Posted by: Dirk | August 29, 2009

Bruegel: home work for the EU commission

This is from the foreword of a memo by Bruegel think tank, located in Brussels:

THERE IS NOW A DISTINCT POSSIBILITY that this crisis will be remembered as the occasion when Europe irretrievably lost ground, both economically and politically.

Economically, there is a risk that, by compounding lingering demographic and economic problems, the crisis will result in a spiral of near-stagnation, rising public debt and declining innovation performance.

Politically, the European Union is at risk of being blamed for having fostered a liberalisation agenda in the past rather than being praised for having promoted a coordinated response to the crisis when it struck.

This is straight talk, which you do not find very often these days. The European institutions have failed in the crisis, almost all of them with the exception of the European Central Bank. There was no mechanism to coordinate fiscal policies, there was revealed to be a patchwork of financial regulations which created moral hazard, the stability and growth pact stood in the way of, well, stability and growth. It is unclear how macroeconomic adjustment will happen, given that inside the euro area the whole burden of adjustment rests on nominal wages (I assume that productivity growth cannot be influenced in the short run).

Don’t get me wrong: this is not a time of sorrow. The EU has been shown the limits of its institutions, and it has to react. If the problems can be fixed, the EU will be very competitive. It has a high productivity, democratic institutions and a sound currency, which has kept its value better than the US dollar in recent years. As Bruegel remarks, the EU can turn the crisis into an opportunity.

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