Saving the Eurozone: Is a

1
Saving the Eurozone Is a Real Marshall Plan
the Answer?

• Nicholas Crafts

2
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

3
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

4
The Political Trilemma of the World Economy
Deep economic integration
Golden Straitjacket
Global federalism
Nation state
Democratic politics
Bretton Woods compromise
Pick two, any two
5
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

6
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

7
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
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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

9
Marshall Plan The Reality

• Aid flows quite small (2GDP 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

10
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)

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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

12
Top 6 Structural Funds Allocations, 2007-2013 (
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
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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

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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

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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

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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