The two-handed groth strategy for Europe: Anatomy through flexible cooperation

Jacques Dreze, Charles Wyplosz, Charles Bean, Francesco Giavazzi and Herbert Giersch
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Francesco Giavazzi: University of Bologna

No 1988011, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: This article develops the international aspects of the two-handed growth strategy. Both the supply and demand side measures are reviewed. The need to work on both sides simultaneously is stressed, even if the specific topic of cooperation privileges the demand side. The report argues that inflation, while always a risk, should not be currently seen as a major issue. Accordingly, it concentrates on the fiscal and external constraints. These two constraints are strongly interrelated. Openness makes fiscal policy significantly less cost-efficient: the case for cooperative action stems from the possibility of internalizing the income flow leakages which may deter governments from working on the demand side of the economy as they make progress on the supply side. The benefits from cooperation are directly related to openness. In practice, this means that Europe can act autonomously, as it is relatively closed: the two-handed strategy does not need to be made contingent on cooperation with the US and Japan. On the contrary, cooperation within Europe is crucial. Yet cooperation is not synonymous with synchronisation and, in particular, different conditions across countries (inflation, public and external debts) warrant different policies. Flexible cooperation must rely on Germany, France and the UK taking the lead in staging a fiscal expansion to match advances on the supply side.

Pages: 48
Date: 1988-03-01
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