Jacques Le Cacheux

Fiscal Policies of the CEECs After Joining the EU

Only a few days after their entry into the European Union, the European Commission initiated an excessive deficit procedure (EDP) against six of the new members (Cyprus, Hungary, Malta, Poland, the Czech Republic and Slovakia). In accordance with the SGP, joining the EU actually requires adherence to the norm of 3% of GDP with regard to public deficit, a norm that the above-mentioned countries had greatly exceeded in 2003. According to the Commission, because this exceeding of the norms did not, in the wording of the SGP, arise from ‘an unusual event outside the control of national authorities, or a severe economic downturn’, the EDP was therefore initiated. In July 2004, the EU Council confirmed the existence of these public deficits and formulated recommendations with a view to putting an end to them as quickly as possible. It is clear that the penalties provided in the EDP will not apply to the new members of the EU (European Commission, 2004b, p. 69). At the same, blacklisting these countries could have some negative impact on the risk premium of their public debt securities, which would have the effect of putting an even greater strain on their public accounts.1 At all events, adherence to the limit of 3% is one of the conditions for entry into the Eurozone, something that the new members of the EU hope to achieve before the end of the decade. Finally, still in accordance with the SGP, by joining the EU the new members have committed themselves to having a structurally balanced budget, even a surplus.

Introduction: Fitoussi’s Fruitful Economics

When it comes to generosity, Jean-Paul Fitoussi is ultra-liberal. When it comes to economic analysis and policy, not so much. Here are summed up the private and public man. But Jean-Paul Fitoussi is also in between private and public, a great friend and thinking partner. This is why “fruitful economics” well describes to our eyes to what branch of our discipline Jean-Paul Fitoussi belongs.

Euro Area Policies and Macro Economic Performance, Ten Years On: Institutions, Incentives and Strategies

Up until the severe slowdown of the summer 2008, the European economies had enjoyed almost two years of relatively faster growth that had tended to mute the criticisms caused by the way the euro monetary zone had been functioning since it was launched. With a growth rate nearing 2.5% a year on average and the German economy picking up and doing even better than the rest, commentators were quick to praise the European Central Bank (ECB) for its sound and wise management of the single currency: by raising interest rates soon enough, the ECB was said to have supported the external value of the euro, thus dampening inflation without noticeably slowing exports growth. Thus the EU wished to believe that the black years are over, that the efficient management of the single currency, the structural reforms, the re-launch of the “Lisbon Strategy” in 2005 with the virtually concurrent reform of the Stability Pact have put the European economy back on tracks and all that is currently needed is simply to keep up with the effort already accomplished. Germany, the paragon of this regained virtue because it has constantly supported the European monetary institutions, their independence and their wise choices, is cited as an example. Germany’s moderate wage policy and its “bold” reforms of the labour and social protection markets are given credit for renewed growth. As it is enjoying better days again, Germany has become fiscal discipline’s most stalwart supporter, after being the country that most largely drifted away from it for many years.

Growth Policies in Europe

While the European summit at Lisbon in the spring of 2000, in the euphoria of a relatively sustained period of growth, proclaimed ambitious objectives for employment rates and promised to make the EU ‘the most competitive knowledge-based economy …’, the five years that followed unfortunately recorded economic performance well below these ambitions. Harsh diagnoses on the state of the European economy and its chief members have multiplied in recent years (Camdessus et al., 2004; Kok et al., 2004; Sapir et al., 2004; Blanchard et al., 2005). They concur in identifying some serious slack in the European economy in comparison with the United States and in the emphasis placed on the dangers that the prospects of lasting weak growth would pose for the financing of European systems of social protection in particular, which would not be supported by demographic change (because of the rapid ageing of European populations) or by technical progress since efforts in research and development in Europe are inadequate. All blame the ‘rigidities’ that are characteristic of European economies, especially in the labour markets, the inertia of public sectors and the too heavy tax burden on the net return from the efforts and savings for financing them and social protection. All seem to agree on the idea that the macroeconomic policies are globally good, or at any rate that the ‘stability culture’ shared by the chief leaders at the heart of the European economic and monetary union — the famous ‘Brussels-Frankfurt consensus’ (Sapir et al., 2004) — and the institutions that are inspired by and support it (the independent central bank, pursuing a primary objective of price stability, and the SGP framing the national budgetary policies) are all in no way responsible for the poor economic performance of the eurozone, and that only ‘structural reforms’ radically transforming the European welfare states and drastically lightening their financial burden are likely to encourage a salutary ‘rebound’ (Camdessus et al., 2004).

Focus on Enlargement

The enlargement of the European Union to include 10 new countries in May 2004 represents a political, economic and social event that is in many respects without equivalent. On 1 May 2004, the EU was enlarged to 25 member states by the addition of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Of unprecedented proportions in terms of population, this integration mainly involves the central and eastern European countries (CEECs), whose level of development is distinctly lower than that of the EU 15. Hence, this enlargement raises numerous questions about the newcomers. They relate to the flexibility of their labour markets, the reform of their pension systems, the exchange rate policies, including the possible adoption of the euro, the financing of the EU, the proposals for the reform of the SGP and of the European system of central banks and finally the economic geography of the EU.

A Short-Lived Recovery or ‘Double-Dip’ Recession?

Marvellous surprise! In 2004, at an average of a little over 2% across the whole of the eurozone, growth was finally higher than that predicted by everyone in the autumn of 2003, at a time when the financial legislation of the EU members was drawn up, so much so that the budget deficits have turned out to be less than predicted. Nonetheless, the economic difficulties were not at an end, with the unemployment rate still close to 10% of the active population in the larger countries of the zone. However, in the third quarter of 2004, prices went up, as a result of the apparently lasting increase in the price of oil, and the advocates of macroeconomic and monetary orthodoxy — the famous ‘Brussels-Frankfurt consensus’ (Sapir et al., 2004) — issued the first warnings of an imminent hardening of budgetary and monetary policies; the ECB then appeared to assess the acceleration in activity as sufficient for it to announce that it would soon begin to apply the brakes; and the European Commission, for its part, proposed a new reading of the SGP which, opportunely, placed the emphasis on the need for a better consideration of the short-term situation and would lead to a rapid return to budgetary policies constrained with greater rigour from 2005 onwards since the growth rate of activity is now close, if not superior, to what many consider to be the potential growth rate of the European economy. When combined with a continued increase in the oil price, bringing about a probable slowdown in the world economy following what seems to resemble a third oil crisis, and an apparently continuing appreciation of the euro, which handicaps European exports and increases the zone’s production costs, would not a more restrictive orientation of European macroeconomic policies run the risk of destroying the weak impetus of a recovery so long expected and already exhausted when hardly started?

Social Norms and Macroeconomic Policies

How can we make sense of the systematic differences in macroeconomic strategies on both sides of the Atlantic? Why, for at least two decades, have macroeconomic policies been so active in the United States and so passive in Europe? Why, for so long, have European governments accepted with apparent resignation such a high level of unemployment and such ‘soft’ growth?

European Integration and the Dynamics of Inequalities

From the point of view of economic inequalities, what does the emerging European society look like? With the birth of the EU 25, this old question confronts us with new uncertainties. In the EU of 12 or 15, we were used to regarding Europe as a club of moderately rich and egalitarian nations, where social democracy and the wage society had shaped a relatively homogeneous society, at least in comparison with the New World. With the progress of European integration and the EU’s enlargement this view is now obsolete. Today, is Europe in the process of moving from being a club of rich and homogeneous nations to being an entity difficult to describe? What is happening in the process of Europe’s enlargement, in the framework of a Europe that, who knows, could extend from Iceland to Anatolia? The central hypothesis that is shared here is of course that this group is characterised by growing inequalities. We shall examine the extent of these.