Leszek Balcerowicz is absolutely right that we must seize on the current crisis as an opportunity for reform. He is also right that the policy response to the crisis, though necessary, must not be allowed to lastingly set back growth and progress in Europe. Finally, I fully support that the reform efforts must be linked to a public understanding of the causes of the crisis. Unfortunately, the specific causes and measures he advocates falsely interpret those causes, and the situation in Europe that has come out of the crisis.
First, on causes Balcerowicz’s emphasis on monetary and fiscal laxity is misplaced. The crisis was largely due to the excessive laxity of bank supervision and regulatory enforcement in the financial sector. The idea that it was macroeconomic policy that caused the crisis doesn’t fit the facts – many countries that had bubbles, including the UK, had much higher interest rates and much tighter public budgets than the U.S., and many countries that didn’t have bubbles were exposed to large capital flows and global low interest rates (if the latter is what matters). The timing is also wrong, with the Federal Reserve’s supposed excessive ease coming into play well after the bubble was underway. Those countries that did a better job of regulating and supervising their financial systems suffered less damage.
Second, and reflecting this reality, the real challenge is to unwind the emergency guarantees and state interventions into the financial system, while restoring the necessary degree of regulatory discipline. This will take a true buy-in from the public now that the moral hazard of governments bailing-out both too-big-to-fail institutions and too-widespread-to-lose forms of savings has become the expectation. Fiscal and monetary discipline, on the other hand, will for the most part be restored shortly, although with some pain and protest. But the recognition of bond market requirements, even if not of strict adherence to the Maastricht fiscal criteria, is binding throughout Europe – and with one notable exception, problematic before the crisis, long-term interest rates and inflation expectations in European economies reflect this reality.
Third, the vast majority of economies in the eurozone and in eastern Europe are right to treat the crisis as an exogenous demand shock – something that is coming from outside their control, and is temporary. Whether in the form of Finnish and German programmes to support work-sharing or the Czech Republic and Poland’s tolerance of one-time currency depreciations without changing monetary policy frameworks, those economies that are without structural imbalances are right to ease temporarily in response to a demand shock. The minority of European countries that need more fundamental rebalancing, such as Ireland, Hungary, and Spain, obviously face a different set of challenges.
We would be wrong on the politics as well as the economics, however, if we did not publicly recognise that the majority of European states in terms both of population and economic weight responded rightly to the crisis, and did not cause it. The one-size-fits-all re-statement of the same old list of neo-liberal critiques of pre-crisis Europe, which the Balcerowicz article appears to support, is misguided in the current context. Yes, the Kurzarbeit-type measures could, if allowed to persist, impede labor re-allocation in normal times, and a reliance on devaluations is a long-run loser. And yes, there certainly still are structural concerns about Europe’s low trend productivity growth, made the more pressing by the demographic burden. Yet most of Europe had made great strides on labour market liberalisations before the crisis, and dogmatic financial liberalisation has proven to be excessive. There certainly is room to re-think the recommendations.