Europe Needs a Smarter Austerity Debate
Deficit-reduction won't save uncompetitive countries on its own. But failing to restrain public spending will allow inefficiencies in certain sectors to persist.
By Simeon Djankov
The Wall Street Journal
Fiscal austerity is blamed for all of Europe's ills. If only we could loosen the belt somewhat, the argument goes, everyone would be better off. This refrain is repeated by Presidents Fran?ois Hollande and Barack Obama, bureaucrats at the IMF and in Brussels, and striking workers across Europe. More public money, they say, means better growth and job prospects.
The evidence is to the contrary. The European Union economies that have experienced the highest growth in the past three years—Germany, Latvia, Lithuania, Poland and Sweden—all take austerity seriously. The European Commission's Winter 2013 forecast shows a similar trend. The five fastest-growing economies in Europe are projected to be Bulgaria, Estonia, Latvia, Lithuania and Romania—all fiscal hawks.
In 2009, Bulgaria's budget deficit was 4.4% of GDP, above the Maastricht limit of 3%. Following cuts in government expenditure and a pension reform that increased the mandatory retirement age by two years, the budget deficit fell to less than 1% last year. Yet Bulgaria's economy has recorded 12 consecutive quarters of positive growth, one of only four such economies in Europe.
Austerity simply means that governments spend what they earn, or close to it. People agree with this principle when applied to a household budget. A recent poll in Bulgaria finds that only 17% of respondents want their family to live off debts during the crisis. Yet when you ask the same question for the nation, 58% want a looser budget. Someone else should pay the government's bills.
Many analysts say that the government of Prime Minister Boyko Borisov, in which I served as deputy prime minister and finance minister, fell last month due to its austerity drive. But the real reason is our failure to reform sectors like energy and health care, and to force austerity upon them, too.
The strikes that led to the government's resignation started in February due to higher electricity prices. These were made necessary by the ever-increasing inefficiency of the energy sector. High-cost power producers continuously joined the energy grid, and the state-owned energy company was forced to cover the resulting losses. The choice was between a price increase to save the energy company from bankruptcy and much-delayed reform. The regulator chose the former.
Health care is another unreformed sector. Successive governments have caved under pressure from pharmaceutical companies, medical associations and labor unions to increase public expenditure on health care. Yet the perception of service quality has worsened; an astounding 93% of Bulgarians say health services are inadequate. Each attempt at reform during our time in government was met by calls for the dismissal of the minister of health. Four ministers came and went—mission not accomplished.
Europe needs austerity. Otherwise inefficiencies in certain sectors go on. Moreover, large public expenditures open more opportunities for corruption—another reason for strikes in countries like the Czech Republic, Slovenia and Spain. Patience is running thin. Not only is there less money to go around, but public officials misuse it to their benefit.
Europe also needs a frank discussion about competitiveness. The main weakness on the Continent is that many countries produce and export too little and at too high a cost. This is seen in the external trade data. In 2012 France ran a current-account deficit of EUR 82 billion, Spain EUR 32 billion, Greece EUR 20 billion, Portugal EUR 11 billion and Cyprus EUR 4.3 billion.
Some blame the euro. The reasoning is as follows: The Southern Rim countries joined the single currency at an overvalued exchange rate, and as a result their prospects for export-led growth were minimal. In contrast, Germany undervalued its currency at entry and thereby continued to gain in productivity, also in part thanks to the labor-market reforms of Gerhard Schr?der. Hence its trade surplus of nearly EUR 200 billion.
There is a lot of truth to this monetary explanation—take Iceland's quick recovery as an example. But the other main culprit is the regulatory burden. According to World Bank data, it takes 11 procedures and EUR 9,000 to open a small business in Athens. It takes 735 days and 43 procedures to resolve a simple commercial dispute in Larnaca, Cyprus. And it takes 59 days and visits to eight different offices to register a small piece of property in Paris.
It is cheaper and faster to do all this in Berlin. And a lot cheaper and faster to do it in New York, Singapore, Toronto or Sydney.
So suppose that the euro-zone countries that have undergone various rescue efforts do eventually manage to balance their budgets. Suppose that it only takes them an extra few years. And suppose they do it by cutting unnecessary expenditures and boosting revenues.
Would it suffice? Hardly. By then, unemployment would be over 25%, as it already is in Greece and Spain. Popular discontent would have thrown out or scared off another government or two.
Europe, therefore, also badly needs a growth plan to get the economy going. At various Ecofin meetings over the last four years, I raised the growth issue in concert with fellow ministers from Poland, Sweden and the U.K. But it never truly came into focus. There were always too many emergency rescues to discuss. Too much attention was paid to fiscal pacts, tax harmonization and bank supervision as the next big thing.
Perhaps we should have named it "austerity in the burdens to business." Then it may have caught policy makers' attention. Austerity in government budgets, combined with reduced red tape and structural reforms, may just make Europe work.
Mr. Djankov was deputy prime minister and finance minister of Bulgaria from 2009 until last month.
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