EU must find a third road to growth

This post appeared in the Danish newspaper Politiko (Berlingske Tidende) on 21 November 2014.

Economic growth in Europe is staggeringly low, investments are few and there is a lack of confidence in the future. In addition, the EU still needs to recreate 6.6 million jobs that were lost during the financial crisis. Austerity cannot end the recession. Because of this, expectations that president of the Commission, Jean-Claude Juncker, will reveal a 300 billion euro stimulus package next week are encouraging.

New investments are necessary for new infrastructure, roads, railways, cross-border power grids and high-speed digital networks to strengthen productivity. The EU member states should speed up the digital economy and build the fibre-optic highways that are necessary for successful competition in the global economy. Without these investments, Europe will fall behind the digital frontrunners from the United States, South Korea and Japan.

The launch of Juncker’s 300 billion euro stimulus package is a positive signal from the Commission, but the package will not be enough to lift Europe out of the crisis.

The funds will be distributed over three years and in actuality, the package is no more than 0.7 percent of European GDP and will only be sufficient in patching a few potholes. Experience shows that it takes several years from the when political decision to invest in infrastructure is made to when the construction is finished.

Just think of the Femeren Bridge, which will take more than 12 years from its legal-initiation to the completed construction. Europe’s decision-making and executive processes should be accelerated in order to create new jobs can faster and more effectively.

Innovation is necessary

The stimulus package cannot work by itself. Innovation in economic policy should accompany the package. For a while, there was hope that Mario Draghi’s activist methods in the European Central Bank and historical low interest rates would be the magic trick that could end the crisis.

At most, it has calmed the nerves in the financial sector and among the ministers of finance, but it has not boosted the real economy to a great extent. The European banks’ total lending has diminished by 740 billion euro.

Stricter capital requirements have led banks to become more stringent. Even talented entrepreneurs and innovative companies face difficulties in acquiring funds for new projects. Some are trying their luck with crowdfunding online, but in the big picture, online crowdfunding deals represent only small change that cannot end the crisis in Europe.

According to studies from the IMF, EU countries are under-investing at a rate of almost two percent of GDP, and in Germany and Italy, the erosion of the capital stock is visible. Motorways, railways and bridges are decay because even the most basic maintenance has been neglected. This hurts productivity and it could be costly in votes as well.

Eurobarometer polls show that when Europeans worry about the future, they are most concerned about high unemployment rates. A continued growth crisis will probably benefit Eurosceptics and protest-parties, but European governments run a serious risk if they allow the problems to go unsolved.

At the EU summit in December, at the latest, the European Council should agree on an offensive and ambitious stimulus package to address these issues properly. Jean-Claude Juncker has taken initiative and now the heads of state must show leadership as well. In order to make this happen, they must abandon their cemented positions.

Angela Merkel’s Germany has long defended the stringent path of austerity and financial discipline, while France and Italy have advocated for a more expansive finance policy.

We cannot wait five years

Some EU countries, like Germany, have the scope to increase their public sector investments and this should be utilised. Germany should spend more, while countries such as France and Italy should commit to structural reforms of their labour markets in 2015-16.

Think Tank EUROPA has calculated that the total economic scope in the EU countries, within the 3 percent limit on budget deficit, is almost 100 billion euro in 2015 alone. If efforts are made to make investing in facilities and maintaining European infrastructure more attractive to the pension funds, even more funds would be freed up for growth and employment. The EU countries should also agree to speed up the creation of internal markets for services, energy, capital and digital technology. This could help, as it did in the crisis-torn 1980s, to create a greater dynamic in the European economy. Europe must abandon its cemented positions and find a third road to growth.

It must be possible to strike a new European compromise – a Grand Bargain – based on a common growth plan that lifts investments, strengthens the internal market and secures structural reforms. We cannot wait five years for a solution.

Read the entire memo on a new growth plan for Europe here (In Danish).

Tænketanken EUROPA indtager ikke holdninger som organisation. Denne tekst repræsenterer alene – som alle udgivelser fra Tænketanken EUROPA – forfatterens/forfatternes betragtninger.