27 / 2 / 2012
To say that Europe has a growth problem is an understatement. Almost four years since the outbreak of the global financial crisis, only a handful of EU countries (Austria, Belgium, Germany, Slovakia, Sweden and Poland) have seen their economic output return above pre-crisis levels. In all the others, output is still below its peak in 2008 – in some cases dramatically so. Greece, Ireland and Latvia have endured catastrophic declines. But even in Italy, Spain and the UK, where the downturns have been less dramatic, output has already taken longer to return to pre-crisis levels than it did during the Great Depression of the 1930s. If this were not bad enough, many economies contracted in the final quarter of 2011 and will fall back into recession in 2012. How to explain this debacle?
Ask European policy-makers what their growth strategy for the region is, and chances are they will identify two ingredients. First, they will say, countries across the EU must push through structural reforms to improve the supply-side performance of their economies. Labour markets must be reformed; goods and services markets opened to greater competition; spending on research and development boosted; the EU’s single market deepened (notably in areas such as the digital economy); and so on. Second, they will argue, governments must restore confidence and lift ‘animal spirits’ in the private sector by consolidating their public finances. In combination, structural reforms and fiscal austerity will restore the region to long-term ‘competitiveness’, and consequently to economic growth.
The problem with this story is two-fold. The first is that supply-side reforms, though necessary over the medium to long term, are mostly irrelevant in the short term. Few observers doubt that EU countries, particularly those across southern Europe, would be well-advised to take supply-side reforms more seriously than they did under the Lisbon agenda. If they did, their productivity and living standards would rise over the medium to longer run. But to propose such reforms as an answer to Europe’s immediate growth problem is to miss the point: it is to provide a long-term (supply-side) answer to a short-term (demand-side) problem. Deepening the EU’s single market is a perfectly sound idea. But it will do nothing to offset the immediate impact of private-sector ‘deleveraging’ on demand.
Read the full article at CER.