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posted on 08 February 2018

The Fourth Instrument

from Dirk Ehnts, Econoblog101

Frits Bolkestein on the how to cope with economic crisis in the Eurozone

I have been noticed that there is a speech online (h/t to Erik Jochem) from the year 2000 in which Frits Bolkestein discusses “Building a liberal Europe in the 21st century". It took place at the University of Freiburg, where ordoliberalism reigns supreme.

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Here is a very interesting excerpt with some of my highlighting in bold (source):

Theory teaches that there are a number of mechanisms in a currency union that allow the system to absorb any asymmetrical economic impacts. The scope for the first of these - financing extra public expenditure by public borrowing - has been substantially reduced by the stability pact.

Member States will no longer be able to finance extra spending by increasing their budget deficits, which is a good thing in that it will compel them to exercise budgetary discipline. Each Member State must therefore endeavour to keep its budget more or less in balance or even to have a surplus. Any surpluses should be used to build up financial reserves that can be drawn on in times of difficulty.

Another mechanism for absorbing asymmetrical economic impacts is the mobility of labour. It has proved difficult in practice to increase the mobility of labour between Member States. A mere 2% of EU citizens seem prepared to seek work in other parts of Europe. Obviously, mutual recognition of qualifications and harmonisation of social and employment legislation will eliminate a number of major barriers, but this will have little impact in the short term. There are cultural and linguistic obstacles that are difficult to eliminate and that will continue to be too high a threshold for many to cross.

Nor will a third mechanism, that of transfer payments, offer a solution - at least in the short term. The EU’s budget is exceptionally modest in terms of Gross European Product. To give you an idea: the total EU budget is smaller than Germany’s social security budget, and most of the uses are fixed. More than half of the budget goes on the Common Agricultural Policy, and a not inconsiderable proportion of what is left goes to the Structural and Cohesion funds. No money is available, therefore, to help Member States to cope with a crisis, unless they are prepared to increase their contributions to the EU budget. It is doubtful, however, whether there is the necessary political will to re-open negotiations on this question so soon after the Berlin summit.

Because of the ineffectiveness in the short term of the first three mechanisms, it is absolutely vital that we take the fourth one seriously. This fourth instrument - increasing the flexibility of the labour market through wage and price flexibility - is the only way in which we will be able in the short term to cope effectively with an economic crisis. The remarkably swift recovery of the economies in the Far East was due in no small measure to the preparedness of the populations to take on any available work, and if necessary to do the same work for less pay. In Europe the labour market is getting increasingly bogged down in a morass of social regulations. If we want to increase flexibility, it would probably be a good idea to go through the 70,000 and more pages of Community “acquis" with a fine-tooth comb to see whether or not there is some labour legislation that can be scrapped because it has too negative an effect on flexibility or has simply ceased to be relevant.

Often, I hear economists saying that they never realized that adjustment in the Eurozone would come via lower wages. Bolkestein was a member of the European Commission responsible for the Internal Market and Taxation, so he is an insider who should have been listened to.

Of course, the Euro started in 1999 with fixed exchange rates and then in 2002 with cash, but I do not recall anyone from the political elite in Europe criticizing this “fourth instrument". Europeans in their response to the economic crises were led by ordoliberalist thought, and it is high time to acknowledge the disastrous consequences and come up with a new idea of how to run Europe and the nations that it contains.

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