CAN EUROPE DELIVER GROWTH

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CAN EUROPE DELIVER GROWTH?

• Jacques PELKMANS
• Jan Tinbergen Chair, College of Europe, Bruges
• WRR (PM office, think tank), The Hague
• ISTANBUL, 12th Quality Congress, KALDER
• 15th October 2003, Economic Policy session

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Can Europe deliver growth?

• 1. GROWTH - central to the Rome treaty
• 2. DID THE OLD EEC DELIVER?
• 3. EU DEEPENING GROWTH
• 4. WHY EU-28 GROWTH IS DESIRABLE
• 5. EUROPEAN GROWTH TRADE-OFFS
• 6. DANGEROUS LIAISONS Luxembourg, Cardiff,
  BEPG
• 7. HOW EUROPE CAN GROW AGAIN

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GROWTH - Central to Rome Treaty

• 1956 -- SPAAK REPORT Growth Catch-up
• 1957 -- ROME Treaty Growth under conditionality
• CONSTRAINTS
• balance of payments (viz. IMF)
• (socially) harmoniousdevelopment
• tiny Social Fund
• farmers (fair standard of living)
• (regionally) balanced expansion
• note no environmental constraint, no
  regional funds
• GROWTH FIRST 3 out of 4 economic aims about
  growth!
• - Development, expansion and accelerated raising
  of standard of living

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GROWTH - Central to Rome Treaty (II)

• Means Instruments ambitious (at the time),
• Forgotten today
• France gave up indicative planning
• Italy exposed its developmental state
• Tariff/ quotas removal near-automatic
• deep anti-trust was courageous
• 2X external tariff cuts before 1970
• Strongly market-driven
• Interventionism receded
• CAP, initially no drag on growth (exit,
  productivity)

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Did old EEC deliver?

• YES, for fifteen years (58 - 73)
• no less than 4.5 annually
• industrial intra-EEC trade exploded at first
• 1958 - 1964 (annual growth)
• FRANCE 23 (!)
• Italy 27 (!)
• Germany 13 (!)
• road haulage grew double the rate of growth
• Japan still faster (from lower base)
• Catch-up with US

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GDP per capita at current market prices and PPS
1950-2000 EU-15 and Japan, US 100
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EU Deepening Growth (I)

• i. EU needed a crisis?
• external 2X oil shock
• currency mess
• rise Japan NICs
• internal first EMU not credible
• stuck beyond CU-plus
• budget quarrel, paralysis
• CAP costs rising steeply
• ii. Deepening, forget it
• UK exit referendum (1975)
• EMS, weak, with many outs
• Greece entry political, no credible
  implementation, little growth
• internal market no (tough) mother principle,
  and with vetos

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EU Deepening Growth (II)

• Leadership prompted by crisis
• iii. from bad to worse stagflation,
  eurosclerosis, huge unemployment,
• grey protection against NICs, even Turkey!
• iv. low-key turn-around
• Court Dassonville, Cassis-de-Dijon
• Council Internal market, standards, customs
• EP Court case against Council (it won!)
• Commission NARJES IM Paper 1984
• v. visions and decisions
• Non-Europe report EP (Albert / Ball)
• Commission IM White Paper
• Council IGC Single Act (QMV IM definition)
• Delors (cohesion) package

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EU Deepening Growth (III)

• vi. EC-1992, supply-side / consistency 7 years
• vii. leadership Maastricht
• EMU, near-automatic / credible
• subsidiarity / more cohesion
• new areas (CFSP- JHA)
• viii. consistency
• budgetary consolidation (with pain!)
• low inflation
• IM, opening externally

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EU Deepening Growth (IV)

• growth impact IM hard to verify
• Cecchini 4 1/2 - 6
• Monti (after) 1.3 plus (?)
• many effects not in methods
• temporary adjustment costs
• growth impact euro hard to verify
• budgetary clean-up painful
• disinflation painful
• long-run credibility highly positive
• absence of currency crises key (e.g. INV
  predictability)
• direct gains ( 1)
• indirect spill-over financial markets ( 1)
• micro-conditions below standard
• SO EU level delivered, problem elsewhere

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Why EU-28 growth is desirable

• Growth imperative differs
• EU-15, and Central Europe AGEING
• sustainability social model
• COHESION new MS ROM, BUL, TUR
• catch-up growth for decades
• All EU-28 GLOBALISATION
• permanent capacity to change
• ZERO GROWTH menace reform inertia price rises
  over time (viz. Japan)

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EUROPEAN GROWTH TRADE-OFFS

• i. growth via more debt NO
• ii. growth via US model neither necessary nor
  desirable
• iii. growth, with rigid labour markets,
  ILLUSION
• full status-quo in social
  protection
• short working lives / high
  pensions
• iv. growth, with a magic eEurope
  ILLUSION
• v. growth by greening GDP not the point
• vi. growth equity manageable
• vii. growth, from EU-level (Lisbon)? NOT AS
  SUCH, NOT AS TODAY
• viii.growth first and reform later FLAWED

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EUROPEAN GROWTH TRADE-OFFS (II)

• CENTRAL PROBLEM
• unwillingness - Member Stateslevel
• fear - market functioning
• AT EU LEVEL IM EURO follow-up strong
• Central Europe, with tough acquis, in
• CAP bad, but reducing problem
• EITHER, give ECONOMIC UNION precise role, OR
  address MEMBER STATES

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EUROPEAN GROWTH TRADE-OFFS (III)

• ECONOMIC UNION MEANS OR MUDDLE?
• MONETARY UNION
•          the euro
•          price stability
•          ECB
•          entry conditions
•          budgetary disciplines
• ECONOMIC UNION
• INT. approx./reg.l. cohesion Cardiff
• MARK. common policies - policy Luxembourg
• freedoms - transfers Lisbon processes
• mutual recognition _______________
• automatic stabilizers

Wide and deep integration
Positive measures/ coordination MS level
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Dangerous Liaisons coordination processes(I)

• UNIONS COORDINATION FEVER
• - EU VERSION OF OECD, BUT W/ COMMON GOALS
• - ECONOMIC UNION
• NOT ALLOWED TO FUNCTION, LET ALONE, TO
  FUNCTION WELL
• NOWADAYS, EU CANNOT
• alter EPL or early retirement
• liberalize (seriously) labour mobility
• go for minimum standards education
• coordinate national R D
• improve incentives for risk-taking
• take fiscal measures for growth
• reform domestic markets
• use a central budget (etc.)

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Dangerous Liaisons (II)

• LUXEMBOURG PROCESS
• not (really) an employment strategy
• controlled / throttled by vested interests
• hence, many taboos
• hardly any domestic-political resonance
• no sanctions, little else
• CARDIFF PROCESS
• domestic reforms M.S., well..
• no (strict) legal basis, no sanctions
• little transparency
• no domestic political resonance
• LISBON
• goal nebulous (too) far
• credibility? (like EMU-1 and APEC)
• deadline, without real programme without direct
  means
• some resonance of benchmarking
• BEPG ever read one? ever read implementation
  reports?
• Political leaders do not

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HOW EUROPE CAN GROW AGAIN (I)

• FIRST PRIORITY
• growth dynamos
• Central Europe
• Turkey
• acquis prospect critical
• avoid excuse culture
• SECOND PRIORITY EU-15 growth strategy
• given macro-economic stability
• given the deep IM
• no ad-hoc-ery
• CLEARLY, BOTH PRIORITIES INTERACT POSITIVELY

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HOW EUROPE CAN GROW AGAIN (II)

• CATCH-UP GROWTH essentially depends on
• i. market functioning (incentives
  competition) and openness
• ii. initial income gap
• iii. macro-economic stability / predictability
• iv. good domestic policies (e.g. education)
  institutions (FDI)
• v. no policy reversals
• PRE-ACCESSION EU MEMBERSHIP
• should greatly help i., iii. and v., and to some
  extent iv.
• TOUGH PRE-ACCESSION hegemonial, yet benign
• LESSONS A. Catch-up in EU is trend
• B. Bad policy / weak EU response
  can break trend

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HOW EUROPE CAN GROW AGAIN (III)

• SAPIR REPORT
• PREMISES GOOD microeconomic reforms first
• MS sense of shared ownership
• GROWTH AGENDA (MS not in mandate!)
• 4 policies for growth i. IM dynamic
  micro weak labour on EU
• ii. knowledge INV. OK,
  but too little, too weak
• iii.adapt SG pact good, but not
  essential
• iv.
  reform cohesion/ OK, not crucial,
  impact (?)
• help restructuring
• 2 modes of delivery v. better EU governance
  mainly sensible (but a-political!)
• vi. revise EU budget refreshing,
  hence vested interests
• radically
  balk impact small

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HOW EUROPE CAN GROW AGAIN (IV)

• A few other queries
• a. how to make the MS spend (much) more on R
  D?
• b. why not place 50 of all national (public) R
  D under the SAPIR agency?
• c. how to get business to keep R D here and
  spend more on it?
• d. how to (really) reform Europes 2nd/ 3rd
  levels of education (competitive, technical/
  math, geared for jobs)?
• e. Why Europe is weak(er) in risk-taking,
  entrepreneurship, innovation?
• f. Why is (cross-border) infra-structure not
  EU-driven?
• g. Why is labour-market reform possible in small
  EU countries, and not in 3 big ones?
• h. Why is the IM for services (bigger than
  industry agro fish) so hard? What growth
  impetus?
• i. Are the politics of subsidiarity bad for
  growth?