PARIS – Europe is falling into a stagnation trap. With growth barely visible, and dangerously low inflation causing real interest rates to rise, the weight of public and private debt has grown very heavy, and many fear that another lost decade is at hand. And, though the threat of eurozone fragmentation has receded, it has not disappeared. Given all of this, Europe is losing relevance internally and externally.
France and Germany – which largely drove European integration for more than six decades – must not resign themselves to this state of affairs. They urgently need a common plan, not mutual recrimination by German supply-siders and French demand-siders.
We find such controversies pointless. Lackluster productivity growth is prima facie evidence of a supply deficiency. The combination of high unemployment and falling inflation is prima facie evidence of a demand shortfall. Interest-rate differentials within the same currency area are prima facie evidence of fragmentation. The truth is that Europe suffers from multiple ills.
So action is needed on all three fronts. The question is how to carry it out. If Europe were a single country with a single government, it would adopt a two-handed strategy, combining ambitious pro-growth reforms with fiscal-policy support. The central bank would make it clear that it stands ready – provided that the reforms are real and the commitment to subsequent fiscal consolidation is credible – to serve as a “backstop for government funding” (as European Central Bank President Mario Draghi put it in August).