Jean-Paul Fitoussi

Europe: How Deep Is a Crisis? Policy Responses and Structural Factors Behind Diverging Performances

The effects of the current crisis on the level of output, and consequently on unemployment and poverty, are likely to be deep and long lasting; they should not be underestimated, especially now that some timid signs of recovery are appearing. The crisis was triggered by the US financial sector, but its roots are real, and can be traced to the deepening income inequality of the last three decades, which led to a chronic deficiency of aggregate demand. In the Unites States, the center of the crisis, the policy reaction has been bold, and as a consequence the effects of the crisis are less important than in the eurozone, where only France has a comparable performance. The policy inertia of the eurozone countries, in fact, is more structural, and is related to the institutions for the economic governance of Europe. The statute of the ECB and the Stability and Growth Pact, that reflect a doctrine opposed to discretionary macroeconomic policies, constrain eurozone governments and its monetary policy. The relatively better performance of France can in fact be explained with these lenses: on one side it has a well developed system of automatic stabilizers, and on the other it suffered less than other OECD countries the deepening of income inequality.

The Slump in Europe: Reconstructing Open Economy Theory.

Part 1 The problem for analysis: magnitude of the slump existing explanations new directions plan of the book. Part 2 Stylized facts: exchange rate movements real interest rates user cost of capital wage shares mark-ups average product of labour investment relative price of capital goods (un)employment. Part 3 Orthodox theory: the standard propositions and qualifications the essential orthodox model. Part 4 Elements of a reconstructed theory: customer markets in the transmission of foreign shocks capital mechanisms in the transmission of real interest shocks real investment-good prices in the transmission of shocks the persistence of the slump in Europe - our supply-price view. Part 5 An examination of demand-side explanations: the fiscal austerity hypothesis the tight money hypothesis the hysteresis effect required by demand-side explanations. Part 6 Can Europe do it?.

Modern macroeconomic theory

This book is the result of a conference held at the European University Institute in May 1980.

Summing up the Conference

Professor Hague was asked to attempt to summarise the work of the conference. He said there had been four kinds of paper. First, there were macroeconomic papers like those of Malinvaud, Georgescu-Roegen, Fitoussi, Parkin and Kaldor. Second, there were labour-market papers both macroeconomic and microeconomic, by Holt and Bergmann. There were papers dealing with broader aspects of society and the future, namely, those of Emmerij and Sodersten. Finally, there were country papers on Italy, Japan and the USA.

The EU Budget

After the setbacks to ratification of the European constitutional treaty in France and in the Netherlands, the June 2005 European Council was not able to reach an agreement on the future of the European budget. And the compromise eventually agreed upon in the Council’s meeting of December 2005, under the British presidency, was first rejected by a massive coalition in the European Parliament in January 2006, the argument being that the budget is too small and insufficient to meet the main objectives of the EU. It took another three months of negotiations before a slightly modified version was finally adopted in three-institutional compromise. Yet when the European summit of 22 and 23 March 2005 in Brussels adopted a reform of the Stability Pact along the lines of what the German and the French governments were requesting, the way had seemed clear for a compromise on the future medium-term budget (2007–13) of the EU of 25 member states or, more probably, 27, since Bulgaria and Romania, which have now signed accession treaties, will more than likely have joined the Union by then. The European Council meeting on 22–23 March had endorsed the idea of a stronger cohesion between the pact and a European budget serving the interests of the Lisbon strategy.

Monetary Policy and the Macroeconomics of ‘Soft’ Growth

After the Second World War, European construction and the fulfilment of the national economic policy objectives of European Economic Community (EEC) countries formed a virtuous circle: the pursuit of policy objectives was facilitated by European construction, and the latter was greatly helped by the achievement of both full employment and rapid growth. The EEC was a means to the ultimate ends of economic activity; that is, rising standards of living in a cohesive society that could offer all its members a job and an opportunity for progress. The question ‘Why Europe?’ had such a self-evident answer that it was not even raised.

An Economist’s Manifesto on Unemployment in the European Union

In this Manifesto, we make a set of proposals to fight unemployment in the EU. We believe that the European unemployment problem needs to be attacked on two fronts: through a broad spectrum of supply-side policies and the demand management policy. The expansion of aggregate demand is necessary to increase both investment and employment. However, unless supply-side measures are also taken, demand expansion can result in more inflation instead of more employment, because of the mismatch between the demand and supply of labour. What is important to stress is that both demand and supply-side policies must be adopted together by all European countries, in order both to avoid beggar-thy-neighbor problems and, at the same time, to catch all the possible complementary effects of these policies.

Wage Distribution and Unemployment

The increase in unemployment in Europe is often traced, at least partially, to the existence of some rigidities in the labor market. It is a common wisdom that wage inflexibility and labor market institutions increase the cost in terms of unemployment of adapting to shocks. In particular, minimum wage legislation is seen to have an important responsibility in countries where such legislation is binding1. By preventing relative wages and hence the wage distribution from adjusting, it leads to mounting unemployment among less qualified workers.

On the Measurement of Social Progress and Wellbeing: Some Further Thoughts

Two years after the delivery of the report on The Measurement of Economic Performances and Social Progress (Stiglitz-Sen-Fitoussi),this paper provides some further reflections on the subject. Since 2008, when the work of the Commission began, the world has experienced several dramatic events which all call into question our measurement systems and the policies which were grounded on them: the financial crisis of 2007-2008, the grave events in Japan, the Sovereign debt crisis, and the revolutions in the Arabic world. In particular, the Japanese earthquake and its aftermath underlines three central shortcomings of our metrics: the measurement of the economic product,the measurement of well being, and the measurement of sustainability. For economists, these concerns are especially important, because we often rely on statistical (econometric analyses) to make inferences about what are good policies. Those inferences are only as reliable as the metrics that they are based on. Our statistical systems should tell us whether or not what we are doing is sustainable, economically, environmentally, politically, or socially and whether proposed policies will in fact enhance well-being . There would be little sense in pursuing policies aimed at increasing some widely used metric like GDP ifsuch policies lead to a decrease in well being.

Peer Pressure and Fiscal Rules

In a seminal contribution on fair wages and unemployment, Akerlof (1980) showed that social norms can persist, even when costly to follow for individuals, if disobedience entails a loss of reputation. This chapter extends to public behaviour the argument developed by Akerlof. We maintain that public social norms may limit the ability of national governments to manoeuvre when building and managing an economic and monetary union, and yet survive because of reputation considerations. More specifically, the public social norm we consider in this chapter is the Stability and Growth Pact (SGP), signed in 1997 by the countries participating in the European Monetary Union.