Transcript Marshall Plan the Answer?

Saving the Eurozone: Is a ‘Real’
Marshall Plan the Answer?
Nicholas Crafts
Marshall Plan: The Dream
• Idea of new Marshall Plan has enduring appeal
from Russia in 1992 through Greece in 2012;
iconic status
• Generally seen as lots of aid to ease current
pain and kick-start growth
• Specifically, today, to make fiscal consolidation
more acceptable and reward pro-Euro parties
Life in the Eurozone
• Is difficult for countries with competitiveness
and fiscal sustainability problems
• Deflationary fiscal consolidation might in
principle solve these problems but at high cost
• 1930s experience says ‘golden straitjacket’
untenable; devalue and default was the classic
recipe then
• Exit is tempting and could be contagious
The Political Trilemma of the World
Economy
Deep economic
integration
Golden
Straitjacket
Nation state
Global
federalism
Democratic politics
Bretton Woods compromise
Pick two, any two
Political Trilemma
• Suggests long-run trajectory is ‘deep
economic integration’ and ‘democratic
politics’: a fully federal Europe
• ‘Bretton Woods compromise’ (capital
controls) neither attractive nor feasible
• Marshall Plan to buy time
Productivity Growth
• Faster labour productivity growth could improve
competitiveness and fiscal arithmetic
• Pre-crisis productivity performance in
Southern Europe disappointing; a lot of
unrealized catch-up potential
• 2004 Accession Countries mostly did much
better
Pre-Crisis Productivity Performance
GDP/HW, 2007
($1990GK)
Y/HW growth,
1995-2007
TFP growth,
1995-2007
Greece
17.29
3.36
0.61
Italy
25.63
0.46
-0.20
Portugal
15.62
1.16
-0.63
Spain
23.50
0.48
-0.58
EU15 median
30.44
1.67
0.64
Czech Republic
14.51
3.87
0.79
Estonia
22.69
7.18
4.71
Hungary
10.66
3.08
0.21
Latvia
14.20
5.84
2.86
Lithuania
15.30
6.30
4.31
Poland
11.83
3.20
2.01
Slovakia
17.32
5.18
2.96
Slovenia
22.40
4.32
1.70
Supply-Side Reforms
• Generally agreed that ‘structural reform’ could
improve Southern European productivity
performance a lot
• For example, the standard OECD list: complete
the Single Market, strengthen competition, tax
and regulatory reforms, improve schooling (Barnes
et al., 2011)
• Most of this would pay off quite soon but is
politically costly
Marshall Plan: The Reality
• Aid flows quite small (2%GDP for 4 years) – cf.
the wish list of Greek politicians
• Direct effects on European growth very small
(Eichengreen & Uzan, 1992)
• It was a big success but worked as a Structural
Adjustment Program with strong conditionality
to promote pro-market reform – rather like the
Washington Consensus
Marshall Plan: The Details
• Aid allocated to meet balance of payments
needs and matched by counterpart funds
• Recipients signed treaties with USA committing
to financial stability and trade liberalization
• Membership of EPU mandatory
• Big indirect effects on growth – especially
through openness – Europe does not become
Argentina (De Long & Eichengreen, 1993)
A ‘Real’ Marshall Plan in 2012
• Would be a structural adjustment program with
conditionality targeting supply-side reform to
improve productivity outcomes
• This could be a ‘win-win’
• Would certainly not throw more money at
Southern Europe through speeding up/bolstering
EU Structural Funds spending
• Not a substitute for fundamental reform of EMU
Top 6 Structural Funds Allocations, 20072013 (% total)
Greece
Portugal
Transport
25.6
Human capital
23.7
Environment
17.5
R&D
21.8
R&D
9.3
Social infrastructure
12.8
Employment
8.0
Environment
11.2
Information society
8.0
Transport
8.9
Human capital
8.0
Regeneration
4.2
Structural Adjustment Programs
• Were a disappointment in the 1980s and 1990s;
key was to find ‘good candidates’ to lend to
(Dollar & Svensson, 2000); is Greece in this club?
• Need surveillance plus credible threat to punish
non-compliance – no reform, no more aid
• EU did have success with 2004 accession
process: a big prize and a credible threat to
withhold it (Schimmelfenning et al., 2005) but the SGP
experience does not augur well
Is a ‘Real’ Marshall Plan the
Answer?
• In theory, it could be part of the answer
• The arithmetic is not difficult but the politics are
• German politicians should be sceptical that the
conditionality can work and would be properly
enforced
• Greek politicians would not like it
Conclusions (1)
• The main role of a ‘Real’ Marshall Plan would be
to promote supply-side reforms that raise
productivity growth
• There is a lot of scope for rapid productivity
improvement that is not delivered by EU
Structural Funds
• A ‘Real’ Marshall Plan would be a structural
adjustment program with effective conditionality
Conclusions (2)
• If the example of the 2004 accession
process could be emulated, a ‘Real’
Marshall Plan could make a valuable
contribution to saving the Eurozone
• A gamble on this seems unlikely to be
attractive to Germany and the
conditionality is not what Greece wants