Vermeend & Van der Ploeg urge European leaders to follow the American example and stimulate the economy.

Recent figures out this week show an economic recovery in the EU is unlikely to happen any time soon. The optimistic predictions of the previous weeks have turned to gloom. Most member states show little growth and some, the Netherlands included, are facing negative growth. Unemployment figures are averaging more than 10% everywhere.

A large majority of European leaders agrees this is the result of a policy of hard-hitting austerity measures which are crushing domestic demand. The cutbacks were meant to reduce the deficit and government debt. Have they? No, debt has risen and deficits have remained more or less at the same level. The consequences of this policy are nothing short of dramatic for the EU. International think-tanks also agree the present policy is putting the brakes on the economy when the emphasis should be on revitalisation and putting in place structural reforms.

Grip

Until recently Germany was seen as the powerful motor behind the European austerity drive. Now that it, too, is experiencing limited growth, its obstinate attitude towards government spending is slowly changing. It’s taking its time, however, so much so that the US has felt it necessary to tell Europe to get a grip. Obama’s administration is worried about the state of the global economy and thinks it will only recover if Europe, which accounts for a quarter of the global economy, implements measures to stimulate its own economy sooner rather than later.

The present level of real domestic demand in the eurozone is even lower than it was during the global crisis of 2009. In order to prevent long-term economic stagnation EU member states should agree on a joint stimulation and investment programme to get the economy back on track. The EU must press on towards a banking union which will restore the financial markets’ faith in the European banks and jumpstart credit flow to businesses.

Jobs

The Americans are right. Ever since the crisis made itself felt they opted for stimulation to generate growth. While this caused a considerable hike in the US deficit and government debt, it is expected the extra growth will reduce both over the next few years and create more jobs at the same time.

There are two Western manufacturing countries whose economies are performing well: the United States and Japan. Last year the Japanese decided to copy the American model and it’s working: according to the latest prognoses its ailing economy is expected to grow by more than 2%. Europe can’t afford to hesitate any longer. It’s five to midnight. European leaders must learn from failed policies and adopt the American model while there is still time.

Rick van der Ploeg is professor of economics at Oxford University and adjunct professor of economics at the VU University.

Willem Vermeend is an internet entrepreneur and professor of economics and e-business at the Maastricht School of Management (MSM).

This article was published earlier in the Financial Telegraaf