The troubled euro – dismantle it or reverse policy, says economist

The troubled euro should either be dismantled in an orderly way or economic policy must be dramatically reversed to promote economic growth and create jobs.

The thought of dismantling the Euro was presented by Nobel laureate Professor Sir Christopher Pissarides during his inaugural lecture at the London School of Economics and Political Science on December 12th, 2013.

Professor Pissarides, who once believed passionately in European monetary union, warns that if changes are not made soon the Eurozone and the troubled Euro risk creating a lost generation of educated young people.

The troubled euro – fraught with ad hoc decisions

Prof. Pissarides said:

“We will get nowhere plodding along with the current line of ad hoc decision-making and inconsistent debt-relief policies. The policies pursued now to steady the euro are costing Europe jobs and they are creating a lost generation of educated young people. This is not what the founding fathers promised.”

Prof. Pissarides, who was awarded the Nobel Prize in economics, jointly with Dale Mortensen and Peter Diamond, for his contributions to the theory of search frictions and macroeconomics, outlined what Europe needs in order to get its economy moving again:

Changes in fiscal and monetary policy – this will require dramatic changes by those who thought austerity would have only short-term consequences. It is also likely to be unpopular among the electorate in northern European countries.

“The current split between fiscal and monetary policy is untenable” – national government have to recapitalize their financial institutions and insure their deposits, which involves fiscal spending and debt build-up. One of the consequences of poor bank oversight is a deteriorating fiscal balance.

The European Central Bank must become a supervisory authority as soon as possible – Europe needs a single supervisory authority that has the power to dissolve banks when necessary, recapitalize them and insure their deposits. The supervisory authority should not have to rely on transfers from the International Monetary Fund (IMF) and governments, i.e. it should be well funded.

Individual countries’ fiscal finance should be supervised centrally – currently this is partly done by the European Commission. However, Prof. Pissarides says it would be more credible if it were the duty of an independent body.

Fiscal austerity fuels unemployment – the ECB, the IMF, the European Commission and national governments should ease up on austerity. Austerity, which has been ‘about right’ for the northern countries, is ‘far too tight’ for their southern neighbors. Austerity has worsened the north-south divide in Europe.

More investment in Europe – Pissarides said “We should learn how to do our fiscal accounts better and exclude investment projects from the one-year horizons of national budgets.”

Prof. Pissarides added:

“Because governments will be tempted to classify too much spending as investment, we need a European ‘growth council’ to evaluate which policies are growth-enhancing and exclude them from the budget. It can be as generous or as strict as required by the European Council; either way, it will be a big improvement on the current situation.”