Europe’s outdated growth model forces a rethink: rising instability, shrinking resilience, and new limits demand fresh heterodox ideas for a balanced, sustainable economic corridor.
It was a somewhat ambivalent feeling to receive news of Christine Lagarde’s diagnosis that Europe’s “growth model” is now outdated. While this diagnosis echoes a key element of heterodox critique on economic policy in Europe and, especially, the Eurozone – namely that its focus on achieving permanent current account surpluses is neither sustainable in the long-run nor able to produce inclusive growth – the underlying variables that led to this change in the communication of the ECB arguably also matter for a heterodox analysis.
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For one, wars and geo-political fractions blow holes in the European growth strategy – that worked well mostly for those European countries specializing in either finance or high-tech exports (see here) – as they bring rising energy costs and shrinking export markets. This constellation compounds with missed opportunities in industrial development (e.g. relating to the transition of the automotive industry), a pronounced lack of raw materials and a de-facto take-over of many foundational industries by China and other, mainly East-Asian countries. The resulting triple dependency on cheap foreign energy, imported raw materials as well as outsourced intermediate goods expose one blatant weakness of the European growth model, that is, a lack of economic resilience in the face of quickly shifting global value chains. This weakness also affects heterodox controversies – e.g. on the role of wage costs for export success (which was often assumed to be small in core countries, as exports were often seen as less price-sensitive, see, e.g., here and here for some controversy) or on how to reorient European industrial policy in the face of increasing and more encompassing tendencies for deindustrialization. Also the political establishment partially recognized the latter point as was evident in the “Draghi report”, published a little more than a year ago.
In my experience heterodox policy advice (including my own 😉) in Europe in the last decades often emphasized one out of two scenarios. The first one is roughly based on some form of ‘ecologically enlightened’ pan-European Keynesianism, coupled with redistribution and an industrial policy directed at fostering inclusive growth in spatial terms. This package might allegedly do the trick and bring Europe back on track by confronting both, upcoming challenges, like climate heating or increased digitalization, as well as structural sources of economic divergence within Europe. The other prevalent story gave a stronger spotlight to planetary boundaries and emphasized the need for a more fundamental restructuring focusing on a combination of changing consumption norms, large-scale replacements of fossile technologies and foundational economy services to ensure basic well-being in a time of increasingly prevalent limits.
Given the new constraints emerging over the past years, I am not sure whether these stories are still robust and valid. Indeed, I would expect that an even larger share of the population might see falling real incomes. As such reductions in real incomes are typically concentrated at the lower ends of the distribution, this development will run counter the essence of both strategies mentioned, also because the latter strategy does typically strive for greater equality in income as a precondition.
Against this backdrop, I think we have – just like some of our mainstream colleagues, who shift towards more heterodox positions in the face of crisis – to rethink traditionally held views and try harder than ever to find good answers to the question what could be sensible policy advice in a global environment characterized by increasing violence, inequality and uncertainty.
Personally, these changes circumstances have led me to put a stronger focus on the notion of a ‘healthy and sustainable corridor’ when talking about economic policy options. In my view, the notion of a corridor is not only a meaningful metaphor in public communication – in the sense of a possible alternative to the dominant imaginary that the economy is something that ‘grows’ 😉 – it also has the potential to conceptually integrate several dimensions of economic policy. In this spirit the idea of a corridor has an ecological dimension – as the corridor obviously resonates with concepts like a ‘safe space for humanity’ or the ‘doughnut’ –, a distributional dimension – as the corridor encapsulates the idea of acceptable minima and maxima in income and wealth –, as well as a behavioral dimension – as it redirects our focus towards living well within limits instead of transgressing them. The principle of a corridor also speaks to international trade and finance; it implies a focus on balanced foreign accounts and diverse, resilient as well as mutually beneficial economic relationships. Finally, related notions of resilience, balance and stability resonate with an Aristotelian perspective on welfare, that is, in many respects, consistent with heterodox views on well-being.
All in all, additional constraints do not imply that there is no way forward. But new circumstances might require us to rethink what our preferred intuitions, models and hypotheses imply under contemporary conditions. As someone smart allegedly said once: “When the facts change, I change my opinion. What do you do, Sir?”
All the best
