(open letter posted on Naked Keynesianism)
On the basis of our diagnosis we are convinced that Europe should reverse the current austerity policy regime. This would require profound institutional and policy change.
In terms of monetary policy, we believe that ECB should act as a credible lender of last resort to relieve the sovereign debt crisis. Strict regulation of financial markets is a further step, and it is necessary to separate investment banking from commercial banking.
In terms of fiscal policy, the link between the ECB and fiscal conditionality should be fundamentally changed. Monetary policy should support and accommodate progressive fiscal rules aiming at employment creation and growth. Budget deficits can only be consolidated in a growing economy.
These growth stimulating policies are consistent with the desired long run stabilization of debt-to-GDP ratios. In the present situation of mass unemployment, these policies do not carry a significant risk of inflation.
We also believe that the adjustment has to be supported by stimulation of consumption via higher wages starting from the core surplus countries (like Germany) where wage restraint policies have considerably contributed to the growing income inequalities and current account imbalances in the Eurozone.
If the German finance minister believes in what he said, that no country can live forever beyond its means, then it must also be clear that no country can live indefinitely below its means. This implies that the change in the wage policy in Germany has to be an important part of the solution.
Mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction through fiscal consolidation for the benefit of high finance, must be recognized as the imperative for the political viability of the Euro project. We must have the intellectual honesty and courage to act accordingly.
Jawaharlal Nehru University, New Delhi, India
Corresponding author: Srinivas Raghavendra (email@example.com)
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