The recovery plan revisited

When EU leaders meet in Brussels this week (19-20 March), assessing the impact of the European Economic Recovery Plan agreed at the December European Council will be a key focus of their discussions.

 

They will no doubt claim it has been successful in mitigating the effects of the downturn, but does this reflect economic reality – and will it help to deliver the ‘smart, green growth’ which was a key objective of the original plan?

 

The package agreed in December emphasised the need to ensure that the measures taken in response to the crisis would be “timely, temporary and targeted”. Judged in this light, the picture is mixed.

 

Broadly speaking, the spending intentions are timely, focusing in particular on 2009. However, spending huge amounts of public money is more difficult than many people assume. Often, public authorities lack the systems to react quickly and the capacity to deliver. It remains to be seen how quickly these barriers can be overcome.

 

Whether the stimulus is temporary can only be assessed in the longer term. But households and companies’ behaviour will be shaped by beliefs and expectations: if they think there will be a long-term deterioration in public finances, the money pumped into the economy will not have the desired effect. Here, firmer plans are needed in most Member States, setting out how public finances will be improved once the immediate crisis has passed.

 

Has the stimulus been targeted? Many measures have focused on boosting demand, albeit through different mechanisms (including, for example, tax reductions or a premium for scrapping old cars) and the ‘automatic stabilisers’ (increased government spending on unemployment and other benefits) are addressing some of the social impact of the crisis.

 

But when it comes to structural reforms, there is little evidence so far of the envisaged “right structural reforms in synergy with smart investment … to improve underlying competitiveness and get …into a strong position to pay back borrowing and build a platform for sustainable growth” – a declared objective of the initial plan.

 

Smart investments are sadly lacking. The European Commission had called for “investment in infrastructure, green technology, energy efficiency and innovation, aiming to accelerate the transition to a knowledge-based, low-carbon society”. Some action has been taken, for example in infrastructure investments and through the EU’s regional and cohesion funds. However, although some politicians have even talked of a global 'green new deal', the reality is that across Europe, relatively little has been done to target funds at facilitating the transition to the green/knowledge economy.

 

To some extent, this is understandable. Political attention is drawn to the large-scale manufacturing industries where many jobs are under threat. Both the green and ICT sectors are still relatively healthy, making it difficult to provide a justification for state support. Investments in these areas are also often complex and risky, which makes bureaucracies more reluctant to commit funds.

 

But this means that Europe is missing a significant opportunity to lay the foundations for future growth and jobs. The fiscal stimulus programmes need to re-emphasise their commitment to the green, knowledge-based economy and to demonstrate how funding is being channelled in this direction.

 

There are short- and long-term opportunities in these sectors, where combined public-private action can have a large impact. Training programmes to develop skills for the new green economy sectors; auditing and assessing cities’ energy and environmental footprints; investing in energy efficiency and in future infrastructure (such as broadband and ‘smart’ energy grids) - all of these could simultaneously help the economy recover, make public services economically and environmentally sustainable, and boost growth in new areas of competitive advantage. Investments in green technology (most notably, energy saving) could also have a significant automatic pay-back effect through the cost savings prompted by them.

 

Finally, has the action been coordinated? Broadly speaking yes, but with significant blips along the way. Some countries were initially reluctant but came around as the scale of the crisis and the interdependence of global economies became more apparent. Lately, however, the temptation to focus on protecting the national workforce from outside competition, stabilise domestic banking systems, inject state aid into national champions, and spend government money on buying goods and services supplied by domestic firms has surfaced in a range of different countries.

 

But is this really an issue? Some US commentators believe this a ‘natural’ tendency, but the situation is different here: Europe has built, at times painfully, a Single Market which provides significant benefits to all European citizens and companies.

 

Such a Single Market has been (and must be) built on the principle of equal treatment of all EU citizens and companies, regardless of where in the Union they choose to settle or operate. Workers must be allowed to compete for jobs and companies for public infrastructure programmes across the EU. So far the Commission, with the help of some Member States, has done enough to safeguard the Single Market. But it needs to be more assertive in highlighting what we risk losing. When strong Member States appear to flout the rules, the Commission must show more leadership and decisively defend the Single Market.

 

The overall size of the fiscal stimulus will also be a focus of this week’s European Council. The Commission claims that the Member State contribution has been “in the region of 1.2% of GDP”. While there are some quibbles about how much of this is truly new money and exactly how it is being spent, the Commission also points out that, when combined with the automatic stabilisers, the overall stimulus will be a sizeable 3.3% of GDP.

 

There are legal and political issues concerning €5 billion of proposed EU spending but, in relation to the overall stimulus, this is a minor distraction. In terms of scale, the stimulus has achieved what was envisaged. But whether it will be enough in the longer term is anyone’s guess.

 

Furthermore, the efforts of different countries have varied significantly. The Commission notes that “the scale varies widely according to the Member States' room for fiscal manoeuvre”. While this was unavoidable in the short term, it is somewhat unfair that those who have been prudent in the past should now bear the burden of stimulating all of Europe’s economy. In the longer term, the EU needs a better system for enforcing sound public finances across the Union, especially in the euro zone.

 

The recovery programme has pointed Europe in the right direction. While there are some difficulties and threats emerging, it is still on track. If we can improve in those areas where too little action has been taken – boosting the green knowledge economy, addressing long-term fiscal sustainability, and robustly defending the Single Market – the stimulus package can not only help deal with the current crisis, but also set Europe’s economies on the right path for the future.