Reports 2010

Building Europe's economic future

1 December 2010

The first of two sessions considered future directions for European Union economic policy. According to Vanessa Rossi, Senior Research Fellow, International Economics Programme, Chatham House, “we have little idea what the European economy will look like over the next few years”. We will not know what type of Europe to project to 2020 until the European debt crisis has a “clear and credible resolution”, she continued. By 2020, many EU Member States will still be struggling to return to the Maastricht Treaty debt limit of 60% of GDP, she predicted.

Daniela Schwarzer, Head of Research Unit EU Integration, SWP, observed that there are continuing political tensions in Germany over the Greece bailout last spring. There are pending challenges to Germany’s participation in the bailout, asserting that it is not compatible with current EU law, which will be resolved by the German Constitutional Court next spring. A change in the EU legal structure may be necessary, Ms. Schwarzer observed.

There must be conditionality for any permanent bailout fund and “strong EU institutions to enforce the conditions”, she added. Germany still dislikes the concept of eurobonds but opinion in Germany may be moving toward acceptance of the idea of pooling euro-zone Member States’ sovereign debt up to 60% of GDP.

Europe has fallen behind other regions of the world and is “suffering from a long-term economic growth crisis”, said Fabian Zuleeg, Chief Economist, EPC. According to Mr. Zuleeg, this crisis is the result of several factors, including increased global competition for resources, particularly energy; increase globalised competition; and Europe’s aging population demographics that could lead to slower growth and “less economic dynamism”. The costs of EU Member States’ commitments for climate change mitigation could also reduce long-term growth rates, Mr. Zuleeg warned.

The current economic crisis exacerbates these problems. Government will have less money to invest in stimulating growth. Austerity plans now being implemented in many Member States “will reduce growth rates over a prolonged period”, he predicted. This will adversely impact labour markets. “Europe’s social welfare model is under threat”, Mr. Zuleeg added.

The Single Market is the principal tool at the EU level to promote growth. A “digital” Single Market, adapted to the Internet age, could add 4% to EU GDP by 2020, he argued. Europe also needs to be “open and welcoming” to foreign investment.

Jean-Claude Thébault, Director, Bureau of European Policy Advisors, European Commission, observed that the Lisbon Treaty added little to the Maastricht Treaty in terms of economic governance. The current crisis provides motivation to “finish Maastricht’s unfinished business”, he said. The crisis has helped to improve financial supervision at European level with new powers given to Eurostat.

We need to end the “domino effect” of the sovereign debt crisis, Mr. Thébault argued. This crisis is not a crisis of the euro; it is a global financial crisis.

In a globalised world, economic policy at the EU level is necessary, argued Matthias Oel, Special Advisor, Cabinet of President Van Rompuy, European Council. A key issue is how to make the EU’s voice heard. There needs to be an economic pillar along with the SGP, he added.

Mr. Oel noted that the EU’s recently announced growth strategy for the coming decade, Europe 2020, “can add value”. It seeks to promote a smart, sustainable and inclusive economy. The Europe 2020 strategy sets five ambitious objectives - on employment, innovation, education, social inclusion and climate/energy - to be reached by 2020. Each Member State will adopt its own national targets in each of these areas. Concrete actions at EU and national levels will underpin the strategy.

Quoting John Maynard Keynes, Carlos Altomonte, Senior Research Fellow, ISPI, reminded the audience “markets can remain irrational a lot longer than you and I can remain solvent”. According to Mr. Altomonte, Europe faces two interrelated problems, one short term – the current financial crisis, the other long term – slow economic growth. The financial crisis might be solved by approval of national budgets by the EU and the issuance of eurobonds, he suggested.

In the globalised economy, investors have options in regions other than Europe.  “Europe needs to fix its problems or investors will go elsewhere”, Mr. Altomonte warned.

The last two years have been hard for economic policy-makers, noted Olli Rehn, European Commissioner for Economic and Monetary Affairs. The Commissioner compared the months it took for Member States to agree to the Greek bailout last spring to the days it took them to agree to the Irish bailout in November 2010. The Ireland case shows that “Europe can now act decisively and effectively”, Mr. Rehn argued.

Europe will do what it takes to ensure stability, but “restoring confidence takes time”, he said.