Saturday, April 19, 2014

A New Deal for Europe

Europe is at a crossroads. Its model of economic integration has become unsustainable since the 80s but the situation has worsened with the crisis.  Have we learned the lessons from the crisis?

In the past 25 years, the EU has accomplished significant progress in terms of economic integration with the institution of the internal market in 1993, the creation of the EMU in 1999 and the enlargement to 28 member States. However, despite macroeconomic stability, the economic performance of the EU has been poor with low growth and productivity.

Five years after the bust of the global financial crisis , the outlook is still negative:   low potential growth, high unemployment, loss of income, high levels of public debt, loss of competitiveness and slow reduction of unit labour costs (not helped by a strong euro), tight credit rationing due to bank's de-leveraging. Meanwhile progress toward the banking Union is slow and no steps are taken toward a genuine fiscal Union, despite austerity fatigue and growing risks in the eurozone periphery.

Europe is losing ground with the other parts of the world as shown by the graph below (2007= 100, in current USD ).

Since 2010, European governments have undertaken wrong economic policies which have aggravated the crisis in terms of growth and cohesion. Economic governance still needs to be fixed but this cannot be a means to an end. The only way forward is to combine a sound reform of European governance with a  true strategy for growth and employment based on long term investments.

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