems that are of essential importance for
the people, such as employment and the improvement of the standard of
living. Hence the need for some more flexibility in changing the rules while
waiting for this European public space to become reality.
Question from the floor: I would like to know what strengths Europe has in
terms of economic development and growth with respect to the United States.
For example, Japan as well as China, understand themselves as continents.
With its cheap and abundant labour force and its population China is a very
interesting market for both the United States and for Europe. I would like to
know what strengths, hitherto unused; Europe has which will allow it to
confront the economic growth of the United States
Prof. Jean-Paul Fitoussi: I did not talk of the economic field as if it were a
battlefield. Japan has its strengths. China has it strengths, above all in the
future. Europe has enormous strengths. It has a market of 400 million
inhabitants. If we look at countries like Italy and France we note that they
have an hourly rate of productivity higher than in America. One hour of work
in Italy is 4% more productive than one hour of work in the United States.
Thus there are strengths. The productivity of the workforce is particularly
elevated in Europe. Then there is the size of the market, the education of the
workforce. But there also is the problem of the ageing population. But the
problem of an ageing population is also an opportunity to welcome all wouldbe imigrants who want to abide by the rules, to Europe. Thus I do not think
that there is a structural problem in Europe, and this became obvious during
the so-called Trente Glorieuses (1945-1975), or during the 1990s. Europe has a
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substantial capacity for growth and employment creation. The issue is, to put
it differently, that it is not the European societies but the European
governments that have a problem of competitiveness.
Prof Roberto Tamborini: Thank you, Professor Fitousssi, for the splendid
meeting you have offered us, and thanks to all of you for participating. Given
that you will become an honorary professor, our wish is that you may draw
closer to our university and hence also our society. Thanks again.
25
WORKING PAPERS OF THE SCHOOL FOR INTERNATIONAL
STUDIES
01/2003. Majocchi, Alberto, Fiscal Policy Coordination in the European Union and the
Financing of the Community Budget.
02/2003. Fabbrini; Sergio, How Can a Market be Built Without a State.
01/2004 Fitoussi, Jean-Paul, The International Scene and the Economic Government of
Europe
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PUBBLICAZIONE REGISTRATA PRESSO IL TRIBUNALE DI
TRENTO
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