European Economic and Social Committee Transition to Post-2020 Europe What type of new governance do we need – A view from European periphery European Economic and Social Committee Transition to Post-2020 Europe Budapest, 28 November 2017 Péter Ákos BOD, Professor Corvinus University of Budapest petera.bod@uni-corvinus.hu

Particular challenges in non-core regions The mental tyranny of convergence Trends and their drivers/obstacles Horizontal policies: set goals before institutions What stakeholders (existing and missing) should do

Source EUROSTAT – Database by Pitti Z. 2017 Economic convergence is a (very, very) long term project GDP per capita, PPP base, 1995-2016 Source EUROSTAT – Database by Pitti Z. 2017

Theories about the determinants of economic performance Dominant paradigms Theories about the determinants of economic performance 1950s f(K, L) recommended policy: high investments rate (low wages) and full employment 1960-1970s f(K, L, technology) policy: state-induced technological modernization 1980/1990s f(K, L, policy): maximum economic openness, FDI-driven technological change, microeconomic and macroeconomic adjustment 2000s to date- F(K, L, institutions) Policy: introduce proper institution

Incoming FDI-flows have slowed down in recent year FDI inflow s in per cent of GDP

Demographic shifts in EU 28 and in eastern periphery Change of number of population, 1995=100

CEE wage convergence is on but takes historic times Austria= cca 3600 Souce: WiiW

Material considerations are not in favour of personal policies of staying put in your home country

Growth potential in periphery Classical growth theory: Labour and Capital (and something else;Endogenous growth theories: and institutions and policies and finance and (new) geography and values etc. Whatever growth theory you trust, growth (and catch-up) outlook for the periphery is less than rosy. Inter-European migration trends: brain drain or brain gain? “In the origin countries, the loss of predominantly young and better-educated works has adverse cumulative effects, as predicted by endogenous growth theory and the new economic geography with their emphasis on positive externalities from agglomeration . Mass emigration creates skill shortages, reduces potential growth, and removes the political influence if active and educated professionals. In the destination countries: dualization of the labour market” (Schelkle, 2017)

Laggards: should they make efforts to enter EZ? Less appetite for fulfilling Maastricht entry tests after the financial crisis – but motives/drivers are mostly political and emotional rather than economic. Optimum currency zone (OCA) arguments are mostly irrelevant: OCA does not cover endogenous shocks, nor financial sector. Excessive volatility of floating currencies is a risk; national governments have limited freedom to manipulate exchange rate as competitiveness enhancer

In CEE, firm size (and nationality of owners) is a problem SME productivity as per cent of big firms average (left), and in thousand EUR (right) Source: MNB

Hungary ( and some others in CEE): somewhat below EU average in public service digitalization see Digital Economy and Social Index

What should stakeholders do? Restructuring Horizontal strategies should start by rethinking the desired scope of subsidiarity. Should member states compete in taxations? Should social and regional standards and norms be strictly harmonized across the board? Should competitive business practices curtailed in order to protect sensitive (and potentially angry) regional/social segments, or should winners be made to contribute to restoring the employability of the disposed persons and the competitiveness of their organizations? More (better) prudential and sustainability rules – or stronger surveillance and enforcement? Or rules and indicators that matter will be doctored under the Goodhart’s law: "When a measure becomes a target, it ceases to be a good measure”. How to listen to the yet non-exiting constituencies such as future generation? Should be undisputed academic truth elevated at policy level to counterbalance short-termism, populism, obscurism?