The basic paradigms of EU economic policy-making need to be changed

The anaemic growth of the European Union/euro area derives from its economic paradigms. The principle 'one size fits all' behind European Central Bank policy activates centrifugal forces. Diverging trends in unit labour costs, external competitiveness and external balances follow. German policy actively supports this. 'Excessive external surplus procedures' against countries generating large surpluses at the expense of domestic consumption (and the partners' rising debt) should be instituted. The Stability and Growth Pact needs modification. The 3% fiscal deficit/GDP mark may prevent automatic stabilisation. Insistence on the budgetary positions being 'close to balance or in surplus' lacks rationale. When the private sector's propensity to save is larger than its propensity to invest, that requirement cannot be observed. A permanent fiscal deficit may be a secular necessity. Problems related to rising public debt may also need to be addressed. For the euro area these problems could be rendered far less serious than often believed. Copyright The Author 2012. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.