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

_IMF News, February 14, 2019_

## Source details

**Canonical URL:** [A Commitment to Shared Prosperity: The Next Chapter of Unity in Europe](https://www.imf.org/en/news/articles/2019/02/14/sp021419-a-commitment-to-shared-prosperity-the-next-chapter-of-unity-in-europe)

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## Bibliographic details
- Published: February 14, 2019

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### 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.*

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## Content in this bundle

- [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2014/sdn1411.pdf){rel="external" type="application/pdf"}

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## References

- [Christine Lagarde](https://www.imf.org/en/About/senior-officials/Bios/christine-lagarde)
- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [Greece and the IMF](http://www.imf.org/external/country/GRC/index.htm)
- [Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)
- [Portugal and the IMF](http://www.imf.org/external/country/PRT/index.htm)
- [Spain and the IMF](http://www.imf.org/external/country/ESP/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [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](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2019/02/14/sp021419-a-commitment-to-shared-prosperity-the-next-chapter-of-unity-in-europe_