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CAN EUROPE RESPOND TO ITS CHALLENGES? José Viñals Director General Banco de España IESE, Madrid, July 8 th 2004.

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Presentation on theme: "CAN EUROPE RESPOND TO ITS CHALLENGES? José Viñals Director General Banco de España IESE, Madrid, July 8 th 2004."— Presentation transcript:

1 CAN EUROPE RESPOND TO ITS CHALLENGES? José Viñals Director General Banco de España IESE, Madrid, July 8 th 2004

2 IESE, July 8th 2004 2 Contents  European integration and the process of globalisation  EU´s Economic Performance: The European Model  Challenges  What should economic policy do?  Conclusions

3 IESE, July 8th 2004 3 European integration and the process of globalisation  Europe is favourably contributing to globalisation (One Market, One Money)  Considerable institutional success -Central-Eastern European enlargement May 2004 -European Constitution -Enlargements 1986 (Sp, Post) and 1995 (Sw, Aus, Fin) -Single Internal Market 1993 -Monetary Union 1999 Present: Past:

4 IESE, July 8th 2004 4 How is the EU economy performing?  Long-term evolution is most useful also to understand present European problems and future prospects  The European economic and social model

5 IESE, July 8th 2004 5 The European economic and social model Economic and social cohesion Macroeconomic stability Growth

6 IESE, July 8th 2004 6 1 1.5 2 2.5 3 3.5 4 4.5 5 1961-19701971-19801981-19901991-2000 % Economic growth EU 15 (1960-2000)

7 IESE, July 8th 2004 7 Growth malaise most worrying  In spite of institutional progress  Frustrating relative to the past  Frustrating relative to expectations  Frustrating relative to the US

8 IESE, July 8th 2004 8 1 1.5 2 2.5 3 3.5 4 4.5 5 1961-19701971-19801981-19901991-2000 % US EU Economic growth: EU vs US

9 IESE, July 8th 2004 9 Per capita GDP (US = 100)

10 IESE, July 8th 2004 10 Employment US

11 IESE, July 8th 2004 11 Macroeconomic stability: EU vs US 1961-19701971-19801981-19901991-2000 EU Inflation3.910.86.72.7 Cyclical instability0.91.71.21.0 US Inflation2.87.94.72.8 Cyclical instability 1.82.02.41.5 EU - US Inflation1.12.92.0-0.1 Cyclical instability-0.9-0.3-1.2-0.5

12 IESE, July 8th 2004 12 1.7 1.8 1.9 2 2.1 19701980199019952000 Ratio of 5% richest over 20% poorest incomes 0.295 0.3 0.305 0.31 0.315 0.32 0.325 19701980199019952000 Gini Coefficient  Lower is less unequal Income inequality in EU

13 IESE, July 8th 2004 13 European long-term economic performance: where do we stand?  Mixed performance of the European model  Lights-macro stability and cohesion  Shadows-growth  Other factors?

14 IESE, July 8th 2004 14 Whan can explain such low growth?  Demography?  Preference for leisure?  Stability-oriented macropolicies?  Other factors?

15 IESE, July 8th 2004 15 Other factors  EU is not a country  Growth has not been a priority  Unfavourable European economic environment  Supply-side problems  Innovation and competitiveness failures Little R+D+i Insufficient tertiary education of quality Uncompetitive product-markets  Socio-economic cohesion systems very inefficient at both EU and national levels Inflexible labour markets Inadequate tax systems  Single market incomplete and not dynamic Financial system

16 IESE, July 8th 2004 16 R + D expenditure (% GDP) EUUS Total1.92.6 Private1.21.8 Public0.70.8

17 IESE, July 8th 2004 17 Expenditure in tertiary education (% GDP) EUUS Total1.43.0 Private0.31.6 Public1.11.4

18 IESE, July 8th 2004 18 Europe recognises its problems  Lisbon Agenda (2000)  Ambitious goal: to become the most dynamic economic area by 2010 …  … but inadequate means: voluntarism, no teeth.

19 IESE, July 8th 2004 19 Challenges  Achieve higher sustained growth while  Consolidating macroeconomic stability  Maintaining an adequate degree of cohesion  Challenging environment  Recent EU enlargement  Adverse demographics  Technological change  Globalisation

20 IESE, July 8th 2004 20 What is at stake? Success of enlargement  Future standards of living of European citizens  Sustainability of the European model  Process of European integration  Role of Europe in the world

21 IESE, July 8th 2004 21 The European model under strain Cornerstone ● Threat to macro stability (budget deficits, inflation )  Low growth   even lower growth ● Cohesion can no longer be financed ● Stable macro policies High growth needs  ● Modernised cohesion (incentive-compatible ) Economic and social cohesion Macroeconomic stability Growth ↑

22 IESE, July 8th 2004 22 What should be done?  Growth must become the top priority for policy  European  National  But fostering growth requires massive reforms  Of economic policies at European and national levels  Of European economic governance (EU as a catalyst-facilitator)  Absolute need for a minimum degree of political consensus  So far, very difficult to achieve (Germany, France, Italy)

23 IESE, July 8th 2004 23 To do list: National level  Essential  Germany is key to unblock reforms  Which reforms?  Goods and (particularly) services markets  Labour markets and cohesion policies  R+D+i+e

24 IESE, July 8th 2004 24 To do list: European level  Complete Single Market and make it more dynamic  Boost investment in knowledge (R+D+i+e)  Redesign-modernise cohesion policies  Improve macroeconomic policy framework (more symmetry in fiscal and monetary policies)  Improve methods of economic governance  Refocus the EU budget

25 IESE, July 8th 2004 25 Conclusions  Europe is nowadays at a cross-roads  Economic problems are deep and structural  Unless decisive change of course to place growth as the top priority  Standards of living of European citizens will stagnate or fall  The European model will not survive  The very process of European integration will be at risk  The role of Europe in the world will shrink further  Diagnosis of problems and solutions is clear: fundamental growth problems requires focus on growth  Will there be the political will to act?  So far, no …. but some hope European Constitution is a positive step Best way to ensure a reaction is to identify the very painful consequences of failing to react

26 IESE, July 8th 2004 26 xxxxxxxxxx

27 IESE, July 8th 2004 27 1. Complete and make more dynamic the Single Market  Financial services and integrated capital markets  Regulatory & competition policies for new entry  Policies to facilitate intra-EU labour mobility  “Green cards” for 3rd country nationals  Infrastructure for connecting up markets

28 IESE, July 8th 2004 28 2. More investment in knowledge  Higher spending in R+D+i [1.9%=>3%] & higher education [1.4%=>3%]  Better spending [several centres of excellence]  Independent European Agency for Science and Research  Tax credits for small start-ups

29 IESE, July 8th 2004 29 3. Redesign cohesion policy  Fundamental change needed  Cohesion and convergence  The best cohesion is to achieve real convergence  Goal: nations and not regions  Funding criteria: efficiency in generating value-added  Restructuring  Deeply affects the Common Agricultural Policy  Eligibility criteria: restructuring need and a good proposal (value added rather than rents maintenance)  Comprises affected individuals in all Member States

30 IESE, July 8th 2004 30 4. More symmetric macro policy  More effective & flexible implementation of SGP  Reinforce the role of the Commission  Create independent national Fiscal Auditing Boards  Foster higher surpluses-lower deficits in good times  Better policy coordination  A consistent fiscal stance for the euro area  Reinforced dialogue euro area Council/ECB/Commission

31 IESE, July 8th 2004 31 5. Better economic governance  Simpler and more effective decision-making needed in large, heterogeneous Europe  Stronger EU enforcement of the Single Market (independent EU bodies, like Competition Agency)  Better descentralisation of regulatory functions  Incentives for implementing the Lisbon Agenda (role of the EU budget)  Qualified majority voting

32 IESE, July 8th 2004 32 6. Refocus the EU budget  Cohesion should be consistent with growth, not an impediment to it  Reorganise radically economic expenditures, focussing on limited areas:  Growth fund (for the EU)  Convergence fund (for low-income countries)  Restructuring fund (for affected individuals)  Revenues: target tax bases with EU dimension

33 IESE, July 8th 2004 33 -2 0 1 2 3 4 5 6 1990q11992q11994q11996q11998q12000q12002q1 2004q1 % US EU Cyclical evolution EU vs US (1990-2004)

34 IESE, July 8th 2004 34

35 IESE, July 8th 2004 35 Unemploymen t US vs UE: Philips Curves

36 IESE, July 8th 2004 36

37 IESE, July 8th 2004 37 Income inequality “within” and “between” countries in EU before and after Enlargement “Within”“Between " UE - 15 0,152 0,0080,160 UE - 27 0,1490,0640,213 Total

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