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February 5, 2013 7:00 pm
European leaders have started a discussion on German-inspired “contracts for competitiveness and growth”. The idea, to put it bluntly, is to bribe reluctant governments into changing their economic policies. It may backfire – and a better approach is available.
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The proposal put forward by the European Commission is that instead of exhorting governments in vain, and before a country reaches the point where it needs the IMF, the EU would support its reforms with temporary conditional transfers. It would agree with the government on a policy agenda and give grants in exchange for its implementation.
There is a case for such an approach. Reforms, even those most beneficial for society as a whole, are often opposed because they erode what economists call “rents”.
Those enjoying rents – for example because the market for their product is kept closed – have every reason to fight against change. Those who would benefit from reform are more numerous but unorganised, so they do not fight for it. To overcome resistance, buying off the rents may be an advisable option. However, countries in need of reform generally also suffer from weak public finances. Hence the idea of relying on other countries’ money.
From their point of view, it may be better to pay a bit now rather than a lot later. Lack of reform hinders growth and competitiveness and is likely to create financial trouble.
Yet there are objections. Buying off rents may be very costly. The politics of the proposal are awful. To negotiate domestic policy with international bodies is a humbling experience no government is likely to be keen on, unless forced to do so by markets. Opponents to reform would be quick to depict the government as Brussels’ lackey
There is a better option. Instead of telling governments what they should do, the EU should decide what it wants to do and should pay for it wherever needed, via new contributions from member states if necessary. But it should also state clearly that it cannot spend money on certain goals if the national government’s policies make its spending ineffective. So it should make spending for a given goal in a given country conditional on national policies not hindering the achievement of the goal.
Here is an example. Assume the EU wants to foster employment of older workers. It could introduce grants to national employment agencies to help them enrol unemployed people in their 50s in dedicated training and placement schemes. But it would be absurd to support such employment if national legislation discourages it through, for example, early retirement schemes or overly generous disability benefits. The same approach could be applied to other EU schemes, for example to foster labour mobility .
The difference with the competitiveness contract would be threefold. First, the EU would not be telling governments what is good for them. It would set its own goals and pursue them. Second, a scheme would not single out individual countries. Instead, it would imply a focus on some of them – a scheme intended to remedy long-term unemployment would necessarily target countries where long-term unemployment is high. Third, the attached conditions would not comprise of a laundry list. Rather, they would be targeted at significant roadblocks to the achievement of specific EU goals.
Such an approach would have defined goals and its effectiveness could therefore be assessed. It would also be more palatable politically than patronising contracts.
The writer is director of Bruegel, a Brussels-based think-tank
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