Central bank interventions and the cheap money on their own will not solve the problem of Europe and other developed regions – it will not initiate regular economic growth. Nobel Prize winner Michael Spence, economics professor at Columbia University, and Stern School, recommends America and Europe to carry out enormous investments that are based on state of the art infrastructure technology and support community objectives, with their significance reaching beyond the borders of their country. He believes, executing and maintaining them will generate massive income and growth within relatively short time.
Michael Spence said in the interview he gave to Peter Zentai, potentials that lie in the relationship between public and private sectors must actively be assisted and exploited. Worldwide, the era of minimal growth is likely to be long-lasting. Major economies in the current setup are on a razor’s edge: potential demand is still generated by investments based on borrowings that do not aid stable, long-term growth. This scenario also includes the risk for an economic crisis, similar to the last one. As it was seen in recently, the main ‘heritages’ of such crises are the falling asset prices and a decline in household spending – increasing their savings. This formula eliminates any chance to initiate stable growth.
The unorthodox politics of central banks of the major economies dropped yields – and interest rates as well. For this reason, bigger portion of the savings are moving to assets that promise greater pay-offs, though including continually increasing risks and generating less significant demand.
The unusual central bank interventions contributed to credit deterioration and improved the quality of the financial system, essentially strengthened investor confidence. However, on their own, they are not enough to initiate a stable growth. ,,It has been proven that expansionary monetary policies do not achieve their goals; if politics ‘steps aside’ and does not finish the structural reforms, it will not liberate labour market.’’ – says Spence. ,, I grew up in a Hungarian neighbourhood in Canada. My favourite dish is stew. I learnt how to make the original, real stew. It is going to be perfect, only if we thoroughly pay attention to the balance of ingredients, and do not leave out any required spice or else. I am going to try use stew as a metaphor: in order to initiate stable growth and create more jobs so demand is generated, the ingredients must be distributed in proportion. The ingredients of ensuring stable economic growth are the following: monetary easing by the central bank, structural reforms, breaking down bureaucratic regulations that hinder economic operations, eliminating favoured groups’ privileges, and politics-driven enormous investments within the public sector that can also integrate the private sector.’’ – said the Nobel Prize winner economist.
Michael Spence also mentions the experiences of Hungary and the other ‘ex-communist’ countries, saying that in comparison to capitalist countries, they used to spend more of their national income on governmental investments. However, as it turned out, it did not make their economies any more efficient. They missed the market, the private capital, and the freedom from their ‘recipe’. This is why they were defeated by the market-centric world. Communist China, however, managed to survive by deciding to continuously add supplementary ingredients at an increasing rate. It intentionally marketized its economy, but never failed to emphasise public investments.
The expert deems it dangerous that western countries can only achieve minimal growth – and by the stagnant demand and productivity they hold back the rest of the world as well.
The ‘recipe’ of Europe’s success, minimizing separate national fiscal policy is crucial. They should be planned and organised internationally. In Europe, it would be extremely important to create higher quality monetary policy and a European bank union.
These factors are able to filter corruption mechanisms from the system efficiently.
,,I would like to advise Europeans: like it or not, they must be patient, because numerous structural reforms progress very slowly, and their execution is extremely complex and requires sacrifices. However, such opportunities are not to be missed…’’