Unity in Diversity: The Case for Europe
IMF News, June 17, 2016
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Bibliographic details
- Authors: Christine Lagarde Finance
- Published: June 17, 2016
Overview / Key messages
- Europe’s progress from conflict to peace and prosperity is the result of embracing the ideal of “Unity in Diversity.”
- Current challenges include worries about cultural identity, security, jobs, incomes, and living standards, which fuel calls for closed borders and economic nationalism.
- The speech argues that a united Europe remains the best path for prosperity and dynamism and that proponents of unity must present a renewed, inclusive perspective for citizens who feel left behind.
Historical and institutional achievements
- The European Union represents “the biggest innovation since the birth of the nation state in the Treaty of Westphalia in 1648.”
- Institutions cited: the European Parliament, the European Commission, the European Court of Justice.
- The Single Market:
- “more than 500 million” people.
- Generates “about a quarter of global GDP.”
- “Trade within the single market doubled to about 22 percent of combined GDP over the past two decades.”
- Helped create “almost 3 million new jobs between 1992 and 2008.”
- The Single Currency:
- Introduced “one market, one money.”
- “The euro has become a major reserve currency.”
- EU expansion:
- “Income per capita in ‘transition economies’ has risen from around 30 percent of EU15 levels in the mid-1990s to about 50 percent today.”
- Austria and other countries benefited economically from neighbors’ advancement.
1. Rising to Today’s Challenges
- Main contemporaneous shocks identified:
- The legacy of the Euro Area crisis.
- The record influx of refugees.
- The referendum in the United Kingdom.
- The legacy of the Euro Area crisis
- Crisis response principles: provide liquidity and restore banking health; address fiscal imbalances credibly; undertake structural reforms; use macro policies to support households and companies.
- Comparative advantage of nation states: centralized decision making and ability to fund support via broad-based taxation (implicit solidarity).
- Euro Area weaknesses: incomplete institutional structure, lack of political union, slow consensus-building, disputes about burden sharing, large differences in country risk spreads.
- Noted policy responses and progress:
- Creation of the European Stability Mechanism as a firewall.
- Substantial support and unconventional policies from the European Central Bank.
- Establishment of the Single Supervisory Mechanism as a step toward banking union.
- Remaining legacy effects and projections:
- “We expect only a modest pickup in growth from 1.5 percent this year to 1.6 percent in 2017.”
- Unemployment remains high; many public and private balance sheets are weak; incomes mostly stagnant; growing sense of inequality and fear that the next generation may be worse off.
- The refugee crisis
- “Last year, the number of asylum seekers in the European Union more than doubled to about 1.3 million.”
- Two economic points:
- IMF research suggests refugees “can provide a net gain to the economy without taking away income from native labor.”
- Rapid integration of refugees into labor markets and schools must be the top priority.
- The U.K. referendum
- The economic risks of leaving the EU are “firmly to the downside.”
- Membership benefits highlighted:
- Jobs and income gains from increased intra-EU trade.
- Trade and integration into European supply chains (examples: aerospace, car factories).
- Trade raised productivity and incomes through economies of scale and efficient specialization.
- Migration has contributed to the U.K.’s dynamism and record-high employment.
- Overall judgment: EU membership has made the U.K. “a richer economy” and “a more diverse, more exciting, and more creative country.”
2. Policies for a Prosperous and Dynamic Europe
- Overall framing: an aging Europe must compete globally (more than 7 billion people worldwide), and needs to “raise its game” to remain competitive.
- Lift potential growth (policy recommendations)
- Open economic structures to spur competition and encourage investment in new productive ideas.
- Specific actions:
- Lower barriers to entry in retail and professional services.
- Shrink the tax wedge on labor income.
- Improve efficiency of public administration to reduce business start-up costs.
- Develop a vibrant market for digital services and compete in the technological revolution.
- Establish a capital markets union to make it easier for startups to raise funds.
- Clearly articulate how TTIP and other trade agreements benefit the majority of the population (noting that “more than 30 million jobs in the EU—that is, one of every seven jobs—depend on exports to the rest of the world”).
- Boost economic resilience (policy recommendations)
- Strengthen crisis prevention:
- Simplify the Stability and Growth Pact to promote stronger enforcement of fiscal rules.
- Move toward a common deposit insurance scheme and a “fiscal backstop” for bank resolution—identified as vital, missing elements of banking union.
- Address moral hazard concerns by accelerating cleanup of bad bank loans, which have held back growth in some Euro Area countries.
- Make the monetary union more inclusive (policy recommendations)
- Increase risk-sharing and mechanisms to mitigate sharp swings in living standards.
- Role for a stronger center with means to support sectors and regions hit by cyclical downswings.
- Propose a centralized investment scheme to address common challenges:
- Refugee settlement.
- Adaptation to climate change.
- Investment in transport and communication infrastructure.
- Acknowledge weak public support in many countries for reforms and fiscal risk sharing, but emphasize the necessity of these reforms for inclusive growth.
Conclusion
- Europe is stronger when it stands together; the example of openness and tolerance (Hungarians and Austrians cutting through barbed wire in 1989) is invoked as a source of pride and strength.
- Immediate priorities: explain and underpin a united Europe with policy actions that work for all citizens and build a better and more prosperous union for the next generation.
Source: Unity in Diversity: The Case for Europe, by Christine Lagarde, Finance in Dialogue, Vienna, June 17, 2016.