Ah, the Lisbon summit of March 2000. Remember that? Confident predictions of the EU becoming the most dynamic and competitive region in the world by 2010, based upon the beneficial effects of the euro’s introduction and substantial economic reform. And now back to reality…The deflation of the American bubble economy, beginning at the end of 2000, had a serious effect on most European economies. But that was in 2001-2, and although many of the world’s major economies – even the Japanese – are growing again, Europe remains stuck in stagnation.
In response, last week’s Berlin summit -in wich leaders from Britain, Germany and France met- sought to kick-start the ‘Lisbon process’. Proposals were made for a ‘super Commissioner’ to co-ordinate economic reforms and promote a common agenda. And the agenda? Well, it’s similar to what was proposed in Lisbon: promote enterprise, increase flexibility in the labour markets, strengthen the knowledge economy, and remove unnecessary regulation.
The most important actor
It is here that we need to take a step back and think about what is going on. For the debate about the European economy rarely discusses the role played by the European Central Bank, surely THE most important actor in the eurozone economy. It is astonishing, because the ECB’s almost comical obsession with low inflation has squeezed much of the life out of the European economy. What about economic growth and low unemployment? Have we forgotten the Depression of the 1930s?
The ECB’s standard response to these criticisms is regularly repeated like a religious belief: its sole responsibility is to ensure low inflation, which creates the necessary conditions for firms to create jobs and thus promote economic growth. If unemployment remains high, then national governments must take the blame for placing obstacles in the way of companies increasing output and hiring more workers. This is true to a certain extent, but it only half the story. Monetary policy can and should be used intelligently to boost the economy when it is in recession, and cool it down when things are going well.
So what should be done? Two options immediately suggest themselves. One, win the battle of ideas within Europe over monetary policy, and push the ECB into promoting growth and unemployment as well as low inflation. Two, we need to ask ourselves whether the ECB should be 100% independent of political pressure.
Remember that the Bank of England is ‘only’ autonomous from the British government, meaning that the BoE is still accountable to the government and the wider population for its actions. Support for a fully independent central bank is stronger on the continent than it is over here, but the longer the European economy remains in a coma the more we should consider changes more radical than those proposed in Lisbon and Berlin.