Interest, Growth, and Income Distribution

Before the 2008 crisis, national fiscal policies were used passively within the European Union to reduce budget deficits and public debt, and the common monetary policy was used actively to control inflation via the interest rates. This policy mix represented the only form of macroeconomic policy coordination between EU member states. It was presumably conceived as a temporary arrangement in a transitional phase where a number of sovereigns were becoming subsovereigns. The crisis revealed the unsustainable character of this temporary solution in the absence of a new federal sovereign, a fact that was clear to many observers already before the creation of the euro. The crisis should raise awareness that the time has now come for a substantial reorientation of EU macroeconomic policy. The suggestion made here is that two complementary objectives should be assigned to EU macroeconomic policy coordination. First, fiscal policy should be coordinated around full employment deficits in a functional finance logic and in such a way as to exploit the working of Harrod's foreign trade multiplier so as to reach full employment at the EU level. Fiscal stabilization at the national level should be compensated by a budgetary impulse coming from a deficit created at the federal level or by an equivalent result achieved by the use of national fiscal policy instruments. Second, the rate of income growth should at the same time be targeted to exceed the rate of interest on government debt, the latter being sufficiently under the control of monetary policy. As it is well known, public debt sustainability problems disappear automatically in this case. Other targets established following the same logic could usefully complement these two objectives, such as the coordination of wage policies across the EU.