The best advice I received when taking up policymaking responsibilities in Turkey more than a decade ago was to take “a lot of time and care to develop and communicate the ‘narrative’ to support the policy program that you want to succeed.” The more that economic policy is subject to public debate – that is, the more democracy there is – the more important such policy narratives are.
The crisis faced by the European Union and the eurozone is a telling example of the need for a narrative that explains public policy and generates political support for it. A successful narrative can be neither too complicated nor simplistic. It must capture the imagination, address the public’s anxieties, and generate realistic hope. Voters often sense cheap populism.
European Central Bank President Mario Draghi provided such a narrative to the financial markets last July. He said that the ECB would do everything necessary to prevent the disintegration of the euro, adding simply: “Believe me, it will be enough.”
With that sentence, Draghi eliminated the perceived re-denomination tail risk that was highest in the case of Greece, but that was driving up borrowing costs in Spain, Italy, and Portugal as well. It was not a populist message, because the ECB does indeed have the firepower to buy enough sovereign bonds on the secondary market to put a ceiling on interest rates, at least for many months.
Central bankers, more generally, are typically able to provide short- or medium-term narratives to financial markets.
Central bankers, more generally, are typically able to provide short- or medium-term narratives to financial markets. US Federal Reserve Board Chairman Ben Bernanke provided his own by pledging that US short-term interest rates would remain very low, and the Bank of Japan’s new chairman, Haruhiko Kuroda, has just provided another by saying that he will double the money supply so that inflation reaches 2%.
While central bankers can provide such narratives to financial markets, it is political leaders who must provide the overall socioeconomic messages that encourage long-term real investment, electoral support for reform, and hope for the future. Central bank alchemy, to borrow a term from the US journalist Neil Irwin’s new book, has its limits.
Europe, in particular, needs a narrative of long-term hope that will trigger a real recovery. France is coming closer to the danger zone, and even Germany’s annual GDP growth is falling well below 1% per year. In the meantime, the easing of sovereign interest-rate spreads provides little comfort to the growing army of unemployed in southern Europe, where youth unemployment has reached dramatic heights – close to 60% in Greece and Spain, and almost 40% in Italy.
The narrative should address three essential questions. How can the European model of strong social solidarity and security be reformed, but endure? How can economic growth be revived and sustained throughout the EU? And how can Europe’s institutions function with enhanced legitimacy to accommodate countries that share the euro and others that retain their national currencies?
For starters, a revolution is required in the organization of work, learning, and leisure. Social solidarity, essential to European identity, can and must include longer work lives, but also more work-sharing, adult learning, and shorter average work weeks (particularly close to retirement).
Such flexibility requires the consent of all: employees must adjust to changing requirements; employers must re-organize their enterprises to allow more work-sharing, work from home, and learning intervals; and governments must overhaul taxes, income support, and regulation to promote a “flex-solidarity revolution” that encourages personal choice and responsibility, while remaining committed to social cohesion. This can lead to a better future for all, with citizens gaining better access to adult education, having more free time to pursue personal interests, and remaining productive and occupationally engaged far longer into their healthy lives.
Europe does not need Asia’s rates of economic growth. It can secure decent jobs and prosperity, with a sustained annual growth rate of around 2%.
Europe does not need Asia’s rates of economic growth. It can secure decent jobs and prosperity, with a sustained annual growth rate of around 2%. To achieve that, German voters should be told not that their country’s resources will forever flow to Spain, but that their wages can rise at twice the rate of the recent past without risking inflation or a current-account deficit, because Germany has the world’s largest external surplus.
Service-sector industries throughout the EU must be opened up. The countries with stronger fiscal positions should take the lead in a major pan-European skill-upgrading program. The number of pan-European scholarships should be doubled. School programs everywhere should aim to educate trilingual citizens.
Moreover, a full European banking union with shared resources for resolution should be created without further delay. The European Investment Bank, which received a significant capital increase in 2012, should add a large investment-support program for medium-size enterprises to its current operations, with a subsidy financed from the European budget to encourage first-time job takers for a limited period. Jobs and training for young people must be the centerpiece for the new growth pact, and projects must move ahead in “crisis mode,” rather than according to business as usual.
Finally, while monetary union obviously requires greater sharing of sovereignty, there should also be a “greater Europe” that includes the United Kingdom and others. This implies two-tier institutions that can accommodate both types of countries: the “euro-ins” and those that prefer to preserve their monetary sovereignty in a larger Europe built around a vibrant single market and common democratic values.
These interconnected visions can and must be realized if Europe is to thrive again. Together, they form a compelling narrative that European leaders must begin to articulate.
If Italy were to enter a phase of uncertainty, with shaky governments, with a new government, and be attacked on the financial markets, this would be a huge problem. Not just for Italy, of course, but for the rest of Europe. Italy is just too big to fail.