Bring Europ out of economic anaemia, we can do it : Manifesto 2006 (English)

by « Money and Unemployment » (a French non-profit organization)

The European Union and the Eurozone countries in particular have suffered from a macroeconomic disorder for a long time. The root of the problem is inactive monetary policy and a regulatory environment that has not adequately adapted to new international trade conditions. However, it is not too late for Europe to show the world that growth can accompany sustainable development and international cooperation.

1-Persistent Economic Weakness.

Over the last five years the 15 original European Union member countries have experienced low economic growth -on average, about 1.5 % from 2001 through 2005. The growth rate was even lower (1.4 %) for the 12 Eurozone countries (sharing the euro common currency). Growth rates vary from as high as 4% to less than 1% for Germany, Italy and France. Clearly, the smaller member countries have no responsibility for this. Note that the world growth rate is 5 %. Although we do not consider GDP growth to be the best indicator of sustainable development and growth, it is useful in international benchmarking and clearly indicates that low growth is endemic in the Eurozone countries.

The Eurozone countries have the necessary ingredients-manpower, infrastructure, skills, and talent-to fill their needs and to combat this economic weakness that has led to countless other problems: Massive under-employment, social break down, low confidence, a feeling of powerlessness and a loss of trust in public powers.

The current economic context may lead to social, environmental, health and geopolitical crises. It could also be the first step on the path to the type of authoritarianism that followed the 1929 economic crisis.

2 – Monetary Policy.

Good monetary policy should be firmer than that which is exercised by the European Central Bank (ECB) today. First and foremost, it must lead to the end of financial market domination. It should go beyond combating inflation through the manipulation of short-term interest rates:

a) A Central Bank must serve its citizens and acknowledge the role the money supply plays in the economy and employment. Policy must be fine tuned to promote growth and control inflation.

b) Short-term interest rate changes are not enough to boost the economy; given the current state of severe economic uncertainty and massive unemployment that encourages people to over-save (20-25 million people are unemployed in the 15 Western European Union Countries).

c) As more new members join the EU, the ECB’s interest rate policy becomes even almost impossible. Low interest rates cause inflation (some would even say an over-heated economy) in countries with high growth rates and promote stagnation in slower-growing economies.

d) Since the ECB refuses direct intervention on the money supply, secondary banks, via lending policies, determine the money mass, which is clearly not optimal.

There is much money in the market to-day, but unfortunately it is just inadequately distributed. Some sectors, like real estate, have too much money and suffer from inflation, other areas are cruelly lacking in funds. Most notably, the Eurozone countries lack funding for the type of long term and low yield development projects that are absolutely necessary to confront the following challenges: Globalisation, increased competition from Asia, climate change and energy shortages. On a more general level, funding is needed for investments that promote sustainable growth.

This is all the more regrettable because an active monetary policy initiated by the Central Bank is being implemented in other major countries, this showing that alternatives can be carried out.

3-A Few Examples.

Below are a few examples of active intervention by a Central Bank (with political approval) in the country’s economic growth.

In the United State, it is evident that the Federal Reserve (« The Fed ») intervenes directly in the economy to promote growth and employment and that its actions go far beyond that of simply combating inflation. One only needs to look at the Fed’s monthly reports to understand this. The FED does not think twice about increasing the money supply with an annual purchase of roughly $40 billion in US treasury notes.  Interest rate policy, which has recently kept interest rates as low as possible, also supports this. To break out of the 2001 recession, the Fed progressively dropped interest rates to 1%, the lowest level since 1958. Recently, the Fed has progressively hiked rates in a manner that is clearly focused on preserving economic growth.

The Japanese Central Bank has always favoured growth, ignoring any form of economic orthodoxy. More recently, Japan instilled 0% interest rates. This was followed by a softening of monetary policy via Government Bond purchases to the point where bank reserves grew to the current level of 35 000 billion yens (300 billion USD), well over the required reserves of 6 trillion yens. The Central Bank consequently ensured that the money supply was sufficient for economic growth.

Despite global pressure to do otherwise, the Chinese Central Bank continues to keep the Yuan undervalued as a way of making Chinese exports more competitive on the world market, with obvious economic success.

4 – The Eurozone countries must meet the challenge.

The following measures should be implemented without further delay:

a) The European Central Bank’s mandate must be extended to cover the following:

o Set short-term interest rates as it does today

o (And this is what is sorely lacking today!) The ability to create money that will be used for investments in the Eurozone countries, other EU member countries or by national or international development agencies (that conform to a set of specific criteria set forth by EU officials).


b) Funds created by this new policy would be distributed by the European Central Bank to organisms responsible for promoting sustainable growth, innovation and job growth/creation. This would be accomplished within the framework of long-term projects overseen by the EU Executive.

The competent authorities that would determine appropriate investments would be either national governments or the EU Executive.


5 – How will Euro exchange rates with the rest of the world and preference to EU members be managed?

The success of any growth stimulus policy will depend on the export level of the Eurozone countries and the whole EU 25 to the rest of the world. Any policy that merely boosts consumption and yet ultimately leads to an increase in demand that is satisfied by imported goods is worthless.

Currently, however, and in spite of the weak growth rate that we have already addressed in the previous paragraphs, export levels from the region have never been weaker and more worrying. Exports from the Eurozone have dropped over the last 12 months from €53 Billion to €  43 Billion from December 2002 to June 2006 (source: Banque de France).

This drop cannot be entirely explained by high petrol prices or even by a lack of competitiveness. European countries, and the Eurozone even more so, are vulnerable to relocations to Asia, specifically China. Chinese exports of low cost manufactured goods increase year after year, with an even larger range of products sent abroad. If participation in international free trade continues to diminish Europe’s ability to compete, several countries and entire regions may see the demise of whole sectors of the economy (ie: the textile industry) and they will suffer the consequences that go with it.

Because any policy to promote growth will be compromised by this excessive competition, Europe must react by promoting appropriate currency exchange rates and a so-called « EU preference ».

Floating exchange rates are an integral part of international laissez-faire capitalism. The US Dollar has been devalued and the Chinese Yuan even more so, leading to an un-level playing field in international trade. We are not calling for a return to fixed currency rates dictated by a centralized authority, but rather a new mechanism that encourages fair trade through a two tier system:

a) Currency Trades Tax:

Countries that wish to do so will be invited to enter into a system of flexible exchange rates in which prices are set to avoid currency speculation (characterised by rapid, intense trading). This tax on currency trades is known as the CTT and would be levied in the country of delivery:

o The tax rate would be about 0.1% on trades executed within the authorized band (varying 2%-3%).

o If a currency trade is executed at a price outside the band, the tax will be much higher-up to 100% higher during a severe economic crisis.

Member countries will implement an advisory body to set the target exchange rates.

While waiting for this system to be implemented, the ECB should take the necessary steps and stop the freefall of the dollar. Unfortunately, the ECB has thus far refused to intervene.

b) Return to a Trade System that Favours Inter-European Union Exchanges:

The EU should levy import duties on goods emanating from any country that either refuses to cooperate with a reasonable currency exchange rate system or practices economic dumping that puts European jobs at risk. Duties should also be increased on the specific goods and products that exacerbate trade imbalances. This system would simply comply with the « Treaty of Rome » which calls for preferential trade conditions for transactions between member countries of the European Union.

The conditions set forth by the « Treaty of Rome » have been set aside due to GATT and WTO agreements (whose main goal is to drop trade tariffs) that have dismantled trade barriers. The failed « Doha Round » demonstrates the extent to which several countries have reservations (especially for agricultural goods) about applying an irrational dogma rather than a rational way of dealing with world trade.

  The European Union should move towards a system that favours more balanced trade, while at the same time avoiding the implementation of an overly protectionist system. Import duties should remain realistic, maintained to promote balanced trade and address the most ostentatious forms of dumping. Import duties would become an arm in the combat against imports from countries with extremely low wages that threaten the very livelihood of the European industrial and services sectors.

The implementation of a Social VAT (should it be enacted for fiscal reasons) would render European products more competitive, at least temporarily.

This policy should incite regional groups of countries to cooperate and implement laws that would encourage solidarity in productivity, human and environmental development. Free trade or quasi free trade could exist, because the playing field would be level. Further solidarity could be achieved by promoting technical, financial and monetary cooperation.

The World Trade Organisation should change into a body that we will hypothetically call the « World Competition Organisation »   with a mandate to arbitrate in unfair monetary policies, and encourage fair customs duties.

6 – A Better Understanding and Control of Inflation.

No monetary policy should lead to higher inflation. Over the last few months, the rise of the Consumer Price Index for the EU has been very low.(1) Moreover, the ECB does not anticipate an increase in inflation, except in the real estate and quoted securities sectors.

A pick up in the economy would lead to a growth rate between 2.5%-4.5% and would not cause a significant rise in the inflation rate if the following is adhered to:

a) Sufficient internal and external competition. Most notably, imports should be fine tuned to conserve adequate competition in the concerned markets.

b) Authorities must increase their surveillance of prices, excesses and shortages that could lead to higher inflation.

c) The same type of market surveillance should be extended to the job market, while at the same time increasing dialogue and training.

A sharp increase in petrol prices could limit this optimistic outlook. However, the risk exists anyway and is not higher with high growth. On the contrary, by continuing on the path towards economic expansion, higher revenues will compensate energy price increases.

(1) From 1.3% to 1.6% per year from 2005 to mid 2006 for the CPI ex-energy and from 0.7% to 1% for the over-all CPI.