1. András INOTAI How to manage the costs of crisis management in the European Union? „Post-Crisis Economic Development of EU and Bulgaria” 18-19 October 2012, Sofia

2. 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?

3. 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

4. 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

5. 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 2014-2020 - slowing/frozen growth prospects in the EU (and the world economy): towards a „lost decade” without reaching pre-crisis GDP levels before 2014-2020 - 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)

6. 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)

7. 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 ?

8. 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)

9. 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 2020 - Euro 120 bn very small amount, when exacerbated debate about the future of the multiannual financial framework between 2014 and 2020

10. 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”?

11. 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)

12. 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

13. 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)

14. 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

15. Thank you for your attention.