Juergen B. Donges

On 19 May 2016, the Rafael del Pino Foundation organised the Master Conference "European Economy. A bet against confusion", to be given by Juergen B. Donges, Emeritus Professor at the University of Cologne (Germany). Donges, Professor Emeritus at the University of Cologne (Germany).

Juergen B. Donges is Emeritus Professor of Economics and Director of the Institute for Economic Policy and the Otto Wolff Institute for Economic Studies, both located in Cologne.

Professor Donges was Vice-President of the Kiel Institute for World Economics and Chairman of the Commission for the Deregulation of the Economy, set up by the German Federal Government. From 1995 to 1997 he was a member of the German Federal Government Commission on Public Sector Reform and subsequently Chairman of the German Council of Economic Experts.

Juergen B. Donges is scientific advisor to several institutions and trustee of several scientific and cultural foundations, including the Fundación ICO, Madrid, corresponding academician for Germany of the Real Academia de Ciencias Económicas y Financieras, Barcelona. - Member of the Academy of Sciences of the Land of North Rhine-Westphalia, Düsseldorf and advisor to the Rafael del Pino Foundation.

Summary:

On 19 May 2016, the Rafael del Pino Foundation organised a lecture by Juergen B. Donges, Professor Emeritus at the University of Cologne. Donges, professor emeritus at the University of Cologne, in which he analysed the main problems of the European economy. According to him, the solution to these problems is affected by three types of confusion: the idea that it is condemned to a long period of stagnation; the idea, defended by the President of the ECB, Mario Draghi, that it is in danger of being plunged into a deflationary spiral; and the idea that fiscal consolidation policies must be ended. Well, these assertions are unfounded, and the policies that flow from them are misguided. At present, economic growth in the European Union is low. When such a situation arises, pessimism creeps in and the memory of the Great Depression immediately comes to mind, when the expression secular stagnation was coined. This is now being repeated because it is said that there is not enough scope for private investment in an ageing and shrinking population. The conclusion drawn from this diagnosis is that public spending policies must be put in place. The problem with this approach is that it only focuses on the demand side, while on the supply side there are the entrepreneurs, the workers, the students, the innovators. And from this perspective we have to take into account that the digital revolution, combined with the creation of a digital single market, is going to be a huge boost to productivity and economic growth. It will change the entire production system for the better. In this situation, it makes no sense to talk about stagnation. However, for this boost to happen, three institutional conditions must be met: that the United Kingdom does not leave the European Union, that the negotiations on the Transatlantic Trade and Investment Partnership (TTIP) are successfully concluded, and that the European single market is maintained, for which Schengen must be preserved. As far as deflation is concerned, a low inflation rate makes the ECB nervous, even though in such a situation there is no distortion of markets and no expropriation of citizens' purchasing power. And it is nervous because it fears that a deflationary process could be triggered. However, in a deflationary scenario, consumption would fall, and yet we are seeing that it is the main driving force behind Europe's recovery. Business investment is not falling either and unemployment is not rising, but falling, and new jobs are being created, all of which boosts domestic demand. Taking all this into account, it turns out that ultra-expansionary monetary policies were not necessary. Such policies are not effective, as the case of Japan shows, because what is needed in the European Union are structural reforms. Moreover, they generate perverse effects on public indebtedness, finance companies that have no future viability, create real estate bubbles, deteriorate the profitability of the banking and insurance sectors and are provoking currency wars. Therefore, interest rates should not be close to zero but around 2.5%. As far as fiscal consolidation is concerned, the main arguments against it are twofold. The first is that many countries are in an emergency situation as a result of the refugee crisis. This expenditure, however, is perfectly manageable. The second is the belief in the virtue of deficits to boost economic activity, forgetting that in an open economy public spending multipliers are very low. In this case, fiscal expansion evaporates and is a boost for other economies. In the case of Spain, the lack of fiscal rigour, mainly due to the autonomous regions, calls into question the country's credibility. The abandonment of fiscal consolidation by EU countries exposes the eurozone to a serious danger of implosion. To avoid this, public spending needs to be contained and tax collection needs to be made more efficient.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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