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It's now or never for European growth

EU Growth Strategy / COMMENTARY
Hans Martens

Date: 28/06/2012
To solve the economic crisis, the EPC has consistently advocated focusing on economic growth: European leaders should spend as much time on economic growth as on fiscal discipline. They should do so not just because of the financial markets, who have been calling simultaneously for economic growth and fiscal discipline, but also because of all those affected by the crisis – including the unemployed – who have no chance of getting a job unless growth picks up, because of the investors, who need to be encouraged by signs of recovery, and because of the entrepreneurs who dare not start new businesses amid the negative economic mood.
Economic growth is, of course, also the best and most efficient way to reduce public debt and the deficit burden that are currently weighing Europe down: austerity without growth is not working.
Some may consider policy focused on economic growth to be old-fashioned, believing instead that we should look more towards well-being, quality of life, etc. But social and political disasters are waiting to happen unless we get Europeans back to work. To do so, the crisis economies must grow, and they must grow healthily in order to really start producing new employment opportunities. Without jobs, well-being suffers.
The traditional way of kick-starting economic growth – namely by expanding public finances through borrowing – is not really an option due to the need for fiscal discipline and the poor state of public finances across Europe. Instead, growth can only be kick-started by demonstrating the value of European cooperation, showing what we can do together at EU level to maintain the necessary balance between fiscal discipline and economic growth.
The EPC has made a number of proposals to get the crisis economies going again, including getting unspent Structural Funds out into the economy. The unspent funds are worth over €80 billion, and there are many reasons why they haven’t been spent. Traditional means apparently aren’t working, so now is the time to find a solution: including by being more innovative about the rules that govern the funds. It is crucially important to find a solution that ensures the quick deployment of the funds, and that avoids replicating the environment that led to under-spending in the first place.
Some in the financial markets argue that this isn’t new money, but that’s beside the point: obviously the funds had already been committed, but they are not being spent, so of course it will make a difference if they now enter the ’real’ world.
Structural Fund spending has the advantage of focusing primarily on where the need is greatest, namely in the south and east of Europe. Structural Fund spending is particularly important because it can create jobs in the here and now, and it can help to improve competitiveness in the longer term: whether through infrastructure investment, energy saving or improving the skills of the work force.
Secondly, an increase of the capital of the European Investment Bank is overdue. A relatively small capital increase (€10 billion has been mentioned) would enable the EIB to re-lend to banks for specific purposes (for example for SME loans) something like seven times that figure.
Thirdly, the idea of Euro-Project-Bonds has been around for a while, but the process of getting the scheme operational has taken a long time. In addition, the proposed scheme is very modest as the bonds are guaranteed by the EU budget, which is very small.
A more ambitious scheme is needed. Member states could guarantee a much larger scheme of Project Bonds. The market for highly-rated, solid and long-term investments is clearly there. Tap into it, and do so now. The need for new investment in modernising Europe’s infrastructure is clearly spelled out in plans for a ’Connecting Europe Facility’, which talks about the crucial infrastructures of energy, transport and the digital economy. An ambitious scheme clearly needs to bring in far more private capital if these aims are to be reached.
In the medium term, other contributions to economic growth could be aggressively pursued, including trade agreements with the world’s growth areas. The FTA with South Korea is a good example, and much more could be done. There is also additional mileage to be found in the Single Market, including full implementation of the Services Directive, in the Digital Single Market and in a Single Market for resource efficiency, including smart grids, European recycling schemes, etc.
In the long term, Europe still needs to carry out structural reforms, and there is already a very good framework for doing exactly that: Europe 2020 and its focus on green, smart and inclusive growth. The idea is so intuitively right that it is hard to understand why there is so little enthusiasm for it, and so little action on implementation. The EU is at risk of repeating the same mistake as with the Lisbon Agenda: ‘a good idea, shame about the implementation’.
It is crunch time for Europe now, and the eyes of the world are on Brussels this week. We can demand of our leaders that they seriously reshape the balance between fiscal discipline and economic growth. They must not just try implementing a series of short-term patches, but actually present a real growth plan: one that can have an immediate impact, while at the same time setting out a credible path for the medium and longer term. Finally, they need to do this in a credible manner that not only satisfies the financial markets, but also all those Europeans who together shape the European economy, and whose actions determine the direction of our economic, social and political futures.
Hans Martens is Chief Executive of the European Policy Centre (EPC) in Brussels.

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