Workshop 2004

Growth and Cohesion in the EU: The Impact of Macroeconomic Policy
12-13 November 2004
Maastricht University, Faculty of Economics and Business Administration

Background

Macroeconomic policy in the EU is a subject of an often heated debate. On the monetary policy side, the actions by the European Central Bank (or lack of actions) are frequently commented upon by political leaders. Moreover, the ECB activities are monitored by various bodies both from a political background (European Parliament) and from an academic background. (European Shadow Financial Regulatory Committee). Finally some European countries are reluctant to give up their monetary independence. On the fiscal policy side, the failure to abide to the stability and growth pact by France and Germany caused a lot of controversy. (Actually, the pact has been controversial from the very beginning, especially after EU-president Prodi dubbed it as “stupid”). However, the discussion is in most cases about the implementation of the policy, starting from a shared view of how the economy works. This view is dubbed by the Sapir report as the “Brussels-Frankfurt consensus” of macroeconomics. (See Sapir et al. (2003), p. 41. See also Arestis and Sawyer (2003) for a critical discussion.) Important ingredients of this view are that the economy tends to fluctuate around the NAIRU: when unemployment lies below the NAIRU this will spur inflation. Economic growth and the level of economic activity is determined by supply factors. As a consequence, fiscal policy should be as neutral as possible and monetary policy should manipulate the interest rate to neutralize demand shocks.

Consistent with this macroeconomic consensus is the notion that fiscal and monetary policy should be detached from the political process. This underlies the idea of an independent ECB and a Stability and Growth Pact that restricts the room for fiscal policy. Macroeconomic policy should have an accommodating role in economic growth, basically not hindering it. As the Sapir report puts it: “To expand economic growth potential requires first and foremost reforms of microeconomic policies” (p. 4). This emphasis on microeconomic policies is also found in the Lisbon Strategy 2000 and the recommendations by the European Employment Taskforce 2003, which evaluated Europe’s recent disappointing performance in light of the targets of sustainable growth and more and better jobs. (See the report of the Spring European Council 2004 and the report of the European Employment Taskforce, “Jobs, Jobs, Jobs”, November 2003.) While the monetary policy and the Growth and Stability Pact are appropriate to solve macroeconomic problems, the EMU countries should reform their labour market institutions to make the labour markets more flexible and more competitive. In addition, competition on the goods market has to be increased to lower the mark-up.

The implementation of the Lisbon Strategy is challenged by the need to balance the tension between efficiency and equity, which are represented by its central goals of Sustainable Growth and Cohesion, respectively. The latter goal aims amongst others at abolition of social exclusion, eradication of poverty and enhancing gender equality. The Sapir report recognizes this tension and criticizes the EU inclination to try to kill two birds with one stone: “policy instruments are assigned two objectives at the same time: for example, fostering growth and improving cohesion. It would be better to assign one objective to each policy instrument.” (p. 4) In that context macroeconomic policy can play a somewhat larger role than is currently envisaged, but the report is not very clear about that and remains close to the Brussels-Frankfurt consensus. (See Sapir et al. (2003) recommend “increasing the role for fiscal policies in bad times … and more effective and flexible implementation of the Stability and Growth Pact, while sticking to the 3% ceiling. … the conditions under which the 3% deficit threshold can be breached should be modified.” (p. 5) See also the recommendations on pp. 144-145 and the discussion preceding these recommendations.)

The Center of Full Employment and Equity–Europe (CofFEE–Europe) is by its very nature concerned about achieving full employment and equity in Europe. We also think that macroeconomic policy should have a larger role in achieving these aims because aggregate demand has a large and lasting impact on the macroeconomic performance of a country. (See for instance Modigliani (2000) and Mitchell and Muysken (2002).)For that reason we wish to scrutinize the Brussels-Frankfurt consensus from various angles and discuss the implications for macroeconomic policy.

A main concern when regarding the current European situation is the persistently high unemployment. Over the last decade (1990-2002) unemployment averaged 9.3%, while the OECD average was 7.1%, and EU-unemployment is on the rise again. In addition, the level of European unemployment has been on this high level since the 1980s while unemployment in the US has decreased from 7.2% in the 1980s to 5.5% in 1990-2002.

According to the Brussels-Frankfurt consensus, the European labour markets are too rigid in comparison to the US labour market. Hence, the unemployment problem can be solved by increasing incentives, improve the returns on schooling and redefining the role and the necessity of labour market institutions. However, we would like to emphasize that it is not clear which institutions may cause labour market rigidities and to what extent. These institutions are the result of a long process in which cultural values (e.g. about equity) play as an important role as economic values. Hence, changing labour market institutions is a complicated process and therefore the unemployment problem needs a much broader set of solutions, including active labour market policies, policies concerning schooling and the development of skills. (See Agell (2003) and Baker et al. (2002).) But first and foremost the role of aggregate demand in the determination of unemployment should be recognized. Therefore macroeconomic policy cannot be ignored when aiming at full employment. This policy then should be supported by active labour market policies and income policies.

Within this context, CofFEE–Europe dedicates its 2004 workshop to the role of macroeconomic policy in the European Union. The aim of the workshop is twofold. First, an in-depth discussion with a number of invited, reputable scholars on the Brussels-Frankfurt consensus and the impact of macroeconomic policy, in particular for full employment. Second, an analysis of the interaction between macroeconomic policy and the welfare state, with a focus on the implications for cohesion. Next, to define an appropriate role for macroeconomic policy, this workshop intends to exchange ideas about the future of the welfare state in the new European Union and define a future research agenda in this field.

The papers in the workshop will discuss 5 related topics in 10 sessions: in each topic we discuss two papers. All papers are invited papers from reputable researchers.

Topics

1. Unemployment and the NAIRU
This discussion basically touches upon the theoretical debate about the Phillips curve and the NAIRU. Relying so exclusively on supply side policies implies a firm belief in the existence of the some Non-Accelerating Inflationary Rate of Unemployment. Although the NAIRU has theoretical appeal, it is hard to find a NAIRU in empirical research as e.g. Mitchell and Muysken argue.

2. The role for the ECB in the solution of unemployment
The ECB has been designed as an independent institution that will only focus on inflation. This fits in the NAIRU-view of the economy. In addition, the building of credibility has been the absolute priority on the ECB agenda. So far, the ECB has succeeded in stabilizing the inflation rate at a low level. However, various governments have asked for a more active policy: in periods of a strong Euro, low inflation and high levels of unemployment a decrease in the interest rate might be a good policy. In this respect, the ECB can learn from the FED.

5. Macroeconomic policy and the Lisbon Strategy
The Lisbon Strategy is a commitment to bring about economic, social and environmental renewal in the European Union. The strategy aims to make the European Union the world's most dynamic and competitive economy. Job creation alongside social policies will ensure sound economic development and social inclusion (http://europa.eu.int/comm/lisbon_strategy). Hence, this Lisbon Council has set the long-term goal of labour market policies and the question to be answered is twofold. First, what are the main barriers on the road to becoming the most dynamic and competitive economy and second, what economic policy must guide us to this long-term goal? With respect to the latter, an appropriate role for macroeconomic policy should be recognized.

Preliminary programme (abstracts are available by clicking on the titles)

12 November 2004	room 3.061
10.00–10.30	Welcome with coffee and tea
10.30–11.30	Malcolm Sawyer, University of Leeds, UK
		“Alternatives for the policy framework of the Euro”
11.30–12.30	Clemens Kool, Utrecht School of Economics, The Netherlands
		“What drives ECB monetary policy?”
12.30–13.30	Lunch
13.30–14.30	Jan Kregel, United Nations Dept. for Economic and Social Affairs
		“Interest rate policy, debt sustainability and counter-cyclical policy in a non-sovereign monetary area
14.30–15.30	Bill Mitchell, University of Newcastle, Australia & Joan Muysken, Maastricht University
		"The Brussels-Frankfurt consensus: An answer to the wrong question”
15.30–16.00	Afternoon tea
16.00–17.00	Francesco Saraceno, French Observatory of Economic Conditions (OFCE), Paris, France
		“Reform of the Stability and Growth Pact: Reducing or increasing the nuisance?”
19.00		Dinner at Restaurant “De Hertog”

13 November 2004	room 0.089
09.00–10.00	Paul Tang, Netherlands Bureau for Economic Policy Analysis (CPB), The Netherlands
		“Is the American model Miss World? Choosing between the Anglo-Saxon model and a European-style alternative”
10.00–10.30	Coffee and tea
10.30–11.30	Lucio Baccaro & Diego Rei, International Institute for Labour Studies, Geneva, Switzerland
		“Institutional determinants of unemployment in OECD countries: A time series cross-section analysis (1960-1998)”
11.30–12.30	Tom van Veen, Maastricht University, The Netherlands
		“The benefits of labour market institutions?”
12.30–13.30	Lunch
13.30–14.30	Henri Sneessens, University of Louvain-la-Neuve, Belgium
		“Labor market adjustment and macroeconomic performance”
14.30–15.30	Chris de Neubourg, Maastricht University, The Netherlands
		“The architecture of European welfare states”
15.30		General discussion and afternoon tea

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