European economic governance: the Berlin—Washington Consensus

• Published in: Cambridge journal of economics Vol. 37; no. 3; pp. 479 - 496
• Main Authors: Fitoussi, Jean-Paul, Saraceno, Francesco
• Format: Journal Article
• Language: English
• Published: Oxford Oxford University Press 01-05-2013; Oxford Publishing Limited (England)
• Subjects: Berlin; Consensus; Constitution; Constitutions; Eastern Europe; Economic Development; Economic growth; Economic growth models; Economic growth potential; Economic inflation; Economic policy; Economic reform; Economic theory; Eurocurrency market; European Union; Eurozone; Financial economics; Germany; Governance; Government and politics; Keynesianism; Law; Macroeconomic policy; Macroeconomic reform; Monetary Policy; Neoliberalism; Output rate; Pareto optimum; Prospects for the Eurozone; Reform; Studies; Treaties; Washington; Western Europe; Europe
• ISSN: 0309-166X; 1464-3545
• DOI: 10.1093/cje/bet003

This paper argues that the European Union (EU) has gone further than any other country or institution in internalising the prescriptions of the Washington Consensus. Embedding neoliberal principles in the treaties defining its governance, the EU has enshrined a peculiar doctrine within its constitution. We further argue that this 'Berlin—Washington Consensus' has serious empirical and theoretical flaws, as its reliance on Pareto optimality leads to neglect the crucial links between current and potential growth. We show by means of a simple model that the call for structural reforms as an engine for growth may be controversial, once current and potential output are related. We claim that adherence to the Consensus may go a long way in explaining the poor growth performance of the European economy in the past two decades, because of the constraints that it imposed on fiscal and monetary policies. The same constraints have deepened the eurozone crisis that started in 2009, putting unwarranted emphasis on austerity and reform. Challenging the Consensus becomes a precondition for avoiding the implosion of the euro and recovering growth.