Europe's Growth Challenges
IMF News, November 19, 2010
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Bibliographic details
- Authors: Dominique Strauss-Kahn
- Published: November 19, 2010
Overview
- Speech delivered by Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Frankfurt, November 19, 2010.
- Main theme: how to ignite and sustain economic growth across Europe to preserve the postwar European model built upon peace, growth, and social cohesion.
- Diagnosis: Europe faces a serious growth problem magnified by the global financial crisis; inadequate euro-area governance and slow cooperation have exacerbated the downturn and recovery.
European growth — findings
- Historical context:
- Europe enjoyed stellar growth in the decades after the war driven by technology catch-up, a stable macroeconomic environment, growing European integration, and a strong banking system.
- Gains stalled in the early 1980s.
- Labor market and social outcomes:
- Living standards have stopped improving because citizens are not reaching their full potential; work fewer hours is a conscious social choice but has a dark side.
- Unemployment in Europe is chronically high; employment participation is persistently low—especially among women, older workers, and the young.
- Labor market institutions tend to reward privileged insiders at the expense of excluded outsiders.
- Risks of a "lost generation" distanced from the labor market with long-lasting income loss, worse health, higher mortality, lower children’s educational attainment, and faltering beliefs in institutions and democracy.
- Productivity and competitiveness:
- In southern Europe, productivity is lagging; infrastructure, innovation, and labor skills are not up to par; entry barriers are large in some sectors.
- Financial sector shortcomings:
- Over the past decade, the financial sector focused more on sophisticated innovation and less on being a true driver of economic growth.
- Difficult for start-ups to obtain funding; small and medium-sized enterprises are first to be cut off when pressures arise.
- Crisis amplification and governance:
- The euro area suffered from a deeper recession than elsewhere in the world—even the United States—and is slower to bounce back.
- Close financial integration means problems with banks or sovereigns in one part of the euro area quickly become problems for all.
- Area’s institutions were not up to the task of managing the crisis; setting up temporary solutions was a drawn-out process; sovereign crisis is not over.
- The wheels of cooperation move too slowly; repairing the financial sector is taking too long because of insufficient attention to the pan-European dimension.
Reform agenda — policy recommendations
- Immediate priorities:
- Fix the financial sector first: ensure banks have sufficient capital to support growth without incurring excessive risks.
- Implement decisive tools for dealing with problem banks, better supervision, and better crisis resolution procedures.
- Use Basel III as a landmark for stronger bank capital standards.
- Support demand while recovery is weak:
- Take initial steps that support demand where possible.
- Pursue credible medium-term fiscal consolidation with the pace tailored to country circumstances.
- Make job creation a priority: "Growth without jobs is growth without value."
- Financial sector orientation:
- Reorient the financial sector to nurture growth and support small businesses.
- Reduce overreliance of small businesses on bank financing; expand venture capital markets.
- Labor market reform:
- Launch a "Single Labor Market" initiative at the European level as a sequel to the "Single Market" initiative.
- Create a level playing field for European workers in labor taxation, social benefits systems and portability, and employment protection legislation.
- Research, education, and innovation:
- Devote more resources to research and education; the euro area lags the United States in publically- and privately-funded research and development.
- Consider transferring the research and university budget to the EU level as a more radical approach.
- Rebalance growth across the euro area:
- Address internal imbalances: current account deficits in some countries need to shrink while growth in surplus countries (for example, Germany) must become more domestically driven.
- Immigration and demographics:
- Adopt a less restrictive approach to immigration to address projected labor force declines and skills shortages; use immigration to help make the social model more sustainable.
- Fiscal instruments and central resources:
- Increase centrally-allocated budgetary resources beyond the current EU budget constrained by the Treaty.
- Use more transparent EU-wide instruments—examples cited include a European VAT, or carbon taxation and pricing.
Center-driven agenda — institutional proposals
- Rationale:
- Large-scale challenges require collaborative, center-driven approaches; when driven by the center, European agendas (single market, monetary union) have succeeded.
- Peer pressure has not served Europe well; the center must seize the initiative in financial, economic, and social policy.
- Possible institutional moves:
- The most ambitious, extensively discussed academic solution: create a centralized fiscal authority with political independence comparable to the ECB to set each member’s fiscal stance and allocate central resources to hit stability and growth targets.
- Given political constraints, alternative steps:
- Shift main responsibility for enforcement of fiscal discipline and key structural reforms away from the Council to reduce narrow national interest interference.
- The Commission could play the enforcement role within the existing institutional context; a separate, independent institution could also work.
- Expand centrally-allocated budgetary resources and adopt EU-wide instruments as noted above.
Conclusion
- The postwar European project replaced conflict with cooperation, producing rising growth, prosperity, and social cohesion—gains now threatened by low growth, poor employment prospects, and growing economic divergences intensified by the global financial crisis.
- The only answer is more cooperation and greater integration: fortify the economic foundations of the union, finish the job of deeper integration, and realize the common destiny of Europe.
Speech: "Europe's Growth Challenges," By Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Frankfurt, November 19, 2010.