Europe’s Misguided Search for Growth

BRUSSELS – A few months ago, 25 of the 27 members of the European Union solemnly signed a treaty that committed them to enshrining tough deficit limits in their national constitutions. This so-called “fiscal compact” was the key condition to get Germany to agree to increase substantially the funding for the eurozone’s rescue funds, and for the European Central Bank to conduct its €1 trillion “long-term refinancing operation” (LTRO), which was essential to stabilizing financial markets.

Today, however, the eurozone’s attention has shifted to growth. This is a recurring pattern in European politics: austerity is proclaimed and defended as the pre-condition for growth, but then, when a recession bites, growth becomes the pre-condition for continued austerity.

About 15 years ago, Europe endured a similar cycle. In the early 1990’s, when the plans for the European Monetary Union (EMU) were drawn up, Germany insisted on a “Stability Pact” as a price for giving up the Deutschmark. When Europe fell into a deep recession after 1995, attention shifted to growth, and the “Stability Pact” became the “Stability and Growth Pact” (SGP) when the European Council adopted a resolution on “growth and employment” in 1997.

The need for growth is as strong today as it was 15 years ago. In Spain, the unemployment rate then was as high as it is now, and in Italy, it was higher in 1996 than it is today. Politically, too, the background is the same: the “G” was inserted into the SGP under pressure primarily from a new French administration (at the time headed by Jacques Chirac). Today, France has again given the political impetus for a shift to growth.