The spectre of stagnation? Europe in the world economy

Veranstalter: Institut für Makroökonomie und Konjunkturforschung (IMK) in der Hans-Böckler-Stiftung
Ort: Berlin, Best Western Premier Hotel Steglitz International
vom: 22.10.2015
bis: 24.10.2015

While the Great Financial Crisis has left its mark almost everywhere in the world economy, its regions have taken different paths in the aftermath. Europe, in particular, still suffers a prolonged slump with mass unemployment and outright deflation posing a threat to political and social stability of the European Union. Is stagnation the new normal for Europe? Why did some parts of the world recover faster after the crisis, while others did not? Are their paths economically, ecologically and socially sustainable or do they only mask a general trend towards stagnation? The conference discussed theoretical and empirical aspects as well as policy options. It also dealt with the implications of these developments for the economics curriculum.

During the three days of the conference that took place from 22-24 October 2015 in Berlin, more than 350 participants engaged in the discussions with the presenters of about 140 selected papers in parallel sessions and 9 keynote presentations.

Programme (pdf)

The introductory workshops on Thursday 22 October, featuring lectures on

attracted more than 120 graduate students interested in alternative approaches to macroeconomics.

The FMM’s focus on promoting young economists was also reflected by the active participation in the special parallel sessions where graduate students can present their work.

Theories of stagnation in historical perspective

In the first keynote speech, Roger Backhouse puts the ongoing discussion on secular stagnation into historical perspective. Tracing the idea back to the late 19th century economist Hobson, who outlined the role of underconsumption, excess saving and inequality in slowing down economic growth, Backhouse revisits the secular stagnation discussions by authors like Hansen, Samuelson, Harrod and Domar. In different ways these economists emphasised the role of technical progress, low population growth and the resulting lack of aggregate demand.

Secular stagnation or stagnation policy? Steindl after summers

Eckhard Hein criticises the mainstream's view of secular stagnation as the result of a negative real equilibrium interest rate. Arguing in a Keynesian spirit with particular reference to Steindl, secular stagnation is considered to be a result of shift in the functional income distribution, and oligopolistic organisation of industries, leading to excess capacity and reluctance to invest. This acts as a drag on effective demand and results in secular stagnation. Distributional policies and public investment can, however, overcome stagnation its tendencies.

Public debt and secular stagnation

In his keynote speech, Peter Skott discusses the role of fiscal policy and public debt with respect to secular stagnation. In models, where the unrealistic standard assumption of agents optimising up to an infinite horizon is dropped, fiscal policy is an effective tool when aiming at full employment, as it can sustainably generate the required aggregate demand. This rejects the standard claim, that there is a clear causal direction from high public debt to slow growth. Rather high public debt results from slow growth, austerity and rising inequality.

Discussion: Chair Heike Joebges

Stagnation in the Eurozone and the future of the Euro

Paul de Grauwe puts secular stagnation into the European perspective. Economic stagnation in Europe is the result of a misguided policy, which considers public debt, rather than boom-and-bust cycles reflected in private debt, to be the main cause of the crisis. The succeeding austerity measures inhibit growth, especially in the periphery. The design failures of the euro zone and especially the too restrictive stance of the ECB gave rise to a crisis of such a magnitude and consequently a redesign of the European monetary system and union-wide fiscal policy are required to solve the crisis.

Japan – Did economic success breed chronic stagnation?

William Garside analyses the Japanese experience with secular stagnation. Pointing to the roots of the Japanese stagnation in its institutional settings developed during the high-growth years after the second world war, he explains the inability of Japanese policy makers to restore growth after the crisis of the early 1990s. Both monetary and fiscal policy proved inadequate to the task, failing to address the problem of zombie companies and non-performing loans on bank balance sheets and to pursue expansionary policies with sufficient vigour.

The US Economy since the crisis: Slow recovery or secular stagnation?

Robert Blecker discusses US developments after the Great Recession. He shows that recoveries from the last two recessions have been sluggish compared to those of the previous decades. This problem's roots lie in insufficient aggregate demand caused by increasing inequality since the 1980s. Demand effects of stagnant and declining incomes at the bottom of the income distribution were temporarily cushioned by increases in household borrowing, but this gave rise to instability and the resulting crisis. Since then the profit share has been trending up but the investment share down. The underlying structural problems of inequality and austerity will need to be addressed in order to restore growth.

Discussion: Chair Katja Rietzler

Policies to avert stagnation: The crisis and the future(s) of the Euro

Mark Blyth criticises the political inability to solve the persistent economic crisis in Europe against the background of a deflationary environment. Ideological blockades and impotent institutions are the mutually reinforcing causes of European stagnation. The deeper roots lie in the structural change of the economic system since the 1980s, when neoliberalism emerged as hegemonic ideology. This ideology prepared the ground for austerity and resulting deflationary pressures and a strategy of all seeking to export their way out of trouble. Worryingly this is breeding populist and nationalist resentments in Europe.

A policy mix of equality – Led development and public investment

Özlem Onaran analyses the current problems of secular stagnation from a global perspective. At the core of global economic problems is insufficient demand caused by falling wage shares, because most individual countries, and the world as a whole are “wage-led”. Hence a strategy for global growth is to aim at increasing wages and thus the wage share, and the abandonment of policies focusing purely on national competitiveness. Financialization has broken the link between corporate profitability and investment. Reregulation of finance and higher public investment is required in order to crowd in private investment, in this way, reversing the declining trend of potential output growth.

Is monetary financing of public investment a way out of Europe’s stagnation?

Andrew Watt proposes the monetary financing of public investment as a growth strategy for Europe. In an environment which is constrained by the exhaustion of monetary policy and legal limitations on expansionary fiscal policy, he sketches a plan for sustainable growth meeting the social needs of European societies. It is argued that monetary financing of public investment – in which the ECB takes newly issued European Investment Bank bonds on to its balance sheet – would be essentially costless in a deflationary environment and can be expected to exhibit high multiplier effects. The independence of the ECB is maintained by making bond purchases subject to an inflation “trigger”.

Discussion: Chair Torsten Niechoj

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