Thursday, 31 May 2012

The European Dream in Peril

The economic crisis that began in 2007 has now become a human tragedy, putting 17-million people out of work in the EU (as many as 50% of young people in some regions) and threatening the foundations on which the European dream rests.

With slowing growth and rising unemployment, the Eurozone must embark upon structural and other reforms to deliver the vibrant society envisioned for all Europeans.

So says Angel Gurria, Secretary-General of the OECD, in his keynote speech to the State of the European Union conference in Brussels. "The Eurozone needs a strong fiscal compact with a strong firewall," he said. "So far, the crisis has shown us how and why we are NOT using all the powers we have."

Gurria believes the debt and economic crisis are a problem of governance.  Differing national policies must converge,  he believes. Key pieces of unfinished business remain: governments must stick to reforms to avoid another buildup of imbalances. Competitiveness must be restored so that Europe can compete in today's world.  More needs to be done regarding growth: fiscal consolidation is indispensable - but its composition is also important, Gurria added, reading from the EU compact currently under consideration by member states. Whatever the decisions, he warns against penalizing job creation a the expense of covering deficits - that is, tax hikes which could make it difficult to sustain growth.

Necessary Reforms 
Reforms should target product market regulation, labour market reform: "go structural." Europe has run out of options on the fiscal and monetary fronts. Gurria claims the financial markets have lost patience and the capacity to wait for Europe to keep tinkering. OECD research "Going for Growth" suggests very strongly that it doesn't take so long to produce results and it doesn't cost much in the short-term if you can communicate clearly on what it is you are doing. If you give a medium-term context in which you are placing your short-term policies, you will get reinforcement for your short term measures; if you only think shot-term without context, your efforts will fail to produce results and will fade away again and again and again.

Gurria says there are three challenges which must be tackled:
1. Existing single market requirements need to be implemented effectively - several members aren't sticking to what's on the books. Determine what is missing in law and in practice to prevent the single market from working.

2. Better coordinate technological infrastructure to foster more competition. This will led to innovation, which will lead to change...

3. Europe needs a more coherent and consistent framework to foster cross-border activity: make it easier to operate across the EU. This will also encourage inclusive social progress. Economics is not an abstraction: it's about people - a better life.

4. Rising inequality. The rich are getting richer in Europe nine times faster than the poor. There is a deterioration of wealth and income. Investment in skills is the most powerful tool to fight inequality. Without this investment, people languish on the sidelines of society - skills are the global currency of the 21st century. It is odd that while unemployment remains high, employers still cannot find workers! This is a skills mis-match.

There are still short-term issues: Greece, Spain, Italy. if these are not dealt with they will interfere with the medium and long-term vision. These short-term issues are soluble with the institutions Europe has already created for itself. We have to find ways.

Copyright INSEAD Knowledge 2012

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