The Solution Is More, Not Less Europe

IMF Blog, July 19, 2011

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The sovereign debt crisis is a serious challenge requiring a strong and coordinated effort by all involved to finally put it behind us.
Surviving the storm will be of little consequence if the euro area becomes trapped in a prolonged period of low growth.
Comparative growth performance (1995–2007):
- Germany: 1.5 percent per year
- Sweden: 3 percent per year
- United States: 2 percent per year
Risk horizon cited: many experts fear that without reforms, growth in Germany could drop even lower in the next 5‑10 years and beyond.
High growth must rely on both strong exports and healthy domestic demand to preserve the stability and resilience of the Economic and Monetary Union.

Stronger economic governance is necessary to improve collective fiscal discipline in light of recurring sovereign debt troubles.
Specific governance measures highlighted:
- A stronger Stability and Growth Pact
- National fiscal institutions with more say
- Completing the budding European financial stability framework
Rationale: Stronger economic governance will support confidence in the euro area and help calm volatile markets that threaten to deter investment and lower growth.

IMF euro area surveillance research suggests that the right reforms could lift annual growth by about ½ -1¼ percentage points depending on a country’s starting condition.
Policy levers to make labor and capital more productive:
- Better technological progress
- Deregulation
- Investment in workers’ skills
Deeper market integration is associated with higher growth, reflecting competition’s beneficial impact on investment and innovation.

Priority reforms include:
- National efforts to make product and services markets more flexible
- Completing the single European market
- Increasing the mobility of equity capital, particularly in the financial sector to allow more cross-border takeovers
Political economy challenge: memory of the crisis provides an opportunity, but politicians and the public remain reluctant to renew commitments to the European project.
Ongoing initiatives mentioned:
- Planned improvements to the Stability and Growth Pact
- Measures under the Euro Plus Pact to improve competitiveness and strengthen fiscal discipline
Assessment: These reforms are welcome but not yet strong enough; additional steps are needed to ensure success.

Press ahead with structural changes and deeper economic integration now to put the crisis behind us.
Central message: More Europe — not less — is needed immediately to secure higher growth and preserve the euro area.

Antonio Borges, July 19, 2011 — “The Solution Is More, Not Less Europe”