Seek Outside Help

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In The Media

Seek Outside Help

Though Europe can help itself economically by lowering interest rates and accelerating structural reforms, financial contributions from non-European countries through the IMF are needed most.

By Uri Dadush

Published on Jan 30, 2012

Source: Athens News

We are not going to see growth in the eurozone this year and we may very well see a decline of economic activity in Europe as a whole in 2012. That is the baseline. In terms of what Europe could do to stimulate growth, there are three types of policies. One is the lowering of interest rates: the ECB is already doing a lot to inject liquidity into the banks and I think that this policy can be continued and expanded.

Secondly, the countries that have reasonably good fiscal shape (Germany, Finland, Austria, the Netherlands etc) can do more to extend government spending or slow down tax increases. These countries can do more on the fiscal side to help other countries in Europe. It is not going to have a huge impact, but I think it can help.

The third thing is to accelerate structural reforms and liberalisation. I know this has a bad name in Greece, because of the pain that comes with these reforms. But this is a part of what the whole of Europe, including Greece, should do in order to become a more flexible economy. In order for the EMU to function, it is essential that the labour market should be able to adjust, that firms should be competitive. This third dimension is important in the long term; however, it is not going to do a lot for Europe or for Greece in 2012 or in 2013. These things take time to work. You have to do them, but they will pay off in the long term.

What is the bottom line? A little bit more can be done, but it is not going to change the picture in a fundamental way. In the best of circumstances, if you did all three of the things that I just said, you will get a little bit more growth in 2012, not much more. The instruments are just not there, given the severity of the problems that Europe is confronting across the board.

Finally, the rest of the world can also help Europe. An extension of the IMF resources and an extension of the European Stability Mechanism and the European Financial Stability Facility requires a greater contribution not only from Germany and France and some of the healthy economies in the eurozone, but also from the rest of the world. It is the single most important thing that can be done, because if you could add another trillion euros to these combined facilities, then there is a strong likelihood that this will be reflected in increased market confidence, and interest rates in many of the most vulnerable countries can come down.

This article was orignially published in the Athens News.

About the Author

Uri Dadush

Former Senior Associate, International Economics Program

Dadush was a senior associate at the Carnegie Endowment for International Peace. He focuses on trends in the global economy and is currently tracking developments in the eurozone crisis.

Recent Work

Commentary
The Labors of Tsipras
- Uri Dadush
In The Media
Greece, Complacency, and the Euro
- Uri Dadush

Economy Foreign Policy EU Western Europe France Germany Europe North America

Carnegie India does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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