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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Europe's quest for growth: which way forward
ARC 2011- New growth models for Europe
B russels, 21 November 2011
Ladies and Gentlemen, Dear Guests and Colleagues,
It is a great pleasure for me to welcome such a distinguished group of participants here at our annual research conference. We are set to discuss today new growth models for Europe.
Despite the necessity and urgency of crisis management – fire-fighting, if you like – nothing could be more important at this point than designing and pursuing policies to lift sustainable economic growth in Europe.
First, without a perspective of robust growth we cannot solve the current sovereign debt problems in a lasting, durable way.
Second, without growth we cannot provide our citizens what they need. In particular, the most vulnerable people among us depend most strongly on what only sustained, healthy growth can provide: jobs, essential public services, and social security.
Third, without a dynamic and growing economy, Europe would risk becoming irrelevant on the global scene, which would lead and further amplify economic decline.
The starting point could be better – no denying of it. The steady although modest economic recovery experienced since around mid-2009 has recently stalled. The proximate cause is the turbulence in the euro area sovereign debt market, while also a global slowdown of activity has contributed. As a result, no real improvement is projected to take place next year in the labour markets, and the economic standstill is also bound to slow down the improvement of public finances.
Some tend to interpret the slowdown as evidence of misguided macroeconomic policy: the EU has pursued excessive austerity which is now hitting back. I have to disagree with this diagnosis.
Our fiscal strategy has been gradual and across countries differentiated consolidation: fast consolidation has been demanded only from those under market pressure.
The fundamental reason for the turbulence in the sovereign debt market is that there is not trust in the market that some highly indebted member states can service their debt. The centre of the turbulence is Greece, but as we know also other members states have been affected.
If a country is excluded from the bond market or is required to pay unsustainable interest rates for its borrowing because of high debt, there is no real alternative to fiscal consolidation.
One simply cannot build growth strategy on accumulating more debt, when the capacity to service the current debt is questioned by the markets. One cannot force foreign creditors to lend more money, if they don’t have the confidence to do it.
Greece's dire situation is not due to excessive consolidation. At around 15 % of GDP so far, the fiscal effort is big, but no bigger than that of Latvia (16 %) and only slightly bigger than the Irish effort (12 %). Both Latvia and Ireland are on the path of recovery. It is also instructive to note that the bulk of Latvia's GDP decline of 22 % from the peak took place in the spring of 2009, i.e. before the major budget cuts.
In addition to the high debt level to start with, the key problem of the Greek economy is its currently limited capacity to create a strong prospect of medium-to-long-term growth. In the package of 26/27 October, the debt challenge is being addressed quite decisively. The focus must now be on both continuing the fiscal effort and intensifying the implementation of such structural reforms that can boost higher growth and job creation. The Commission’s Task Force is coordinating technical assistance for Greece with these objectives in mind.
Ladies and Gentlemen,
Improving the growth potential is key in solving the economic and social challenges in most EU member states that are currently under market pressure. It is not a substitute for fiscal consolidation, but a necessary complement.
Given the need to consolidate public finances and – in several countries – the continuing deleveraging in the private sector, short-term growth depends essentially on the prospects of exports and productive investment. The immediate questions thus would seem to be how to boost exports and improve the environment for investment, when throwing a lot of public money at the problem is not an alternative.
My hunch is that the answer to this will be pretty much the same as to the question of how can we in general create the right framework conditions for sustained growth and competitiveness, irrespective of which demand components are making growth to materialise.
A basic equation of national accounting in the dismal science tells us that GDP growth is the sum of the growth of labour input and the growth of labour productivity. Given that per capital labour input is bounded from above, and with our demographic trends very strictly bounded as well, in the long term all growth must come from improved productivity.
Therefore, the discussion about our medium-to-long-term growth is obviously a discussion about improving productivity.
But this should not lead us think that labour input, and in particular the employment rate, would be unimportant. Given the low level of employment in many EU member states, there obviously is large potential for a level jump in GDP per capita, if we only can mobilise the unused labour resources.
Attention to employment is important also for another and very obvious reason: it is very difficult to see how the fruits of stronger economic activity could be fairly distributed without a high employment rate. While a decent and fair distribution of income is – at least in my eyes – a valuable objective as such, the perception that all get a fair and decent share of the bigger cake is also essential for the political support, which is necessary for growth-enhancing policies.
The “Occupy the Wall Street” movement is making a valid point. But we need a consistent policy programme to that effect. I'm therefore very glad that fairness and prosperity is one the themes of today's conference.
But let's now turn to the question what it takes to achieve high labour utilisation rates and high productivity growth.
Ladies and Gentlemen,
The recent turmoil in Europe underlines the importance of stable macro-financial conditions. It is clear that in the current environment making long-term commitments is unattractive, be it hiring or investment decisions by firms, big-ticket purchases of households, or education efforts by individuals.
Therefore, restoring stability is a sine qua non for any meaningful policy for growth. While we have huge challenges in Europe in this regard, it is encouraging to see that restoring stability is on the way to succeed in some of the most badly hit EU economies, which is also showing up in growth performance. I mean in particular Ireland, Latvia and Estonia.
But, in parallel, we have to work on the key growth drivers. We pretty well know what is needed with regard to the labour input. Flexible wage formation, mobility of labour across sectors, occupations and regions, good basic education combined with life-long learning, avoidance of excessive tax wedge, sufficient incentives for the unemployed to seek employment, pension systems that discourage early retirement etc.
Many of the reforms needed in this area are politically difficult. For the sake of fairness, it is important to limit the distributional impacts; we need flexicurity, in one form or another.
Moreover, it is essential to be able to demonstrate that the medicine helps. There are good examples in this area as well.
The improvement of the Dutch labour market since the mid-1980s can rather directly be linked to changes in policy: wage moderation, and reforms to add flexibility in many dimensions of the labour market, preceded the reduction of the unemployment rate down by 7.5 percentage points from 1982 to 2000.
More recently, the strong employment and growth performance in Germany, following the labour market reforms and enhanced wage moderation initiated a decade ago, tells a similar story. Interestingly, the positive trends in German employment have not been associated with a weaker productivity performance.
As far as product markets are concerned, the literature underlines the importance of competition to eliminate inefficient production and to spur innovation. According to DG ECFIN model simulations, implementing a list of specific single market reforms would increase EU GDP by over 3 % by 2020. About half of that would come from the completion of the implementation of the Services Directive. Capitalising on our large internal market potential is particularly attractive in the current context, as it will not require additional public expenditure, but rather produces savings, e.g. by making better use of the EU-wide markets in public procurement.
Thus, a determined push to complete the single market agenda remains a priority for us. At the initiative of my colleague Michel Barnier, the Commission adopted last April the "Single Market Act", which spells out 12 concrete policy initiatives to that effect. Now we work on making sure that these are turned into reality.
While considerable potential for further catching up remains within Europe, pushing the technological frontier further is increasingly important. Increased competition, education in world-class universities, and strong R&D investment especially in the private sector, all these play a vital role to close the innovation gap vis-à-vis Europe's leading global competitors.
It seems that in many cases an overhaul of the innovation system as a whole is required for better results. Fragmented markets are a barrier in this area as well; and moreover, while some of Europe's "ollies" appear to be doing fine – I should explain, "ollies" are old leading innovators in established sectors – to nurture the "yollies" in innovation based new or “young” sectors such as ICT, bio-technology or medical services, is of particular importance. And there we lag badly behind the US.
Encouraging and enhancing innovation is not enough. It is also essential to ensure that innovation can be brought to the market by providing an environment that not only enables entrepreneurial risk-taking, but also rewards it better. Creating such an environment calls for continuous efforts to make business regulations as lean as possible, without sacrificing their legitimate societal objectives. It also calls for overcoming the hurdles that start-ups face in accessing adequate finance.
What I have said about growth drivers is my take of the recent policy experience and economic analysis. The emphasis is on improving the functioning of the markets, on the provision of public goods like stable macro-financial environment, and on inputs into the innovation process, mainly by financing and organising education and research.
I have not mentioned industrial policy, deliberately. Industrial policy in the sense of the government favouring certain "strategic" sectors by subsidies and/or regulatory measures has been out fashion for quite some time. For good reasons: trying to "pick winners" has not given good results. And of course the dire budgetary situation limits the possibility of subsidisation.
However, it seems that there is some new interest in the concept of industrial policy. I have in mind, for instance, the piece entitled “Rethinking industrial policy" by Philippe Aghion and his colleagues (Bruegel Policy Brief, June 2011). At this stage, I don't express strong views. But perhaps assessing whether there are grounds for such a rethinking could be one of the issues this conference could shed light on.
Ladies and Gentlemen,
Let me finish by noting that we are still very much in the mode of crisis management in Europe. Restoring macro-financial stability is the first priority, and fiscal consolidation is a key element of that policy.
But, at the same time, we must push for measures that enhance our growth potential. That will be the underlying theme in the second Annual Growth Survey, which the Commission will adopt on Wednesday.
For us to succeed in these efforts, the contribution of the research community is very important. Evidence-based analysis – whether it confirms the received wisdom or challenges it – is most welcome in developing appropriate policy designs and responses.
I wish you a stimulating conference, and I look very much forward to a summary of the discussions.