András INOTAI How to manage the costs of crisis management in the European Union? „Post-Crisis Economic Development of EU and Bulgaria” October 2012, Sofia

1. Macroeconomic impacts of the global financial and economic crisis - return to growth or lost decade? - rapid recovery of exports: another argument for export-oriented growth pattern? - budget deficit and steps towards fiscal consolidation - the long-term negative impact: what to do with reducing the public debt?

2. Shifting emphasis on crisis management: from fiscal consolidation to growth stimulus? - original approach: unilateral fiscal consolidation - no other way available in some countries - German pressure (raising revenues by higher taxes and more efficient tax collection + cutting expenditure during social crisis, reducing the staff of public administration, stopping subsidization of state-owned companies) - attitude of financial markets - blind belief in automatic return to growth as a result of „successful” fiscal consolidation „successful” fiscal consolidation - belief in return of international capital - higher labour market flexibility

3. Why unilateral fiscal consolidation does not work? - crisis deepened, negative spiral emerging (negative growth, high unemployment) - crisis deepened, negative spiral emerging (negative growth, high unemployment) - adjustment costs very high but different degrees across - adjustment costs very high but different degrees across member countries member countries - negative social and political consequences - negative social and political consequences - continuous/repeated negative opinion of rating agencies - continuous/repeated negative opinion of rating agencies - no return of confidence + foreign capital, increasing costs of refinancing debt - no return of confidence + foreign capital, increasing costs of refinancing debt

4. Factors of „change of paradigm” - failure of one-sided approach based on fiscal consolidation - failure of one-sided approach based on fiscal consolidation - spread of crisis to several other member countries - spread of crisis to several other member countries - slowing/frozen growth prospects in the EU (and the world economy): towards a „lost decade” without reaching pre-crisis GDP levels before slowing/frozen growth prospects in the EU (and the world economy): towards a „lost decade” without reaching pre-crisis GDP levels before rapidly growing unemployment, with special regard to youth unemployment („lost generation” and its socio-political consequences) - rapidly growing unemployment, with special regard to youth unemployment („lost generation” and its socio-political consequences)

4. Factors of „change of paradigm” - populism and demagogy, anti-EU movements and public opinion - income polarisation - undermining the middle class-based structure and threat to the fundamentals of European democracy - failed or delayed reacion at EU level (partial crisis management instead of clearcut crisis prevention – see Greece between January and May of 2010) between January and May of 2010)

5. Dilemmas at present: how to mix policy measures of fiscal consolidation with growth stimulus? - first fiscal consolidation before growth stimulus - first fiscal consolidation before growth stimulus - growth as a remedy of more manoeuvring room for fiscal consolidation - both at the same time, but how ?

6. What kind of steps in favour of growth-oriented strategy? - EU-2020 – key targets agreed, but… - EU-2020 – key targets agreed, but… - growth and jobs - growth and jobs - Six Pack (German influence) – structural change, privatisation, deregulation of labour markets - Six Pack (German influence) – structural change, privatisation, deregulation of labour markets - but: short vs. longer term effects - but: short vs. longer term effects social and political costs social and political costs different adjustment capacity of member countries different adjustment capacity of member countries - growth stimulus of Euro 120 bn (less than 1 per cent of EU GDP) - growth stimulus of Euro 120 bn (less than 1 per cent of EU GDP)

6. What kind of steps in favour of growth-oriented strategy? - uncertainties: - uncertainties: - very limited manoeuvring room of several countries - very limited manoeuvring room of several countries - loosening fiscal discipline if money for growth available - loosening fiscal discipline if money for growth available - behaviour of financial markets uncalculable - behaviour of financial markets uncalculable - Euro 120 bn very small amount, when exacerbated debate about the future of the multiannual financial framework between 2014 and Euro 120 bn very small amount, when exacerbated debate about the future of the multiannual financial framework between 2014 and 2020

7. Key elements of potential growth - domestic demand? - domestic demand? - limited space - limited space - more space if poorer segments of the society favoured - more space if poorer segments of the society favoured - external „support”: Germany’s „budgetary easing”?

7. Key elements of potential growth - investments: yes, if… - still existing overcapacities - general investment climate (due to economic, social and political factors) political factors) - future-oriented investments - in which sectors - time factor: short-term easing vs. long-term remedies - uncertainty of long-term investments (R+D, innovation) - education and long-term supply-demand on labour markets - splitting labour markets (competitive vs. uncompetitive sectors – and government policies needed everywhere) sectors – and government policies needed everywhere)

7. Key elements of potential growth - exports: most important growth factor - experience with crisis (quick recovery of exports) - growing orientation towards extra-EU markets, but… - factors of international competitiveness

8. Conclusions - unilateral fiscal consolidation does not help - change necessary but results far from unambiguously positive - exports as key factor of growth - debt problem international: EU and USA (to be managed by internationally controlled higher inflation) - key challenges hidden by crisis (demography, labour market, social model, even democracy) - a new quality of EU-level policy-making necessary: fiscal transfer union + political union – as soon as possible (time is rapidly running out) transfer union + political union – as soon as possible (time is rapidly running out)

8. Conclusions - fiscal consolidation and the management of its social and political costs (negative social impacts more threatening than consequences of climate change in the second decade of the 21st century) - fiscal consolidation without eliminating key factors of lack of competitiveness - how to direct investments into the „real sector” - how to encourage personal savings for investments and not for private consumption - political vs. economic rationality

Thank you for your attention.