Relatively Easy Solutions for Europe

Moneybox
A blog about business and economics.
April 4 2012 3:11 PM

Relatively Easy Solutions for Europe

Obviously if there were a really easy solution to Europe's economic problems they would be solved already, but I don't think we should go too far down the path of "no easy solutions" here.

The best short-term solution, as outlined by Jay Shambaugh in a great Brookings Papers on Economic Activity essay (PDF) involves three new steps:

1. A pro-exports tax swap in peripheral countries where payroll taxes are slashed and the money is made up with higher VAT.
2. A pro-consumer tax swap in the core countries, where VATs are slashed and the lost revenue is made up with a combination of bigger deficits and higher payroll taxes.
3. A higher inflation target from the European Central Bank.
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One advantage of this mix of policies is that unlike random acts of austerity, it would actually help solve the problem! Another virtue is that while it's far from a pure win-win it at least gets us out of zero-sum international transfers. German export-oriented firms and their workers won't like this idea, but it's a huge win for German retirees and some classes of service sector workers. It gives Ireland, Spain, Italy, and Portugal a fighting chance to get out of debt not through "bailouts" but through a continent-wide policy mix designed to create jobs and raise incomes. There would still be plenty of long-term issues in play, but it would buy breathing space during which long-term reforms could be debating constructively as possible ways to raise living standards in Southern Europe rather than appearing as a plot imposed by shadowy actors in Berlin and Frankfurt.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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