Without decisive short-term action, Europe’s recovery might never get off the ground with economic, social and political consequences which would undermine the European integration project – and peace and prosperity for years to come – warns Fabian Zuleeg
While flaws remain in the European Monetary Union’s new governance structure with further steps still needed, the risk or threat of immediate and catastrophic collapse is off the table. This creates the much-needed space to deal with Europe’s dual growth crisis: low aggregate growth and a divergent economic performance of some countries, which are falling further and further behind.
The European Union needs to take action to get the real economy going. This need is a political and economic imperative, especially if the EU wants to avoid getting trapped in a low growth and high debt scenario with deflationary tendencies that would also imply, at best, a stagnating labour market. Not only would this be a loss of economic potential and a human tragedy for those trapped in unemployment but it would also favour political forces that will undermine European integration – as will be demonstrated by the populist anti-EU vote in the European Parliament elections in May.
What can be done? So far, there has been a strong emphasis on fiscal consolidation and structural reform with an asymmetric adjustment mostly carried out by the countries in crisis. Support has of course been offered from the European Financial Stability Facility and European Stability Mechanism as well the International Monetary Fund and indirectly from the European Central Bank.
But the focus has been ensuring that countries can continue to meet their debt obligations and to ensure the stability of the financial system, rather than boosting economic growth. Many have rightly argued that a stable macro-economic and fiscal environment with deficits under control creates conditions for growth and that reform of the financial sector is an essential step towards restoring bank lending – which is crucial for investment. However, while these actions are clearly necessary, they are not sufficient to restore growth.
Ideally, structural reform should boost growth in the longer term. By removing product and labour market imperfections there will be a greater incentive to invest and employ. Although, many structural reforms are in reality merely public spending cuts without a long-term growth-enhancing effect. Even if effective, they take a long time to work, especially with respect to employment. And if there is an absence of labour demand in the economy or a lack of available and affordable credit for private investment, even painful reforms might not bring the desired effect.
European action so far, such as the 2013 compact for growth and jobs, are supporting the recovery through – for example – the expansion of lending activities for the European Investment Bank. But the reality is that implementation is too slow and there is little in terms of new growth impulses. There is no convincing answer to the problem of high unemployment, particularly youth unemployment, risking the credibility and long-term stability of EMU. The ‘youth guarantee’ has too little funding underpinning it and there are serious doubts about its practical implementation, especially in countries in crisis. In the end, only a recovery in growth can boost employment levels.
It is time to revisit the idea of an EU-wide plan to boost growth: a new deal for the euro. This could include a dedicated investment fund – a new stability and growth fund of around 0.5 per cent of European gross domestic product, aiming specifically to deliver investment for growth in countries unable to make the necessary investments themselves. This would not be a bail-out but long-term investment – not a transfer union but an ‘investment union’.
Such an ambitious public investment programme should go beyond current plans for frontloading European structural and investment funds, project bonds and the ‘connecting Europe’ facility. More public investments financed by euro-infrastructure bonds and new financial instruments should be complemented by boosting private investment including through a European investment guarantee scheme to provide a form of insurance for excessive risks incurred when investing in crisis countries. The EIGS would create investment opportunities and help to boost sustainable growth and employment in Europe’s periphery, addressing the direct consequences of the crisis.
Such a new deal based on investment would help the entire continent. While targeted especially at crisis countries, it would also create opportunities for companies across the EU and attract global and European investments from pension funds, from companies that have amassed significant unused funds and from globally mobile capital. Most importantly, such a plan could create confidence in the union’s longer-term future, triggering investment and consumption and therefore truly setting Europe on a path of sustainable recovery. However, to do this, a new deal must go beyond small-scale action and repackaging of existing initiatives.
An ambitious new deal could be Europe’s ‘Befreiungsschlag’ – a decisive move to create a new economic trajectory. Without such decisive short-term action, Europe’s recovery might never get off the ground with economic, social and political consequences that would undermine the European integration project – and peace and prosperity for years to come.
Fabian Zuleeg is chief executive of the Brussels-based European Policy Centre think-tank