A Commitment to Shared Prosperity: The Next Chapter of Unity in Europe

IMF News, February 14, 2019

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A Commitment to Shared Prosperity: The Next Chapter of Unity in Europe

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• Published: February 14, 2019

Introduction

• Keynote speech by Christine Lagarde, Managing Director, International Monetary Fund, Munich, Germany, February 14, 2019.
• Occasion: 30th anniversary of the fall of the Berlin Wall; frames the question: Was the fall a beginning, an end, or a middle?
• Central theme: Restarting economic convergence across Europe to preserve the political and economic promise of the EU.

I. Economic and Political Success of the European Union

• Historical achievements and scale:
  • Europe’s postwar recovery since 1949 transformed into an integrated union over "seventy years."
  • The EU comprises "over half a billion" citizens and represents the "second largest economy in the world."
  • Including countries with free trade agreements, the trading bloc accounts for "over one-third of global GDP."
• Convergence outcomes (1993 to 2017 and beyond):
  • Real income per person nearly doubled in the Czech Republic, Hungary, and Slovenia (1993 to 2017).
  • Real income per person increased "by more than two and half times" in the Slovak Republic, Estonia, and Poland.
  • Real income per person "more than tripled" in Latvia and Lithuania.
  • From the mid-1990s to 2007: new member states’ real income per person doubled, and the original EU members saw a "42 percent increase."
• IMF role:
  • The IMF created a new lending instrument specifically designed to address needs of former communist countries.
• Setback:
  • The Global Financial Crisis paused convergence as the EU prioritized survival.

II. The New Challenges to European Unity

• Political and social headwinds:
  • Rise of populist movements questioning integration.
  • Migration from the Middle East and North Africa creating cultural and security concerns.
  • Pressure on the rules-based global trading order built over the past "60 years."
• Generational economic scars:
  • "1 in 4 young people in the EU are now at risk of being in poverty."
• Divergence within the Euro Area:
  • Convergence continued in central and eastern European member states, but between southern and northern Euro Area countries convergence "started to stall over the last twenty years."
  • Between "2008 and 2017," for the five southern Euro Area countries hit hardest by the crisis, average annual growth in real income per person was "actually negative."
• Imperative:
  • Restarting convergence and ensuring broad sharing of growth to restore faith in the European project.

III. Restarting Convergence Through Structural Transformation

• Overall approach:
  • National reform efforts are primary; the EU can support through technical assistance, budgetary support, and fostering cooperation.
  • Three reform areas highlighted: Labor markets, Business climate, Investing in innovation.

• Labor markets — findings and recommendations:
  • High unemployment in southern Euro Area countries:
  • In Italy, Greece, and Spain, overall unemployment is "between 10 and 20 percent."
  • Youth unemployment in those countries is "over 30 percent."
  • Northern benchmarks:
  • Germany and the Netherlands: overall unemployment "below 4 percent" and youth unemployment "less than 7 percent."
  • Constraints:
  • Insufficient investment in education and skills training.
  • Excessive burdens on contracting, hiring, and firing reducing employment flexibility.
  • Policy direction:
  • Reduce undue burdens on firms to hire and fire to unlock job prospects, especially for young workers.
  • Example:
  • Portugal’s labor market reforms increased willingness of firms to offer permanent contracts; "most of the strong job growth in Portugal over the last few years is driven by jobs featuring permanent contracts."

• Business climate — findings and recommendations:
  • Improve attractiveness to investors and reduce barriers to competition (professional services, retail).
  • Reduce time and cost of bankruptcy/insolvency procedures:
  • Resolving a corporate insolvency in Greece takes "about nine times longer than in Ireland."
  • Example:
  • Portugal reduced time to start a business from "almost a month" in the mid-2000s to "less than five days."
  • Policy direction:
  • Modernize and harmonize insolvency regimes and reduce administrative barriers to cross-border investment.

• Investing in innovation — findings and recommendations:
  • Under-investment in R&D across southern Euro Area countries:
  • R&D spending in Italy, Portugal, and Spain averaged "just over 1 percent of GDP between 2000 to 2014."
  • This is "less than half the level of R &D spending in countries like Germany and France."
  • Policy direction:
  • Facilitate venture capital financing, improve public-private cooperation on R&D, expand public support for innovation.
  • Potential impact:
  • In Italy, improving firms' access to financing for innovation and expanding public support for R&D "could raise GDP by 5 percent over the long run."
  • This would translate into an increase of "nearly 2,000 euros per year in the average workers’ real income."

• EU’s supporting role:
  • Provide technical assistance and advice.
  • Devote more resources to supporting reforms and innovation in the next EU budget.
  • Foster economic cooperation and ensure no new internal barriers, thereby building trust to accelerate politically difficult reforms (including climate commitments).

Conclusion

• The fall of the Berlin Wall is characterized as simultaneously "a beginning, a middle, and an end."
• Current moment (2019) requires "courage and creativity" to rekindle convergence and shared prosperity.
• If the EU recommits to its roots and shared prosperity, 2019 can mark "the start of an optimistic new chapter in the European story."

IMF speech text: As Prepared for Delivery by Christine Lagarde, Munich, Germany, February 14, 2019.

Content in this bundle

• Staff Discussion Note (PDF)

References

• Christine Lagarde
• Germany and the IMF
• Greece and the IMF
• Italy and the IMF
• Portugal and the IMF
• Spain and the IMF
• Speeches
• PRESS CENTER
• [continent’s next generation which is still suffering from the economic

scars of the global financial crisis](https://blogs.imf.org/2018/01/24/a-dream-deferred-inequality-and-poverty-across-generations-in-europe/)

• https://www.imf.org/en/home