The challenges facing the EU economy

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It is difficult these days to imagine life in Europe without the European Union. While we are mercifully not in a position to launch such a counter-factual experiment, it is fair to say that Europe’s economic development would otherwise have proceeded more slowly. There would be no single competition policy, single market or single currency. There would be less trade among the nations of Europe, more macroeconomic instability. Spain and Ireland would probably not have achieved their spectacular economic transformation, and without the EU, many countries of central and east Europe would have found it more difficult to manage the transition after the collapse of communism.

For most member states, the EU acted both as a harmonising and a liberalising force. The combined effect of EU enlargement, the single market and a common transport policy has produced a high degree of commercial integration that would otherwise have taken much longer to achieve. Today, one of the most striking images of European integration is the sight of motorways full of trucks from countries such as Romania and Lithuania. Air travel liberalisation has perhaps contributed more than any other policy to bring the people of Europe closer.

It is too early yet to measure the impact of economic and monetary union. There is already some evidence that it may have led to an increase in trade among the countries that adopted it. It certainly has brought a higher degree of macroeconomic stability to several of its members.

If, therefore, one looks at the EU over such a long period, it is difficult to avoid celebrating it as one of the great success stories of economic development through shared sovereignty and common institutions, despite its many well-documented shortcomings.

To succeed in the next 50 years, the EU needs to complete what it started in the past half-century. That sounds like an agenda lacking in ambition, coming at a time when the European economies are certain to be dwarfed in size by China and India, and soon by Brazil and Russia. But economic success should not be defined in terms of Europe’s competitiveness versus the US, as it was in the past, but in terms of Europe’s own needs. In particular, the EU will need a clearly defined strategy to raise productivity growth. Europe remains a global laggard, as the latest global productivity surveys have clearly shown. Raising the level of productivity growth is what economic policy should address first and foremost.

The most important policy recommendation for Europe is to complete the single market. It currently extends to most categories of goods. The liberalisation of services has been proceeding at an excruciatingly slow pace, as has financial integration. The long-term potential economic gains from a liberal single market are still enormous, and still largely unexploited.

The second challenge is to complete economic and monetary union. This includes the enlargement of the eurozone to those countries willing and able to adopt the euro, and to improve the economic policies that make it successful. The biggest obstacle to labour mobility in the European Union is not language, but the lack of portability of national insurance schemes – pensions, health and unemployment. Several other gaps need to be fixed. The eurozone’s stability and growth pact is perhaps not as limiting as some economists had feared, but it will almost certainly need to be superceded by a more coherent fiscal framework at some point in the future. While economic policy will remain the prerogative of national governments, current policies produce economic externalities that are not optimal for the eurozone at large. This question, too, will need to be addressed as part of a wider debate on economic governance. At some stage in the next 50 years, the ­eurozone will have to make up its mind who is in charge of exchange rate policy or who represents it in ­international organisations.

The third challenge is to prepare Europe’s citizens for life in the age of rapid global change. This requires a far more positive attitude towards globalisation, and Europe’s role in a globalised world, in contrast to the inward-looking narrative still peddled by some of Europe’s political leaders. Europe needs to improve the quality of its universities, and offer fresh economic perspectives to those who have been, or will be, displaced by an ever growing influx of migrant workers. The present educational system has been failing too many people.

There is, realistically, no set of policies the EU is likely to adopt to make it the world’s most competitive economy, which was the officially stated goal of the EU’s Lisbon Agenda in 2000. The EU is currently the world’s largest economy, a position it is certain to lose over the next 50 years due to the rise of China and India. Size in this instance does not really matter. But what would matter hugely is if the EU became so lacking in ambition and purpose that it lapsed into genteel decline. The record of the past half-century shows the EU can do a lot better.

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