Saving the Eurozone: Is a ‘Real’ Marshall Plan the Answer?

Nicholas Crafts

Marshall Plan: The Dream

• Idea of new Marshall Plan has enduring appeal from Russia in 1992 through Greece in 2012; iconic status

• Generally seen as lots of aid to ease current pain and kick-start growth

• Specifically, today, to make fiscal consolidation more acceptable and reward pro-Euro parties

Life in the Eurozone

• Is difficult for countries with competitiveness and fiscal sustainability problems

• Deflationary fiscal consolidation might in principle solve these problems but at high cost

• 1930s experience says ‘golden straitjacket’ untenable; devalue and default was the classic recipe then

• Exit is tempting and could be contagious

The Political Trilemma of the World Economy

Deep economic integration

Nation state Democratic politics

Bretton Woods compromise

Golden Straitjacket Global

federalism

Pick two, any two

Political Trilemma

• Suggests long-run trajectory is ‘deep economic integration’ and ‘democratic politics’: a fully federal Europe

• ‘Bretton Woods compromise’ (capital controls) neither attractive nor feasible

• Marshall Plan to buy time

Productivity Growth

• Faster labour productivity growth could improve competitiveness and fiscal arithmetic

• Pre-crisis productivity performance in Southern Europe disappointing; a lot of unrealized catch-up potential

• 2004 Accession Countries mostly did much better

Pre-Crisis Productivity PerformanceGDP/HW, 2007 ($1990GK)

Y/HW growth, 1995-2007

TFP growth, 1995-2007

Greece 17.29 3.36 0.61

Italy 25.63 0.46 -0.20

Portugal 15.62 1.16 -0.63

Spain 23.50 0.48 -0.58

EU15 median 30.44 1.67 0.64

Czech Republic 14.51 3.87 0.79

Estonia 22.69 7.18 4.71

Hungary 10.66 3.08 0.21

Latvia 14.20 5.84 2.86

Lithuania 15.30 6.30 4.31

Poland 11.83 3.20 2.01

Slovakia 17.32 5.18 2.96

Slovenia 22.40 4.32 1.70

Supply-Side Reforms

• Generally agreed that ‘structural reform’ could improve Southern European productivity performance a lot

• For example, the standard OECD list: complete the Single Market, strengthen competition, tax and regulatory reforms, improve schooling (Barnes et al., 2011)

• Most of this would pay off quite soon but is politically costly

Marshall Plan: The Reality

• Aid flows quite small (2%GDP for 4 years) – cf. the wish list of Greek politicians

• Direct effects on European growth very small (Eichengreen & Uzan, 1992)

• It was a big success but worked as a Structural Adjustment Program with strong conditionality to promote pro-market reform – rather like the Washington Consensus

Marshall Plan: The Details

• Aid allocated to meet balance of payments needs and matched by counterpart funds

• Recipients signed treaties with USA committing to financial stability and trade liberalization

• Membership of EPU mandatory

• Big indirect effects on growth – especially through openness – Europe does not become Argentina (De Long & Eichengreen, 1993)

A ‘Real’ Marshall Plan in 2012

• Would be a structural adjustment program with conditionality targeting supply-side reform to improve productivity outcomes

• This could be a ‘win-win’

• Would certainly not throw more money at Southern Europe through speeding up/bolstering EU Structural Funds spending

• Not a substitute for fundamental reform of EMU

Top 6 Structural Funds Allocations, 2007-2013 (% total)

Greece Portugal

Transport 25.6 Human capital 23.7

Environment 17.5 R & D 21.8

R & D 9.3 Social infrastructure 12.8

Employment 8.0 Environment 11.2

Information society 8.0 Transport 8.9

Human capital 8.0 Regeneration 4.2

Structural Adjustment Programs

• Were a disappointment in the 1980s and 1990s; key was to find ‘good candidates’ to lend to (Dollar & Svensson, 2000); is Greece in this club?

• Need surveillance plus credible threat to punish non-compliance – no reform, no more aid

• EU did have success with 2004 accession process: a big prize and a credible threat to withhold it (Schimmelfenning et al., 2005) but the SGP experience does not augur well

Is a ‘Real’ Marshall Plan the Answer?

• In theory, it could be part of the answer

• The arithmetic is not difficult but the politics are

• German politicians should be sceptical that the conditionality can work and would be properly enforced

• Greek politicians would not like it

Conclusions (1)

• The main role of a ‘Real’ Marshall Plan would be to promote supply-side reforms that raise productivity growth

• There is a lot of scope for rapid productivity improvement that is not delivered by EU Structural Funds

• A ‘Real’ Marshall Plan would be a structural adjustment program with effective conditionality

Conclusions (2)

• If the example of the 2004 accession process could be emulated, a ‘Real’ Marshall Plan could make a valuable contribution to saving the Eurozone

• A gamble on this seems unlikely to be attractive to Germany and the conditionality is not what Greece wants