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Hello I'm David Rinaldi and director of studies and policy here affects the foundation for European Progressive studies and I'm super glad to welcome today in this FEPS talks, podcast professor at Nasa has been a secret, well, hello it's a pleasure to have you here professor at the petty School of economics and a Terry on pontoon Saban but besides that, you have been one of the professor of economies the mostly influential,
active in economic economic matters and current affairs providing your expertise continuously, in different capacities and if I if I look at the water what you what are your tasks at the moment you are a member of that was going to say this traditional sale, member of the general Board of Bank Defiance a member of the considerable amount and most importantly we would come to this during the stalk member of the casinos another productivity. Research fellow and bluegill chassis for.
Impressive CD from your antibiotic especially grateful for your time today and look forward to your. 91st, question that we will address in this podcast will be the Emu and then we will move perhaps on competitiveness tank on the stand what competitive competitiveness means, for European account trees and for Europe as a whole.
On the economic and monetary Union in particular you have been very vocal together with other the French and German Economist on the need, to put forward a very comprehensive package. We thought that there was a window of opportunity with franco-german agreement. Mesenburg the commission Pro could forward that they don't know their own proposal.
What do you make of the recent changes in the annual and how would you see actually the new commission engaging into this very sensitive topic of reforming the rules of the European.
Maybe it's time to take it make me a longer view about the reform of the view area kind of Maastricht treaty that, flu which was the a triple bond between a unified nation of the deficits Noble out and no debt restructuring, and we see today that it is any possibility if that is such a strong correlation between Banks and sovereigns this is one problem because then we see the central bank. Play fully its role as a lender of Last Resort without.
Perhaps when a guy station between liquidity and solvency is not so clear, and the other problem is the lack of inflation today so the other day was elegant way to come out, from this situation is worse than inflation and we have neither gross. Please. That situation today so let us be known as since the start of the crises that but his unfinished.
And what still needs to be done what bank in Union needs to be finished with the deposit insurance for instance and we need to break, the borders of liquidity and and Capital Bank Capital between between countries this is very important. Between X and sovereign, we need to be serious about this is a very very big a project and it has to do with national bankruptcy rules. Foods very very important.
The seconds apart is about fiscal issues and it has to do with aggregate level and the country by country level, not much I've been doing this more physical capacity that finally has been decided, and finally we have a third part which has not been addressed much which is about, imbalances productivity growth competitiveness and so we have the European semester which is a very complicated National prism Acres.
Certainly they don't understand that the European semester and we have also received and we have seen a lot of complaining about the complexity of fiscal rules, as well I think we get this common knowledge that the sum of the fiscal rules introduced with the master in the Matic TT like this. GDP ratio of 60% and the deficit to GDP ratio of 3% of being were last introduced, I without a sound economic backing so plus we have a lot.
Are the rules to apply to and interpret what is investment what season, we have political room for interpreting the flexibility the flexibility rules the investment closed how do you make it. And what is your understanding about reforming or revising the fiscal rules do we need to keep the frame but simplifying it. Is it completely wrong to have a certain set of fiscal rules or where do you see the physical reviews full and where perhaps you see that than message.
Some people argue that we don't need physical rules because markets will do the children and I'm not so sure, I slept on in the new area that markets where I missed it before the crisis if you think of the Asian crisis in 97, California crisis it was a lot of enthusiasm about these in the markets about the need economies and Southern. So I think the Market's is not reliable. We need. We need a bit of discipline but we also need physical discipline for from the government.
I think we still need now the proposal of the 7 + 7 report from German report which was published in 2018. What about changing the rules into a spending bill. So the idea of which is very simple is to say that expenditures public expenditures should grow at a pace that is more or less potential.
If suddenly there is a crisis than the spending would continue to grow at the post office, so then that would be whatever the level of the deficit it doesn't matter as long as pending rules but faster than potential, and so this is on the outside because when you look at the performance of a national countries in terms of physical rules, it's mostly on the website that they wear for cyclical like in 2000. Constrain National governments in the upside and give them some leeway in the downside.
Of course it's not so easy you need to rely more on National fiscal councils that will Define what is potential growth. But compared with today's route today so you need to have first a measure of the aqua capsule to have any of the output Jacks you need to have potential growth, and then you need the elasticity of spending and Taxation to gross on the top of the table so you have a lot of unknown to end up with an assessment of the fiscal stance.
We are we just a spending for easy to explain at 4 and it's easier to Money Talk less and known to assess. For a long time have I have been advocating some physical coordination across countries and I must say I'm a desperate about. It's a bit like monetary policy that used to be I want to Triple is the coordination within the European monetary system and it feel, ended up with some of the crisis and I decided to move to a common currency.
We have a fiscal system or european fiscal system and it doesn't work well so maybe, time to simplify and give more away at National level and have a layer which it would be coming to the older Country Song. We have calculated that we need very thin layer issue devotees to only Compass Medical Supplies. You can do a lot with a very small budget the problem is in good times you should refrain.
Using it as something to put additions fine how to understand that you have a budget that you don't touch most of the time. So you have two savings and good times in order to make it possible to to have a counter-cyclical attack on the secret, one of the possibilities to you to use this has been mentioned for the stability. Lysing the European economy around the cycle, is the European unemployment.
Everybody's everybody's most of the human or not they can quarter counties of the you are scared that it will transform into a sort of. Fixed transfer unlock unlock unlock. Actually it is the problem with a somatic shock or employment today to shock globalization related to shock. Are there and actually out in the future and the potential future of each,
member of the European Union. County is today a little bit more at risk but it is a concern for everybody but my feeling is that even though we have made, Samsung steps in order to make the European economy a little bit more resilient, we are still not in a situation in which we can face the next the next Crisis, the framework that you put the living room for national,
action with a common European, European action is certainly is certainly appealing go to politically I think we might not find the balance that is, European how do you see actually these little layer. Also U of U of European coordination on on fiscal fiscal mean. Very strong stabilization function that perhaps the distributor distributor in La Crosse County, or about the measurement of the fiscal aggregate physical stance.
Or the other way, one one of the criticism that we have often listen was that during during the moment of the crisis this economic coordination on the level of the euro. I was unable to make use of the physical space where actually it was it was possible. So I'm which I did the areas in which you see the European are in the European interbank. Sweet areas first is a symmetric shocks across countries second asymmetric shocks and third is the current situation with very very low inflation.
We need to distinguish the street of the first isometric shocks I think unemployment insurance, maybe the best tool why because it's very quick it can be made automatic, that's when you have a big jump in the unemployment rate and you have, 1 year or 2-year lump-sum transfer and we switch authority to the unemployed, add international countries in the in the country that receives you can use his money for instance to expand for a few months the length,
unemployment insurance at the time where to find a job so there's little more hesitant. And then after 2 years comes back to to the initial level with seen that it works in in the United States there's no reason why.
So this can be done and the problem is is a several countries making a large part of the EU EU area are being hit by the same shock and then, she don't have boring the capacity to borrow then it's not going to work, so this is where people start to be built very worried because it would need a common boring. I think these. These roots are easier than Distributing a difficult stance across countries and depending on whether there is room for expansion.
Because you have parliament's and they will vote. Depending on National interest and you cannot blame them for doing that. So it has always been very difficult to explain that you could depart from National interest at 3 open level. Diverse and you rely on insurance company to provide some namakku insurance here, that's on the top of that this is something that could, appeal to the people like it feels to the students this isn't something very concrete we also need to do, Russia latitude in USA.
Know the situation today of low growth low inflation I think I caused from something. Because he's not just a shock it's kind of semi permanent situation with lack of aggregate demand, and this is for this is why interest rate of solo a science the victim of the situation. Because it has to maintain interest rate very low at negative levels and this is creating a lot of. And happiness in some countries so this is quite toxic.
And we have an opportunity today with very low interest rates lower than gross and gross food in the area, it should be, and to have a kind of for European initials. I wish one would be investment and the eib for so you can investment banker, how to use National money to recapitalize the Eid than to ask each country individually to invest in time. And what we need a decision what we need is a crazy board pass for the cabin price and he is where people stop.
With a think to the news that the financial markets are going to fix the problem instead of the case today they didn't lack of supply of projects investment project, there's a couple price which is very low and no credible passport. So this is really crucial and I think here we need to have a, send it to give you a comprehensive view of how to take this opportunity of low interest rates to invest in this foundation and change offside.
You mentioned that you mention investment you mentioned the need to manage in a different way aggregate demand, you mentioned the need to list Oddity for girls and you mention as well the need of using inflation, to go out of this obsession with the public debt and mostly to go out. The fears of stagnation.
So that is a broad abroad agenda that is also changing a little bit of the in the, intellectually how I see it so you actually see the engagement of the European institutions and the public the public the public sec, very active in using old economic tools, Tree Lounge Tree Lounge the economy whereas if we read at the current structure of some of the Emu rules, it is it is more because more based on a sort of,
very limited approach of the state with very very few very few counter-cyclical measures, Weezer the state very much engage in to securing Market. Can you put credibility and public finances in order. We need we need to actually go out a little bit of this area prepare dating the space for 48 for the economic for the economic policy. Ym1 what is the way in which we could perhaps. I come back to a property management of the of the aggregate of the aggregate demand.
Do you see any Jenny potential change in this in the in the in the near future because of the moment the structure of the of the Emu, itself with a different type of adjustment that are that are there and the structure of the MU we can other adjust for a symmetric shop, throughout the entire Mobility.
By shifting some people by having a facilitating the move of some unemployed from one County to the other, bored with the other means that has been that has impacted negatively on the well-being of people as well as on the on the intent of the month. Lowering wages for with an internal internal deflation do you see any room in the near future for.
Different management of this aggregate demand which means perhaps also different management of wages in Europe and a different a different management and. Adjustment automatic adjustment within the year. Okay so cuz I think we should not a discount the importance of the single Market, future growth investment so it's Sublime. We are halfway towards her. Only halfway so you think that since the starts of you can decoration are we have ripped something like 10% disease or order.
Something by 10% in terms of higher GDP per capita thanks to you can eat equation. That we all have sweetness that we still have 10% to go she's a normal. Today's top of group so this is about and a potential to know, focus on labor markets and wages and an aggregate demand. I think there's a tendency in the U area to consider the new area as in the gold standard.
So we forget the fact that if wages increase everywhere in the U area and do you want me to just and that it will get more information, with a wicked currency. So if we had a magic stick we would meet over the weekend and increase wages and prices Everywhere by 10. Unrealistic price window change plate and economies of the creditors would be very unhappy on online credit. Are we going to do that.
But the idea is that a competition between the different kind of fish is good in terms of competition for higher property investment so long as it's very good for the you are at home. The competition to if it is to cut wages everywhere it's a race to the bottom and it has a negative some game because you get depression, and that you will really appreciate and that it's so you don't approve the competitiveness Visa V the rest of the word and you get Creation Museum januarius okay.
And to get out of it, we have to do the competitiveness National competitiveness councils that have been put in place, social Partners all you need to freeze wages for 2 years because we need to recover competitiveness. But since everyone is doing that we will inflation for sure we not increase and if inflation cannot increase and ready price adjustment, so this is really a risk we have today look at the country that Germany Germany have.
Addressed insisted that Germany should expand its, expenditures Investments with you reduce Taxation and having more relaxed, saying that's what the aquaduck is about 0 in Germany so there's no way of doing some physical expansion. Is a statement to you. Facebook but this was misconceived because most of the current account Surplus in Germany comes from the carpet. This is where firms have accumulated savings and they're not doing anything with the savings.
So if a purchasing power is concentrated in the corporate sector it means that maybe you could have some policies to shift, savings to households have ideas how to spend it. Also he would inflate about which policies and it's not true that the government has no impact whatsoever on wages. Public wages for. Get signed with to the other hospital jobs that pay increase in hospital, too and I have come to the point where we should maybe look at very simple rules. Like the labor share.
Tropical storm or less with mean that wages should grow at the same Pace as productivity points. Quitting Cruise should be about the same adjective. Should be the same as a simple rules like that, good morning to ring of these imbalances which is extremely complex and it doesn't work doesn't work any puts emphasis on things that I'm not so important. So we have the open semester that's mixes up imbalances and long-term goals.
I saw you repeat Frances to Italy every year that they need to improve their educational legal system, This Is How We Roll. Where are you have short-term risks that may be missed by Ruben semester because they are not in the hands of, the commission and the government's like my full potential with cheese from the, so Francis I take France they have repeated and the IMF. This is not in the open semester. We are looking at gender balance. Is it true cash balance disease, important parts of butts.
I think the most of the things you're just a Chevy that will so, Berkeley from the experience that you had with the concentration of the appropriate a.m. in France or maybe my next question results to, expand expand this father to try to ask, what is your what are the main takeaways that you have from the national productivity board that you've been contributing.
Perhaps what is the recommended recommendation for the French economy that can made which one more most proud of, and what is the first thing that you would like to see at the European level in this network of increase the corporation that you have wished for between national product. So are the report we feel published as the two parts with part of productivity and a proton competitiveness on productivity.
It's never easy but it was quite easy to sense that starting point was to think about what is rib special. Also we've outlined some points of education system is not deducted competitiveness, we do the job because a tendency of the French is to compare themselves to Germany but you're not going to give it back to the German side.
Ideally you would like to have a common Report with the Germans on how to why is it so that in Germany you accumulate country the new area was a. So how can you continue that how to rebalance the two so you have the right to. Woke up with stiffness and more and more purchasing power at the same time so it's perfect but it's. And then what you do but wait is ideally you would like to have a. We on the wish differential between the two countries for why how to engineer that it is impossible to.
We would like to have some some direct discussions with at least the main at your area countries to coordinate our recommendation, where do I understand correctly that each county has a Monday to focus on on increasing productivity. But if we leave if each County focusing on competitiveness we might arrive at the European or the Eurozone suboptimal song. Action to understand what is competitiveness as a whole.
Absolutely so as far as price competitiveness is concerned it depends on two things and. Wallace. So if the short and medium-term AppleTV T candy candy considered, tt2 effect try to affect my liver. To try to enter the growth rate of wages and what's up what has been done in France with some chores. Is two cats social contributions for low pay jobs. And form not solo page or so and then the risk of course is that wages increase and. And then the company has no impact whatsoever on.
It has no impact on so you have to draw the line between the two. Thanks a lot for all the insights you share I would conclude that with a little bit of perhaps a width of Wishful Thinking let's assume that you are also that you are also. Advising the new leaders in the in the field of economy at the European level.
I think I'm in commission of gentiloni on economy and Christine Lagarde will soon take office at the European Central Bank, what would be the Kidde combination for a guy that and what would be your key recommendation for for Argentina. So I sent you the shoes not to despair. Look at the u.s. it took several decades to achieve monetary Union. So there were several twice and then it succeeded so between 6 and 8 at the end in the U area. And they should also broaden their.
Ariel thinking and maybe come back to some old ideas like the police remix when I try and Cisco I wish you something. I'll debate when you were you and your look at the recent text books about City, separation between fiscal policy and. With the monetary policy taking care of aggregate shocks and he could policy of idiosyncratic shocks.
And if it's not the case for different reasons so we have to wait, about this relationship between monetary policy and fiscal policy at the same time keeping an independent Central Bank. Thank you. Thank you for your attention if you found our conversation interesting so don't hesitate to share it on social media with the hashtag. Music.