Oct. 31 (Bloomberg) -- Nobel economics laureate Christopher Pissarides said officials weighing international assistance to indebted European nations should tame their demands for governments to shore up their finances.
“The troika should be softer on fiscal austerity,” he said in a speech at the British Academy in London yesterday. “More time should be given for structural reforms to work.”
The so-called troika of the European Commission, the European Central Bank and the International Monetary Fund are overseeing the progress Greece, Ireland and Portugal are making in meeting internationally agreed fiscal targets that were part of the countries’ bailouts.
For the currency union to work members are going to need a flexible labor market, said Pissarides, a professor at the London School of Economics. The problem is that the needed reforms may take about four or five years to have an impact on the economy, while fiscal austerity has an instant impact.
An insistence on austerity could produce an “immediate deterioration in the labor market that might undermine the whole reform process,” Pissarides said. “It’s like trying to cure a patient by making him ill, and in the meantime you might discover that the poor fellow has gone.”
In Spain, “there have been reforms in the right direction, they’ve moved quite a long way” by addressing permanent salary increases and protection to workers, he said. The time needed for reforms to take hold may be a matter of “how long it takes for unions to see that circumstances have changed.”
An alternative would be to switch some funds that have been put in place in the European stability fund to a European structural fund. The money could then be used to invest in countries “that are under scrutiny,” he said.
“Fiscal austerity could be imposed gradually as the economy starts reviving,” he said. “Otherwise there’s no prospect of anyone investing in those countries because who would invest now in countries that have been put so deeply into recession.”
In the U.K., the government has been trying to boost private job creation and reduce public spending. “They claimed cutting the public sector would do the trick, but it didn’t, it just sank into a second recession,” he said.
The economic issue that concerns him most is the question of what will revive economies in southern Europe and how that will affect cohesion in the continent, he said, adding that the social unrest that has characterized Greece for more than a year and is appearing in Spain may make its way to Italy.
“My main worry is what’s happening now in southern Europe may have a much longer-term impact on European integration,” he said. “When Angela Merkel visited Greece last summer, the reaction was completely unacceptable.”
Germany “obviously will have to contribute more money for the euro zone to be held together,” he said. “It only takes one German politician to say that they’re not going to do it, then financial markets will attack the euro immediately.”
Pissarides shared the Nobel economics prize in 2010 with Peter Diamond of the Massachusetts Institute of Technology and Dale Mortensen of Northwestern University in Evanston, Illinois, for research into the difficulties of matching supply and demand.
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