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Viewpoints: What would a growth agenda look like?


Election results in Greece and France have shown voters opposing austerity plans and instead supporting pro-growth policies.

All over Europe, the key political divide has been between parties supporting austerity to keep borrowing costs low and those making promoting growth their main priority.

And in the UK, the coalition government's legislative programme, as announced in the Queen's Speech, has been criticised as lacking proposals for growth.

But if the pendulum is swinging towards supporting growth, what policies will that involve?

Here, a selection of economists discuss what changes would be needed.

Paola Subacchi, research director for international economics, Chatham House

A growth agenda means bringing in short-term growth, not long-term growth, which probably will be delivered by the structural reforms that some countries are implementing.

For a growth agenda, I'm afraid we still need to think about demand measures such as temporary cuts to VAT, because these are the measures that deliver quick results.

I don't particularly like these measures and I would prefer that demand would come from higher income growth, but that is not possible in the short term.

The other growth measure, for me, is restoring confidence.

At the moment we have only the austerity message, which is counterproductive because people don't go out and spend, so we need to balance the message.

Pippa Malmgren, president, Principalis Asset Management

Two-thirds of new jobs in industrialised economies are generated by firms that employ fewer than 50 people.

Governments do not create growth - only companies create growth.

If you really want a growth agenda and austerity is not an option, you have to immediately, totally deregulate and vastly reduce the tax rate on all entrepreneurial activities.

Some people will say: "If you cut taxes, you will lose revenue and the state can barely afford to live as it is."

My point is that the state as it currently exists in Western Europe cannot continue to exist - this is the end of the social welfare state.

The problem is that no-one in Western Europe wants to give up the social welfare state, so they have to find a way to fund its continuation and that means they can't deregulate the private sector.

Philippe Legrain, independent economic adviser to European Commission President Barroso

A more competitive currency would be welcome: just as sterling's collapse since 2008 has lifted UK exports, a weaker euro would help Mediterranean economies regain competitiveness for price-sensitive exports.

Countries with a trade surplus must also play their part.

Just as China needs to allow the renminbi to rise, so Germany needs a higher real exchange rate.

That means that Germans need to earn higher wages, commensurate with their increased productivity, so that they can afford more Greek and Spanish holidays.

If businesses will not oblige, an income-tax cut would do the trick.

Comments adapted from an article written for Project Syndicate

Prof John Van Reenen, co-chair of LSE's Growth Commission

European voters are rejecting austerity in favour of "growth".

Although governments cannot wave a magic policy wand and conjure up high output, slowing down public investment cuts must be right, as resources are idle and interest rates low.

What matters even more are long-run growth policies, the focus of the London School of Economics' Growth Commission.

First, we must create a better environment for sustainable growth through flexible markets, infrastructure and management.

For example, we should allow much sharper rewards and sanctions for teacher quality.

Second, we need a pro-active focus on areas of future comparative advantage and global growth, reducing policy obstacles.

Examples are the onerous planning restrictions stifling the hi-tech cluster outside Cambridge and the current immigration policies that are harming our universities.

Jonathan Portes, director, National Institute of Economic and Social Research

Long-term UK government borrowing is as cheap as in living memory.

There are lots of unemployed workers and plenty of spare capacity and the UK suffers from both creaking infrastructure and a chronic lack of housing supply.

All these factors suggest that the government should increase investment spending very substantially.

In the short term, this would boost growth, create jobs and have no direct effect on the government's primary fiscal target.

In addition, it should introduce much more ambitious measures to help unemployed people to get jobs, especially the young.

Over the medium term, the focus should be on improving the skills and labour market prospects of our young people, especially the half who do not go to university, by reforming vocational education and focusing the education system on improving outcomes for relatively disadvantaged children.

Finally, the government should reverse its damaging approach to high-skilled immigration and to foreign students.

Raoul Ruparel, head of economic research, Open Europe

I don't think eurozone leaders are as far off doing what needs to be done to promote long term growth as has been suggested, particularly in terms of labour and other market reforms, although efforts on both definitely need to be stepped up.

The growth v austerity debate is somewhat of a false dichotomy.

Let's not forget that the eurozone is undergoing huge changes and many countries are rebalancing their whole economies.

Simply spending more will not change this and is not desirable, but some differentiation is needed.

Ultimately, the eurozone cannot exist with 17 German-style export-oriented economies and adjusting the approach to account for this is more important than the overly simplistic debate on growth.

Daniel Gros, director, Centre for European Policy Studies

The fundamental problem of the eurozone is the chasm that has opened up between the north and the south.

The north does not have a growth problem as it enjoys close to full employment, robust public finances and record low interest rates.

By contrast, the south suffers from high and increasing employment and battles high deficits.

This fundamental difference in economic conditions means that usual mechanisms the EU might consider for growth do not make sense.

The south simply does not have any fiscal room for manoeuvre and even further debt-financed infrastructure risks unsettling financial markets.

What is needed is more demand in the north, which would allow the south to grow on the back of exports, thus reducing both external deficits and unemployment.

The north, especially Germany, is unlikely to engage in deficit spending, because German politicians simply see no need for it with German unemployment so low.

The only measure that could really help at this point would be a deep liberalisation of the services sector in Germany, which should make investment in this sector more profitable (thus increasing demand in Germany).

Moreover, service sector liberalisation in Germany would also make it easier for southern countries to increase their service exports to the north and thus find employment for the masses of unemployed youth in countries like Spain and Italy.

Prof Charles Wyplosz, Graduate Institute in Geneva

After two years of irresponsible austerity, which has brought the predictable recession that is raging throughout Europe, policymakers seem to have realised that voters are angry.

They were asked to endure pain to close deficits, but deficits are even harder to bring down in recessions, so they feel that they suffered for no good reason.

They are right, but they will be disappointed.

The countries in trouble will find it difficult, if not impossible, to borrow from markets.

The country that can borrow, Germany, is growing fast and starting to feel inflationary pressure from workers who are now in high demand.

No wonder that policymakers are rediscovering the merits of structural reforms.

But the benefits of structural reforms accrue very, very slowly.

The sad conclusion is that individual eurozone member countries are effectively powerless.

We could issue eurobonds to cover expansionary policies, enact fast-acting tax cuts, or the ECB could underwrite newly issued national bonds, but all that would be anathema to Angela Merkel.

Other than that, I see nothing that can be done now.