Social Europe — The latest OECD’s Economic Outlook (EO) contains several surprises. First, it argues for a rethink of the current fiscal policy stance. Secondly, it forecasts an acceleration of the recovery in the OECD because of a major fiscal stimulus in the US. Last but not least, the OECD tackles the Euro Area’s Stability Pact and proposes rather fundamental changes in its rules.
The OECD continues to question the current rules of the Stability and Growth Pact (SGP). Arguing that “existing fiscal rules could limit the recourse to fiscal policy in about half the countries considered” the OECD calls for public investment to be treated more flexibly. While recognizing that some adjustments taking public investment into account already exist within the SGP, the OECD adds that such adjustments are “marginal”.
It proposes expanding the current ‘investment clause’ significantly. Excluding public investment from the deficit criterion (3% of GDP) should be enacted for all investment categories, not just for projects that are co-financed by the EU. This should be done on a permanent basis and also for countries that are in the Pact’s corrective arm rather than being limited to very special circumstances. In other words, and the OECD is openly saying so, this is a move to a ‘golden rule’ on public investment.
Moreover, delving a bit deeper into the EO reveals that the OECD is taking this even further. Indeed, its euro area chapter adds the proposal for the ECB’s quantitative easing policy to condition its buying operations of national sovereign bonds to public investment. This can be taken as implying that the introduction of a ‘golden rule’ on public investment is to be backed up by the ECB providing member states with a reliable source of finance to cover their public investment efforts (as opposed to funding these on volatile financial markets). It may also provide a new avenue of thinking on how the ECB can make its QE policy more effective by directing the billions of money printed into tangible investment and support for the real economy instead of ending up, as is often the case right now, sitting in the balance sheet of corporations.
Behind the euro area average hides the fact that the ‘demand deficit’ of individual member states still differs a great deal. Whereas core members seem to be operating at (or even above) a level of GDP that is in line with their productive capacity, other members are going in the opposite situation. High and persistent negative output gaps in Italy, France, and Spain are pointing to the fact that these economies continue to suffer from serious deficits in aggregate demand.
New fiscal rules on public investment together with a monetary window at the ECB to finance additional public and productive investment could go a long way to mending the euro by all members and in particular those economies most severely hit by the euro crisis would finally get out of their low growth trap.
