How Europe Can Escape the Austerity Trap

Jacques Attali, founding president of the European Bank for Reconstruction and Development; President, PlaNet Finance. PARIS -- All euro zone states have now adopted the same economic policy in the search to improve their competitiveness and return to growth. This strategy is the only one which can substitute under the single currency system of the euro what competitive devaluations would do for an individual country with its own currency. The aim is to lower prices and salaries in order to improve the response to external demand. The increased economic activity of greater exports can in turn hopefully restore purchasing power of wages, growth and employment. France was the last country, after Germany, Italy, Spain and all the others, to explicitly adopt this strategy. It was the right decision; not doing so would have been suicidal. French industry was about to lose all ability to compete with the other European countries, including those with export capacity which until recently trailed far behind that of France. So far, however, this common strategy is not working to improve the situation in Europe as a whole. Unemployment has not fallen across the board, nor has growth returned. Deficits remain high; the debt-to-GDP ratio is inevitably rising. More worrying, commercial banks are not emerging from the dire situation in which they found themselves; private and public investment are slowing; foreign investors are looking elsewhere.If some euro area countries are improving their export markets, it is mostly to the detriment of another member nation, as Spain is now doing against France, and Germany against all other European countries. And if some euro area countries are improving their export markets, it is mostly to the detriment of another member nation, as Spain is now doing against France, and Germany against all other European countries. This is a road to disaster: it will become clear sooner rather than later that the present rigorous and painful course will not on its own solve the specific problems that citizens face in their lives. THE DIRE CONSEQUENCES The anti-Europe diatribes will then repeat that "we told you so -- austerity will only lead to disaster." There will be a revival of parties advocating a dismantling of the idea of a common Europe. We are already seeing parties advocating this policy line scoring big in polls, taking on different forms, in Greece, in France and in Italy. Yet, the policies they propose, if by misfortune were to be implemented, will only sustain the illusion for a limited time that higher wages, greater spending and an end to layoffs are sustainable. Very quickly, these policies will lead to more public debt and subservience to the lenders, who will impose a return to austerity under much worse conditions. It will be too late then. The damage will be irreversible. THE ONLY WAY OUT One single strategy is crucial to avoid this. As a complement to the necessary policy of fiscal rigor, the euro zone as a whole can take on more debt even while individual states cannot.As a complement to the necessary policy of fiscal rigor, the eurozone as a whole can take on more debt even while individual states cannot. Too often, it is forgotten that the euro zone, as a legal entity, has no debt. And, therefore it has a borrowing capacity of at least 1000 billion euros to finance recovery -- with European bonds, public and private productivity-enhancing investments -- that no country or the banks alone can finance. In addition, if the euro zone agrees on a coherent and concerted strategy leading to a relative fall in the value of the euro against the U.S. dollar, the return to growth in Europe is assured. Such a strategy can be implemented by the four major credible players in Europe today: France, Germany, the European Investment Bank and the European Central Bank. If they are able to agree, growth will return very soon in Europe. If they cannot, decline is certain. It is therefore urgent for the ECB to understand that its very future, and that of the currency under its care, requires a strategy much bolder than its current timidity -- merely stating that the decline of the euro against the U.S. dollar would be good, that bringing inflation to under 4 percent is welcome and that Eurobond issuance would a useful complement to the instruments already at its disposal. As for the EIB, it needs to realize that the time for protecting its triple-A rating has passed by continuing to shun investment in the countries that have lost theirs. Europe has reached the point where the bank, on the contrary, should fulfill its mandate by mass financing of projects in troubled countries. For its part, Germany must realize that if the worst materializes and the euro collapses, it must return to a deutsche mark whose values will go so high that no sector of German industry will be competitive. Lastly, the time has come to recognize that France's responsibility to dare to propose such a strategy in a way that Germany, and the two European banks, can only accept. Such an initiative must be taken up and implemented as quickly as possible. In March at the latest. Therefore, France must propose it in February. If France is unable to convince its partners, it will have to abandon, sick at heart, the desire to find sustainable balances that President Francois Hollande has just courageously committed to for the sake of the very principle of solidarity that will have ceased to exist.

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