EUROPE MUST RESET THE CLOCK ON STABILITY AND GROWTH / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Europe must reset the clock on stability and growth

By José María Aznar

Published: Last updated: May 16 2010 20:09

Europe’s monetary union is in crisis once again. This is bad news since the common currency is one of the symbols of successful European integration. The challenge is to ensure that the euro continues to provide stability for all of its members. But for this to happen, Europe must understand the underlying cause of the crisis: overspending and policies that undermine economic growth.

This is not the first serious crisis in the eurozone. That was in 2002-04 and the players were different. At the time, France and Germany were not growing, unemployment in both countries was on the rise, and their public finances had deteriorated so that they were not complying with the stability and growth pact, the European Union’s fiscal rulebook. Paris and Berlin decided to change the rules of the game and relax the criteria for budget deficits. The pact was reformed to avoid the application of regulations on excessive deficits. It was a serious mistake that sowed the seeds of budget irresponsibility. Greece, but not Greece alone, took advantage of the new laxity. The eurozone is now reaping what it sowed.

EU should now admit its mistake and change course. A return to the original stability and growth pact, which included stricter sustainability requirements for public accounts, would send a positive signal to the markets and bolster the euro. Moreover, the EU should encourage national stability pacts for all member states.

The Union also needs to revitalise growth and job creation, which is only possible with a new Lisbon agenda of structural economic reforms. To be successful, this must be comprehensive and require strict compliance.

To strengthen the euro, the message must also go out that the financial aid package for Greece is not a “bail-out”, which goes against the idea and spirit of the European economic and monetary union, but is instead a repayable loan. Otherwise, moral hazard will undermine the euro’s credibility and reduce the incentive for governments to keep their fiscal houses in order.

Greece must implement profound structural reforms to shore up its public finances, meet its financial commitments and return the borrowed money to its European partners under the terms of last week’s rescue plan, agreed between EU finance ministers, central bankers and the International Monetary Fund. But similar austerity is needed from all countries in the eurozone, especially those receiving the most scrutiny from international investors.

Spain is one of those countries. The sharp deterioration of its public finances (from a surplus to a deficit of 12 per cent of gross domestic product in just two years) is of great concern. Spanish unemployment is again above 20 per cent, almost double the European average. Yet Spain is not Greece. It is a dynamic society with companies that can create millions of jobs.

Spain does, however, need to comply once again with the original stability and growth pact. It needs sharp cuts in public spending in a return to budgetary discipline, and a complete structural reform package allowing the Spanish economy to regain its lost flexibility and competitiveness.

Spain urgently needs: 1) large-scale labour reform to transform collective bargaining, deregulate labour recruitment services, lower taxes on employment and encourage the unemployed into work; 2) a new energy policy to avoid the shutdown of nuclear plants, deregulate markets and cut subsidies on unefficient renewable energy sources; 3) a bank shake-up, including authorising the investment of private capital in savings banks; 4) sweeping reforms to reduce the size of regional administrations and create a viable and efficient state; 5) changes to the state pension system to guarantee its mid-term and long-term sustainability; 6) deregulation to increase competition, including reforms to the welfare state and further privatisations of public companies; 7) tax reform to foster competitiveness. The government’s decision to raise taxes is a mistake that will worsen the crisis.

In the past 160 years no leftist government has been able to rescue Spain from an economic crisis. It does not look as if this age-old rule will be broken this time around either. The current Socialist government is incapable of resolving Spain’s problems and taking the necessary steps. Only a new government can do this. The sooner, the better.

The writer is the former prime minister of Spain

Copyright The Financial Times Limited 2010.