Is Europe’s economic stagnation inevitable or policy-driven? -

Europe is suffering a profound economic malaise. Demand is chronically weak and on current trends unlikely to return to 2007 levels until 2020. Is this just temporary – the aftermath of a deep financial crisis and institutional-building in the eurozone – or is something bigger going on? October’s conference focused on whether Europe’s economic stagnation was cyclical or structural. To what extent could the growth slowdown be explained by developments over which governments had limited control, such as demographics and changes in the structure of the global economy? And to what extent was it the result of policy failures – macroeconomic, financial or structural?

Does Europe face secular stagnation? Ageing populations were one reason for Europe’s economic weakness. Supply-side factors were important too: competition was often weak, markets fragmented, regulation excessive, and human capital patchy. But the main reason for stagnation was macroeconomic policy: the eurozone needed fiscal and monetary stimulus, but the politics of the currency union precluded this. And the longer stagnation persisted the greater the damage to growth potential and the greater the risk of stagnation turning secular.

How should Europe respond to demographic change? Some countries faced significant declines in GDP growth due to population ageing. They needed to boost labour market participation and productivity, and to actively encourage immigration. Unfortunately, many countries spent too much on the old and the rich, too little on the young and the poor, and did not innovate enough. Stagnation had worsened these biases: education budgets had been cut and firms were investing less in training. Immigration had become more contentious, making it harder for governments to deploy immigrant-friendly policies. 

Is rising inequality holding back the European economy? The factors driving inequality were holding back growth: the financial crisis had not ended financial sector rent-seeking; governments found it harder to tax capital, meaning that income taxes were too high; and technology was displacing low-skilled jobs. Wage competition between eurozone countries combined with ill-judged fiscal austerity was hitting consumption and investment, deepening inequalities within and between member-states. The eurozone lacked the institutions to cope with these developments.

What kind of banking system does Europe need? Banks needed more capital, as stronger banks increased lending whereas weak ones did not. For some participants, the public recapitalisation of banks was the best use of taxpayer monies; others argued that banks should be compelled to raise money from investors. The single banking supervisor was a step forward but banking systems had become more national in ownership and focus, and banking union required a bigger fiscal backstop. With banks shrinking their balance sheets, governments needed to encourage non-bank forms of finance for firms. 

What can macroeconomic policies do to improve Europe’s prospects? To be effective, structural reforms required a sufficient level of domestic demand which, in turn, required expansionary macroeconomic policies. Policy-makers needed to understand that unless they could agree such a co-ordinated strategy of macroeconomic stimulus and structural reforms, the single currency risked collapse. Finally, the ECB needed to work much harder to meet its mandate. By allowing inflation expectations to fall so low the ECB had worsened the challenges facing the eurozone and eroded its own credibility.

The CER hosted a conference on 'Is Europe's economic stagnation inevitable or policy-driven?' at Ditchley Park (Oxfordshire, UK) on the 3-4 October 2014. A summary of the event can be found below. Read the full report here.

Written by Christian Odendahl, Simon Tilford

sourche: http://www.cer.org.uk/publications/archive/report/2014/europe%E2%80%99s-economic-stagnation-inevitable-or-policy-driven?utm_source=All+website+signups+as+of+21+March+2014&utm_campaign=87294470b6-Ditchley_Park_event_report12_23_2014&utm_medium=email&utm_term=0_c3be79867d-87294470b6-301763949