Three Key Challenges for a European New Deal: Is the EU about to change direction - and can it create jobs and growth if it does?

Is Europe about to embrace growth and job-creation, not austerity - and if so do the EU leaders who have been pushing austerity on the continent for the last two years or more know how to do that? And can they face down the financial markets if they do?

Kirsty Hughes writes this blog in a personal capacity

Is Europe about to embrace growth and job-creation, not austerity - and if so do the EU leaders who have been pushing austerity on the continent for the last two years or more know how to do that? And can they face down the financial markets if they do?

Some - this writer included - have been hoping that a Francois Hollande victory in the French presidential elections might change the tenor of the debate in the European Union and allow serious consideration of policies to tackle soaring youth and adult unemployment, instead of the downward spiral of growth- and jobs- destroying austerity policies currently in place. But in fact the political and policy dynamic is taking off even before the decisive second round of the French election takes place next Sunday - though influence in part by the arguments Francois Hollande has been making.

A new jobs-focused emphasis gains critical political mass

This new dynamic seems to have arisen as a critical mass of different pressures have finally forced the demand for a policy shift from the sidelines to the mainstream of debate - ranging from Hollande in his French campaign demanding a revision of the EU's fiscal/austerity treaty, to Italy's Mario Monti saying austerity alone is harmful, to the debate in Greece as their elections too take place next Sunday, to protests across many other European countries, the fall of the Dutch government, the pressure of the youth unemployment figures hitting close to or over 50% in Greece, Spain, Portugal, the fact that Spain is now being downgraded by the markets, teetering on the brink of a rescue package. What is surprising in many ways is not that this debate is finally coming centre-stage but that it took so long for that to happen.

And while Angela Merkel, Germany's chancellor, may not yet be ready to move, the German Social Democrats, led by Sigmar Gabriel, have also been pushing for this shift in focus to jobs and growth and supporting much of Francois Hollande's broad rhetoric.

But what can Europe do?

The shift in political attention and policy debate is welcome. But do European politicians and the EU have any of the real answers as to how to tackle the worst levels of unemployment in decades? The financial markets and debts have not gone away after all. And many of the EU's existing policies - it's employment strategy, regional and structural funds and so on - are inadequate to the task both in amounts of money and in the detail or focus of the policies.

Three Key Challenges:

(1) Will Europe focus on investment, industrial strategy and job creation in a green new deal?

For the last decade or two, the EU has focused on policies that support rather than take over from 'free markets', when it has attempted to help different regions of Europe develop or even to tackle unemployment black spots. That has led to policies focused on training, or on support to research and development, or to infrastructure projects such as roads (in remote regions where better roads are not necessarily needed or at all likely to create jobs). These have been the acceptable face of intervention - bitty, partial, low key, pro-free market.

But such policies will not turn around 50% youth unemployment or economies facing recession and low or no growth in the years ahead. Pushing down wages, deregulating labour markets, freeing companies from regulation - all these have been tried and championed in the EU for too long, and have not tackled the problems of diverging competitiveness across EU member states, nor done anything to ease or stop the current crisis.

What is needed is a set of policies put together in one coherent big new EU strategy - whether it's called an EU New Green Deal or an EU 'Marshall Plan 2'. Such a New Deal must be of a scale to kick start growth, create jobs across the EU especially in countries facing the highest level of unemployment, and improve competitiveness. That will mean strategic investment and jobs plans across the EU - including clear policies on what investments need to take place to push the EU towards having an internationally competitive economy that is also green and sustainable and that can compete in markets for green energy, other green products and in services too. The EU will have to answer quickly how much of that investment needs to be in different types of infrastructure, how much and how/where there should be subsidies for private investment, or joint public investment in key technologies or sectors. And rapid thinking is needed on how jobs as well as training can be subsidised in ways that create a macro- and micro-economic dynamic of growth, demand, and rising productivity without just creating inefficient or stagnant firms and sectors.

(2) Will it and can it invest the money needed?

The EU's total budget - for the EU not for individual member states - is only about 1.2% of total EU GNP. That goes on paying for the officials and the range of existing policies including the common agricultural policy as well as regional funds, development aid and so on. So a New Deal cannot come out of a bit of the existing budget - it's not enough.

A big boost to the EU economy through a well thought out strategy probably needs to be more like three times this scale to have an impact. 3% of current EU GNP would be around

€360bn - it's a lot of money but compared to the sums being pulled together for the EU's firewall/bailout funds, it's not impossible. But these sorts of sums would have to come from EU governments, investing together in an EU New Deal - Brussels does not have the budget or authority to go for that sort of radical plan.

Is that likely? The European debate may be shifting but the chances of getting these sorts of sums agreed look slim for now. But if the debate does focus onto a serious discussion of investment, jobs strategy and growth, it will need to consider these orders of magnitude and so consider what sums a mixture of bonds (including finally euro-bonds), government investment, taxes (a financial transaction tax) etc could deliver. Countries like Germany, Finland or the Netherlands will be loath to go this route - the real question is whether the ever-deepening severity of the crisis, and the changing political landscape, may shift political opinion in the coming months.

(3) Will the Financial Markets go along with a big EU policy shift?

Pie-in the sky many will say. Not only will EU politicians not agree on a shift to a much more interventionist economic strategy funded at a large New Deal scale but if they did the financial markets would create havoc, seeing austerity plans torn up.

But in fact, financial markets have been schizophrenic all along in this prolonged crisis - as well let us not forget as causal in the global financial and economic crisis since 2007. The markets on the one hand welcome austerity as it shows governments will get their bugdets in order and are reliable borrowers of money. But on the other hand, as austerity destroys growth and shrinks economies, then governments following these policies face bigger deficits and more problems in paying back loans, so markets downgrade them further, their borrowing costs go up, and all the problems intensify.

The only way out of that catch 22 is for EU governments firstly to act together - to say this is our coherent, committed strategic new approach to jobs and growth and competitiveness (and it must be a convincing strategy). Secondly, they have to have a convincing explanation of the various means of funding that new programme - with new taxes, eurobonds, and so forth - that mean that any increase in deficits are planned, controlled, and have a clear path to reduce again as growth takes off. Such a plan would not work if a single country adopted it, but if the 27 EU member states, or even just the 17 eurozone members, had a coherent commitment to such a plan, then the markets would have to really pause before they decided to run away and panic over the first strategic approach to growth not recession in years.

The politics of achieving this are major. But then so were the politics that got to the US New Deal in the 1930s and the Marshall Plan in the 1940s. Today in the US, there is a much less coherent approach but even so the US, and President Obama, have focused more on growth and jobs, than on budget austerity, and have the better outcomes on jobs and growth to show for it. Europe does have choices - and whichever path it takes, continued austerity or a New Deal will impact hugely not only on jobs and growth but on national and European politics including of the extremist variety for years to come.


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