In an interview with La Tercera newspaper in Chile, IZA Director Klaus F. Zimmermann comments on Europe’s economic difficulties and the current debate on austerity and flexibility. He calls on European policymakers to abandon their ideologically motivated policy strategies in favor of evidence-based policymaking. Rather than relying on austerity or demand stimulus alone, they should consider fiscal consolidation and growth-oriented structural labor market reforms as two integral parts of a successful economic package to stimulate the economy. Read the full text of the interview:
La Tercera: France’s former economy minister Arnaud Montebourg criticized austerity as “unnecessarily extending and aggravating the economic crisis.” What is your take on the austerity/flexibility debate in Europe?
Zimmermann: I think that the current debate about austerity and flexibility is not very helpful. The question should not be whether the economic crisis can be tackled most effectively by “left” or “right” policies. Instead, the focus should be on specific policies that do or don’t make sense in the specific context. This should be judged by solid empirical evidence and not by ideological views. When adapting this method of “evidence-based policy making,” it is very likely that a policy mix turns out to be the best strategy. In most cases structural reforms are badly needed, but automatic stabilizers have to be allowed to work – so austerity is not a good strategy in a crisis. Austerity is used as a scapegoat to avoid painful reforms.
Spain has aligned itself with Germany around the issue of austerity. In your view, is Spain getting out of its economic difficulties by sticking to austerity policies? Is that the main difference to Italy, which is again in recession?
Italy is still talking about reforms while Spain has already undertaken some measures and now sees a strong rise in its economic growth. Spain has been heavily hit by the economic crisis and Italy is now facing a triple-dip recession. While even the US economy has grown by 27 percent since 2000, the Italian economy is now at the size it already had in 2000. In contrast, the German economy was remarkably resilient to the Great Recession. The German labor market was hardly affected by the crisis. Hence, Italy and also France are well advised to closely investigate the German model of labor market reforms and, importantly, adapt it to their own country’s needs. In this context, however, it is important to understand that Germany did not follow an austerity model. Instead, it was realized that optimizing the use of public resources to foster growth makes sense only if it is combined with structural labor market reforms.
With Germany’s economy itself slowing down, the euro area in worse shape, and given the deflation risks, do the calls for demand stimulus make sense?
It is certainly true that austerity is not a growth strategy. But similarly, a general demand stimulus is also not a growth strategy. I think that policymakers are well advised – not only in recessions, by the way – to regard fiscal consolidation and growth-oriented structural labor market reforms as two integral parts of a successful economic package to stimulate the economy. Implementing an intelligent combination of these two elements could certainly improve the current shape of the euro area – and also the shape of other economies facing difficulties. The European Union sits on billions of unused money for encouraging investments and fighting youth unemployment. Structural problems like youth unemployment will not be solved just by demand measures.
Where do you think the austerity/flexibility debate will ultimately lead?
I hope that the debate between austerity and flexibility will be soon replaced by a more helpful debate about policies that do make sense or not. The key question is: How do we get the countries under pressure to become more competitive? I thought that the time for ideological views dominating economic policy had already ended. But maybe I was wrong and the era of “evidence-based policy making” is yet to come. In my opinion, this approach would certainly lead to better policies and could increase overall economic welfare.