By Katja Mann. Originally published on Apr 7th, 2012
The World Bank recently published a report which served as a reminder of a fact that is easily forgotten these days: The European Union is a success story when it comes to economic growth and standards of living. The key to success has been regional economic integration: The European Single Market has allowed enterprises and workers to make use of business and job opportunities.
The European “convergence machine”
Richer European countries have helped their less developed neighbours become economically successful by fostering institutional reforms, bestowing financial aid and economic expertise. This process benefited the countries of Southern Europe in the 1980s as well as the ex-Socialist countries of Central Eastern Europe in the 1990s. Successfully undergoing reforms, these regions became attractive to the private sector and subsequent investment allowed for long-term economic growth and a rise in living standards – not only in the periphery, but also in the core of Europe. The spill-over dynamic experienced by European countries is unprecedented: Nowhere in the world has economic growth prompted a comparable convergence effect, reducing income differentials between the EU member states. This process created wealth, allowed Europe to narrow the productivity gap towards the United States, and made the European Union the most open economic area in the world.
But more than simply a highly developed region, Europe has become what the World Bank report calls a “lifestyle superpower”: When becoming rich, Europeans have bought themselves leisure. They can afford to work less than people elsewhere, in terms of hours per week, weeks per year and working lifetime. European states spend more on social protection than the rest of the world combined, providing an almost universal access to social services and health systems.
21st century challenges
However, weaknesses of the European economies have become evident – not just since the financial and economic crisis that started in 2008.
During the last 15 years, Europe has lost competitiveness vis-à-vis the United States and Japan. While in the US the IT revolution created thousands of new jobs, European technology-intensive sectors have performed poorly and heavy regulations put obstacles in the way of setting up new businesses. (For example, it takes 6 days to open a business in the US, but 32 days in Poland and 47 days in Spain.) European firms are facing more and more competition by East Asian companies entering the global market. The situation is particularly worrisome in Southern Europe: In Greece, Portugal, Italy and Spain labour productivity has been declining during the last ten years, for the first time widening the productivity gap between the different parts of Europe.
Not only is the private sector facing problems, but it has also become clear during the crisis that high sovereign debt is unsustainable when economic growth is low. Financing part of Europe’s lifestyle by extensive borrowing has brought Greece to the verge of insolvency while many other European countries are facing recession and worryingly high levels of unemployment.
Yet another problem that Europe will have to deal with in the next decades is demographic change. The decline of the working population is likely to create serious problems for pension and health care systems.
Europe has to face these challenges if it doesn’t want to give up its place as a “lifestyle superpower”. There is no doubt that European economies have to undergo structural reforms that will be painful. But when discussing proposals for reforms, one thing needs to be kept in mind: Europe shouldn’t make the mistake of giving up what in the past has been the cornerstone of its economic success: its unique growth model based on the idea of regional integration.
Exploiting Europe’s strengths
An “ever closer union” should still be the guiding principle for EU member states. Above all, the project of the Single Market needs to be completed. While it is well developed in goods trade and finance, the service sector is still not sufficiently integrated. The need to overcome regulatory barriers is particularly pressing here because three quarters of the national income of developed countries is nowadays generated in the service sector.
Labour mobility should be promoted more vigorously. Of course language barriers are an obstacle for many Europeans. It will never be as easy for employees in Europe to move to another EU country as it is, for example, for US citizens to take a job in another state. Still, fully implementing the freedom of movement for citizens of the recent EU accession countries will be a first step in the right direction. Furthermore, the EU has to make it easier for qualified migrants to participate in the labour market in order to counterbalance its own shrinking working population.
Placing limits on the Schengen area, or even threatening to exit as the French President Nicolas Sarkozy has done in his election campaign, is exactly the wrong signal for regional economic integration.
Working together more closely in fiscal matters is important not only for Eurozone members. A common single instrument to control for excessive government debts is therefore crucial. In this regard, the European Fiscal Compact introduces useful mechanisms, but it should be signed by all member states.
Spill-over dynamics are still low in research and development, cooperation in this area should be further promoted in order to enhance innovation in the European Union.
The list can easily be continued. Policy-makers in Brussels are aware of all this. The European Commission’s growth strategy “Europe 2020” recognises the need for promoting the competitiveness of the European Union. Unfortunately, its success has been limited so far and tendencies of disintegration rather than of further integration can currently be observed. This, however, would mean a serious drawback for restoring economic growth and securing the long-term prosperity in Europe.The EU is (still) an economic success story and should not abandon its growth model