The eurozone needs a dose of supply side economics, said Christian de Boissieu at the fourth annual CFA Institute European Investment Conference today in Paris.
The Chairman of the Council of Economic Advisors to the French Prime Minister argued for major structural reforms to stimulate research and development, innovation, education, competitiveness, and entrepreneurship. Without investing heavily in a sustained reform agenda, de Boissieu contended, the eurozone will flounder at just 1.0- 2.0% GDP growth for the next decade. Eurozone economies would remain undercompetitive and its citizens underemployed.
The council’s thinking was the foundation of French President Nicholas Sarkozy’s €35 billion package, the Grand Emprunt, or “Big Loan,” used to finance the effort in France. But de Boissieu admitted that much more than a one-time stimulus was needed for long-term economic improvement. To avoid further pressure on public finances, he suggested a portion of the large 17% French private disposable savings rate be used to finance additional investments and de Boissieu is hopeful that the policy’s domestic success can ultimately be exported throughout the region.
Other highlights from de Boissieu’s session included the following points:
- Given that together the economies of Ireland, Portugal, and Greece represent only 5% of eurozone GDP, the crisis has never been about these countries per se but rather the fear of a spread to Italy or Spain.
- The underlying problem of the debt crisis had its roots in private rather than public debt. The crisis was simply “transmitted” to public debt as public debt-to-GDP ratios ballooned as a result of the bursting of the real estate bubble and capital collapses at banks.
- Neither Greece nor any other eurozone country would benefit from abandoning the single currency. de Boissieu argued that Greek spreads would “rocket” and the country would be subject to a vicious cycle of devaluation and dramatic inflation.
- The European Union, whose member states combined represent the largest economy in the world, has an aggregate budget of only 1% of gross domestic product, compared to a budget of nearly 15-20% of GDP in the United States. In order to be competitive globally, de Boissieu contended that EU member states need coordinated fiscal policy as well as incentives and penalties to significantly increase spending and investment as a percentage of overall economic activity.
Of course, in an era of large fiscal deficits, the potential risks of such a policy are self-evident.
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