Part 2 : More or Less Europe? Options for More Growth ahead of the Sixtieth Anniversary Treaty of Rome

This article is the second part of the series “European Growth and its Importance to US Prosperity”. For introductory remarks and a brief summary of the report please visit:  The report referred to throughout the analysis regards the Euro Initiatives Global Business & Economic Program publishing “ European Economic Growth and its Importance to American Prosperity”.

Panelists: Olivier Blanchard (C. Fred Bergsten Senior Fellow), Xavier Rolet (Chief Executive Officer, London Stock Exchange) Paul Thomsen (Director, European Department, International Monetary Fund)

Moderator: Megan Greene (Maverick Intelligence, Director of European Economics)

Olivier Blanchard expresses his approval regarding the strength of the report. He liked the short term recommendation he thinks that there is room for fiscal expansion, although he thinks it would be better to do bank recap in countries rather the public investments. He believes that the four tasks are imperative and should be exported.

Overall the speaker refers to the report as naive and too optimistic. He believes that there is no populous support for more Europe in most European countries. It is not a selling point. The big Brussel bureaucracy is seen as an example why Europe is not okay. The size of Parliament is too large and is considered not to be working. Many things can be done, and they leave this criticism as anti-European. These are changes that need to be made. He liked the idea of concentric circles, but he would rather make them overlapping depending on projects. For example, for defense, some countries are willing to go further than others. In regards to migration, it is the same thing.

Xavier Rolet supports the idea that Europe was founded on the graves of what was left of the two world wars. Peace initially meant reconstruction and growth. There are many unemployed workers. Although the environment has somewhat improved, Europe suffers from a deep deficit. Most people would agree that there is a lot of work to do to create a single market, especially in financial services which account for 75% of EU GDP. The focus of the report is good. The political benefits of having European nations to stop fighting each other. He sees that there are many forms of disagreements that citizens would like to see in job creation. Jobs do not come from the government sector. The system is no longer affordable given the performance of the economy. There is competition in 3 areas:

  1. The cost of labor is too high;
  2. The cost of energy;
  3. The cost of capital – is a key area that needs wholesale review, and it remains in the region of a third higher than the US because Europe and policy makers are obsessed with debt.

Governments need to find a way to create more jobs. They will not come out of the blue chip sector or the government. Corporate growing is not as expansionist in Europe. Net employment and job creation performance by the blue chips was negative. That is the most you can hope for in good times, and that is the most benefit to the companies. They don’t want to increase it. They want to keep the line flat. There is a need to work with small businesses and entrepreneurs. They complain about access to capital. Why the only source of money being bank lending, not financial markets, fragmentation and regulation. The particular European feature that wealth is distributed through debt can be subsidized. The EU spend a lot of money supporting debt.

Paul Thomson thinks that the politics of the review lacks in realism. Without a more realistic view, they will achieve the opposite of what they want. Despite the fact that political uncertainties hit Europe the recovery is gaining speed. They think that the remaining unemployment is almost entirely structural. It is not a problem of demand. Some of the factors that weight on growth is crisis legacies like high debt, but mostly structural problems that predate the crisis. Looking at the founding members of the Euro there was a uniform convergence of the countries below the capital GDP with those higher. That convergence has stopped. Their deep structural problems that need to be dealt with are that most of the challenges in that regard are at the national level.

There are six countries inside the Eurozone where debt has increased more than 100% of GDP. There is limited fiscal space. The fundamental challenges are that the output gaps and financial space are totally mismatched. If there is a shock to the system, there is a pro-sick legal tighten when the shock hits. One can hope there are changes to the architecture but that it a pipe dream. They need to undertake fiscal counter action so that they are not forced into a legal tighten in the next shock.


Synthesis by: Patricia Besciu – all opinions are those of speakers

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