PIIE Briefing: Rebuilding Europe’s Common Future: Combining Growth and Reform in the Euro Area



Adam S. Posen and Ángel Ubide

1 Stimulating Demand to Foster Structural Reform in the Euro Area
Ajai Chopra

2 The European Central Bank Must Act Aggressively to Restore Price Stability in the Euro Area
Ángel Ubide
Data disclosure: The data underlying this analysis are available here [xlsx].

3 Role of Fiscal Policy to Spur Growth in Europe
Paolo Mauro

4 An Agenda for Reform of the Euro Area Labor Markets
Jacob Funk Kirkegaard
Data disclosure: The data underlying this analysis are available here [xlsx].

5 Overhaul of EU Financial System Needed to Foster Growth
Nicolas Véron

34 replies on “PIIE Briefing: Rebuilding Europe’s Common Future: Combining Growth and Reform in the Euro Area”

Inflation in the EA has been below 2% since early 2013 and below 1% for the past year, with the ECB’s own staff projections envisaging below target inflation for at last two more. I presume the call for an ‘aggressive’ policy response implies the ECB purchasing sovereign debt, although Draghi’s admittance than some members of the Executive Board even opposed the use of the word ‘intend’ in relation to expanding the existing Balance sheet shows that opposition to full QE still exists. That may not preclude it happening but some further Board resignations may well occur.
A bigger issue is how effective has QE been in boosting economic growth and inflation elsewhere (as opposed to equity markets) and how effective would it be in the EA context. Bernanke said it seems to work in practice but not in theory. Perhaps the ECB should just state that monetary policy has reached its effective limit, so raising the probability of more ‘aggressive’ fiscal action.

“Role of Fiscal Policy to Spur Growth in Europe” etc

All well meaning but they have to get talking to the holders of financial assets, the ones who have most to lose if nothing changes.

Martin Wolf has been writing about the dangers since 2009 but until the sheep wake up we are headed for disaster.
Get those German banks who need it resolved. Get the message out via the Bild.

The game plan underpinning the present negotiations is clearly the hope that some real reform in France will kick in in time to avoid both a major political conflict on the subject of QE between the axis France/Italy and the other main players, notably, of course, Germany but also including Spain which has successfully pulled its economic irons from the fire.


When push comes to shove, the historic record demonstrates that Paris and Rome have never stuck together, the motivation of the former being not to be seen, at whatever cost, in the same league as the latter.

With an upcoming European Council doomed to succeed, and few, if any, options left to Hollande, the approach might just come off.

The words “and policy error” are missing after the word “conflict” (it being by no means certain that QE is suited to the circumstances of a monetary union rather than those of a unitary sovereign state).


Print Five Trillion and give it to the lumpen proles.

Let’s call it ‘structural reform_ation’!


The only inflation central banks appear capable of inducing is in the price of assets. As they tend to be owned by the wealthy and influential, whereas fiscal levers might flow elsewhere, my guess is central bank action will be the horse that is flogged beyond evident pointlessness, until it becomes just too embarrassing to continue.

@ Dan

“A bigger issue is how effective has QE been in boosting economic growth and inflation elsewhere (as opposed to equity markets) and how effective would it be in the EA context.”

Bond yields are already low. Hard to know what QE would do.
It might be better to give money to people to spend. A bit of inflation would do no harm 😉

DOCM: You have not been paying attention. The Eurozone is not a ‘monetary union’. It is a common currency area.

Bloomberg and Financial Times find favour in the CPI!

Debt – DEbt, ODIOUS_DEBT is where it is at. And where it remains … for the mo!


@Colm McCarthy

Mad Oul Jozie down_the_road would like to take tea with you – pristine water from her freshly dug well – to discuss areas of mutual concern re her Case to the ECJ based on the Brehon Law principle of ‘eric’ which refers to compensation for injustice re odious undemocratic debt impositions on the Citizenry.


‘kant_erin’ as distinct from ‘gallop_erin’ inflation one presumes?

This is one of the more depressing pieces that I have encountered in a long while.

“‘Introduction:’ Adam S. Posen and Ángel Ubide”. To characterize it as a ‘damning indictment of policy’ would be an understatement. Will there be prompt policy reversals? Most unlikely. More likely the authors will be dissed by the comely spokesmodels for ministers and the like.

Mind you, the various ‘reform* proposals’ are also a tad on the dodgy side, having already been proved up as successful failures. Reprises? Look likely also.

* The term ‘reform’ is tossed about quite liberally, as is the the term ‘growth’, ‘market/s’ also gets a fair shake.

In respect of the latter I have a bad suspicion that the economic and political worthies have a quite misleading idea about it/them. You know like: kids believe in Santa but econs and pols believe in Markets. One must wonder.

As for ‘reform’. This seems to be as long as a virtual piece of string of indeterminate length. What exactly does it mean? Seriously. Again, I harbour a nasty suspicion that its ‘good news’ for insiders, but ‘bad news’ for the rest of us.

Growth: this term is so badly massaged, mauled, managed, manipulated mis-applied and mis-understood that I simply do not know where I should be finishing, if I could get finished, explaining its correct economic meaning. Its got to the point where I have absolutely no choice but to accept that most commentators are simply clueless – they just use the term glibly and really do not understand what they are wishing for nor understand how you achieve get structural economic ‘growth’ in a real, physical system.

At some risk of being asked to STFU! Economic Growth is:-

An annual, compounding percentage advancement in …….. (fill in the real and finite factors yourself): And please; sustainable economic activity is defined as – a steady, annual, lineal decrement in overall activity – that is, you consume less-and-less each successive year!

In the short and medium term the Permagrowth economic paradigm works out fine. Long-term it stagnates – like NOW! The causus: atherosclerotic debt thrombi clogging the economic arteries. QE stents? – no worky. Quadruple by-pass debt Jubilee – stat!

@ Mickey

the architecture of the Euro is the problem. Lovely sophisticated models but the core assumptions are flawed.
The Germans have to let go before it all falls apart anyway. It’s very emotional…

@ CMcC

“Whats in a name!”. You are missing the point that I was attempting to make i.e. the contrast is between a “unitary” i.e. sovereign state and a “union” made up of 18 sovereign states. This is more than a “common currency area”. (There have been examples where one state effectively uses the currency of another without any formal arrangement between them). A monetary union is an irrevocable agreed fixed exchange rate system. The EU version may not be working very well; but there it is!

The issue is not one of definition but of the powers of the ECB. In a unitary state, QE is not a matter political controversy. In the monetary union as agreed by the EU, it is; and could clearly be a make-or-break issue.

This set of proposals are by this stage boilerplate and Martin Wolf today says the Germans must step up to the plate – as the Americans say.

That could help too but a rise in German demand isn’t going to solve the problem and while it would be good to end dual labour markets, Italy is moving towards increasing its temp workforce while outside the EMU

Poland now has almost as many temp workers as Spain.

Germany has had a fall in what are called ‘atypical” workers and most of the jobs added in recent years have been full-time positions.

What’s missing here is that while demand and supply are highlighted there is no post-crisis context in the world economy.

Europe excels in old technologies and the slowing in emerging markets likely will result in a structural shift in German exports.

An apparent official leak by the Irish Government on a meeting where a Commission official was told not to interfere with domestic water policy while there is a request for EU funds for Irish Water from Juncker’s investment programme, illustrates the dysfunctional system.

Solidarity would be a good thing!

“with little likelihood that the path he suggests will be followed, not least because the path of debt forgiveness that he recommends would cost not just Germany but the other creditor countries of the EU a pretty penny.”

Versus how much deflation is going to cost

I think there would be a very interesting discussion on the implications for sound money theory in an age when the private sector went insane creating money for which there turned out to be so few real world investment opportunities.


Did you ever work in a company that went down the tubes because management made the wrong calls ? I had the pleasure of working in 2 – one had a near death experience while I was there and the other died recently. I was lucky enough to offload my shares 12 years previously.

Pete Lunn’s paper on decision making bias should be read by everyone in ECB Towers.


Anyone who think the crisis is over needs their head examined

“The biggest problem I see right now is the difficulty in judging valuations,” says Ralph Segall, chief investment officer at Segall Bryant & Hamill. “You can’t really say markets are cheap or expensive due to the distortions from central bank policies.”

Europe’s problem of economic stagnation is far more fundamental than these papers suggest. Europe has a demographic problem. It has stopped producing children in anything like the numbers needed for healthy demographics. As a result, Europe is now geriatric. In most of continental Europe the percentage of the population aged 65 plus is in the range 20-25 per cent. In Ireland its 11 per cent. In most of continental Europe the ratio of births to deaths is now under 1.0 (i.e. more deaths than births). In Ireland its 2.6. Europe’s demographics are worse than anywhere in the world apart from Japan, which suffers from similar stagnation.

The root cause of this disaster is not primarily economic, but spiritual. Europe’s traditional Christianty has been under attack from militant and aggressive secularism for almost 50 years (the starting-point was the 1968 pseudo-revolution in France). The triumph of left-liberalism in Europe has brought in its wake a number of undesirable consequences, chief among which are (a) the virtual end of the traditional family and the massive welfare dependency this has spawned (b) the introduction of industrial abortion, which has decimated the younger generation that might otherwise have been there in sufficient numbers to support the rapidly-increasing numbers of over-65s. Alas, they aren’t, so something has to give.

Ireland largely escaped these trends until recently. The US experienced them to a much lesser extent than Europe until recently. Hence their relative economic success. The core objective of left-liberalism in Ireland is to replicate the continental European disaster in Ireland. The core objective of Obamaism is to replicated the continental European disaster in the US. Only time will tell if they succeed.

Given its disastrous demographics and welfare dependency, the idea that Europe can achieve growth through artificial stimuli such as QE is like saying I (aged 65) can win the Olympics 100m if I drink enough lucozade. With its population ageing at the speed it is, and, thanks to industrial abortion, few young people coming along to take their place, I’m afraid the only industry with any long-term growth prospects in continental Europe is coffin-making.


‘The root cause of this disaster is not primarily economic …

Agree John. It is not primarily economic – it is financial; i.e. the ongoing financialization of the humans, and the resources of the planet, by a tiny few ….

As for 1968 – and the legitimate move for human rights in the wee_6 …. in the context of the global 60s rock an roll and an outbreak of idealism amongst the young hegelians ….

Look a little further back to The Enlightenment …. which, hopefully, might arrive on this little island in the near future …. [p.s. Hi to Luceinda ….

Better a few centuries late than never … and a world atheletics for the 65+ group is run every 2 years – go for it!

If QE works in practice, maybe the ECB should try it. GDP in US and UK above pre-crisis levels, unemployment has fallen to 6% and below, core inflation 1.5% or above…Euro area GDP still below pre-crisis levels, unemployment has barely fallen and remains in double-digit territory, core inflation 0.7%


I agree that population growth is a 10 lb gorilla in the room. Also that QE is a nonsense and will do little except bid up asset prices. The question is how does one get the population of Europe back on a replacement path.

My experience is the constraining factors in the deciding how many children to have is the sense of security of the parents and cost, both financial and time of raring and providing for each child.

My generation, those in their 30s, find stagnant wages, more competition from the eager interns, insecure terms and conditions, 0 hour contracts and a more nomadic/insecure work life that isn’t that conducive to children. That’s before one realises what it takes to own a home, feed, cloth, teach and care for a family. The lucky ones can afford one or two kids.

Incidentally, I think there’s a bit of a ‘Hold on a minute’ feeling amongst my age group. They’re now starting to realise the real meaning of defined benefit and defined contribution. The real meaning of having good terms of employment and not…

By the way isn’t the UK’s birth rate about about 1.84 now, from a dismal 1.56 a decade ago. They have plenty of abortions happening, they’re even providing help to the Irish women we turn on backs on here. Plenty of non traditional family structures there too, no one forced to remain in loveless marriages or abusive relationships.

OK, no doubt immigration is the main contributing factor (immigrant women having a tendency for a higher birth rates) in the UK. One could also say they’re having social consequences from it, as UKIPs popularity shows.

That’s why the best way forward for population growth is to make it affordable for people to start and expand a family. Simple.

@ TL

I agree with your conclusion. The sine qua non for achieving the desirable objective is a common floor of working conditions and a recognition that creating an affordable standard of living requires the efficient management of the economy and the elimination of rent-seeking, which would include dividing the available work between jobs for life and temporary and insecure ones. (20,000 applicants for the limited vacancies coming available at the level of clerical officer in the public service says it all!).



“The root cause of this disaster is not primarily economic, but spiritual. Europe’s traditional Christianty has been under attack from militant and aggressive secularism for almost 50 years (the starting-point was the 1968 pseudo-revolution in France).”

Surely the starting point was the Enlightenment

Coincidentally, this broad-ranging speech from the Minister for Public Expenditure and Reform.


There is an – probably unwitting – implicit recognition that the closed nature of the public sector may have to change.

“In assessing this issue, an inescapable fact is – as much now as ever – that the public service must be effective in recruiting and retaining those with the skills, experience and expertise essential to successfully discharge the myriad of diverse roles required for effective and cost-efficient public services.

This requires a structure of remuneration for public servants that is broadly comparable and competitive with other sectors of the economy – which when account is taken of factors such as – job security, pension benefits and of course the Exchequer’s ability to pay.

Particular challenges will continue to arise where private sector employers in Ireland and indeed internationally offer higher pay for scarce or valuable skills possessed by certain cadres of the public service labour force.”

The suggested approach (i) takes for granted certain advantages that public servants in general are expected to have almost as a matter of right (ii) takes equally for granted that “the myriad of diverse roles” it may, or may not, be justifiably involved in and (iii) sets an impossible salary fixing objective i.e. only a market mechanism can set the correct wage for particular skills, not service wide grade agreements which pay the same salary irrespective of those individual skills.

The problem that is posed is a fundamental one and is far from being confined to Ireland. It could be said to be the defining difference impacting the comparative economic performances of the EZ economies. The balance of influence within the trade union movements between the public and the private sectors appears to be the decisive characteristic. In Germany, IG Metall sets the pace. And it knows how to put a price on factors such as job security and pension benefits, not against the background of the “Exchequer’s ability to pay” but the harsh realities of the market.


It is the likely continuing inability of the Exchequer to pay which may – just may – bring about the necessary radical change in approach in Ireland.

Two further links outlining the plot as it appears to be developing.



IG Metall does not seem to fear a downturn in Germany, about the only thing that might prompt Berlin to give the political agreement which, as Reza Moghadam points out, is essential to any successful QE operation.

Lurking the background is the still awaited outcome of the referral to the ECJ by the German Constitutional Court of the underlying legal question.

DOCM: You write: ‘A monetary union is an irrevocable agreed fixed exchange rate system’.

It most certainly is not. It is a common currency area with knobs on, the main knobs being a banking union, a full central bank with LOLR powers and obligations, and a centralised macroeconomic policy. The absence of these knobs is called the Eurozone Crisis.

@ CMcC

If I, like everyone else, had not lived through the process of the actual introduction of the euro, I would agree with you. (I still have the calculator!).
However, I would suggest that what appears to divide us is simply a matter of semantics. I have always viewed the euro as (i) very badly thought out and (ii) Ireland’s participation in the euro as “courageous” (in the Yes, Minister! meaning of the word). But it is irrevocable – short of anything but alternatives too terrible to contemplate – and we have to make the best of it.

I posted this link on another thread.


The one thing that Jean Monnet would not have done would be to set up a central bank un-tethered to any form of real political control. His genius lay in setting up a division of powers between three institutions – Commission, Council (of Ministers) and European Parliament – that allowed for political conflicts to be worked out. Its absence in the cas

.. case of the ECB results in what we are now collectively observing; they are being worked out via platforms such as the FT and, possibly, before committees of inquiry in at least one national parliament.

@Colm McCarthy

Yet another more recent ‘knob’ …. EU acting as Uncle ‘NeoCon’ Sam’s bitch against its own economic interests … Michael Hudson on the GeoPoliticalEconomy of same ….

‘Europe has inverted the major textbook premises of how national diplomacy is conducted. Instead of basing this diplomacy on economic and commercial interests, it is subordinating these interests to U.S. control. And as for Europe’s membership in NATO, instead of viewing military policy as an arm of foreign diplomacy, it is subordinating economic diplomacy, trade patterns, gas and oil supplies, export markets for industry and agriculture all to serve NATO’s military ends.


“they are being worked out via platforms such as the FT and, possibly, before committees of inquiry in at least one national parliament.”

The Euro was designed deliberately, DOCM.
And nothing meaningful will be done about reform until backs are to the wall again.

The Commission is as lacking in influence as anyone with a sense of economic history. This is a massive game of power.

Mody and Muenchau can point out the weaknesses til they are blue in the face but only the breath of Goetterdaemmerung can drive change. It’s very fairy tale-y. Also fat-tail risk-y.

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