The Library was pleased to attend the ‘Euro Plus Monitor Spring 2016 Update’, hosted by the Lisbon Council for Economic Competitiveness and Social Renewal. The board of speakers included Mr Valdis Dombrovskis, the former Prime Minister of Latvia and current European Commissioner for the euro, Professor Holger Schmieding, the Chief Economist at Berenberg Bank, and Mr Paul Hofheinz, president and co-founder of the Lisbon Council.
The Euro Plus Monitor is a study combining two indicators: adjustment progress and fundamental health. By combining these two tools the team led by Holger Schmieding believes it is able to discern which reforming countries are doing so fast enough and which are not. The study also mercilessly shows whether those countries that are already reformed are doing everything necessary to stay healthy. The event’s objective was to present the latest results from the first half of 2016.
The main finding is that Europe remains on the right track. The European economy is growing slowly, but surely: it is expected to grow by 1.6% in the current year and by 1.8% in 2017. One reason for this halting progress is the state of the global economy, which has not yet recovered from the years of the financial crisis. The other reason, partly related to the first, is the overall lack of confidence in the global market. Investment remains the weak point of the EU’s strategy. That is why in the Spring Package of the European Semester, presented last week, the main focus is on social and employment reforms. The Commission is determined to re-launch investment, create jobs and stimulate growth, with the European Fund for Strategic Investments (EFSI) also serving this purpose. Mr Dombrovskis concluded that we need to keep up the pressure for reforms.
Europe remains on the right track, even though, according to Professor Schmieding’s findings, there is some evidence of reform fatigue and, on top of that, fiscal slippage. Adjustment efforts slackened significantly in 2015, the main reason being the very nature of reforms: they are carried out only when the need is inescapable. The pattern is that if there is a crisis, you adjust; but when the crisis recedes, you adjust less. Exports are rising steadily and imports are also rising again after the euro crisis in 2012. In spite of moderately positive economic conditions, the professor’s recommendation is to keep up the work on improvement.
Unemployment on the periphery remains high — although there is no longer a clear distinction between core and periphery in the EU. There are just particular economies that are doing better or worse. Within the common framework of Europe, each country can choose its policy, so the EU is not to be blamed for all the problems. The professor proposed taking Germany’s reforms as a blueprint for Europe. After four decades of rising joblessness Germany turned its labour market around with the reforms of 2004. The equation is as follows: more employment = more taxpayers = balanced budget. The German example shows that labour market reforms work, after a certain lag.
There was more extensive comment on the specific cases of Greece, the UK and Spain and Portugal. The Greek rebound was choked off by politics in early 2015. With the political uncertainty in late 2014, confidence collapsed. In the professor’s view, Greece is in need of a new deal with creditors that would restore this confidence. There is too much discussion of taxes and not enough about structural reforms.
Looking at the historical data on the UK’s performance before joining the EEC, Brexit does not seem like a viable option. The UK economy soared after its accession, which can serve as outright confirmation that it is always better to be a part of the common market. The UK media have been lobbying against the EU in terms of economic constraints, but as already noted, the EU is not to blame for everything. This is largely forgotten in the current debate.
According to the speakers, the general idea of fiscal mechanisms, including sanctions, is correct with respect to Spain and Portugal. It is acknowledged that those countries made efforts during the crisis, but there are fiscal rules that must not be breached. One of the lessons of the crisis was to avoid using procyclical fiscal policy. In order to have a buffer for countercyclical actions during the crisis, they should be also carried out in the years of prosperity.
The outlook for the EU economy according to the Euro Plus Monitor for Spring 2016 is moderate recovery. If we are lucky, the current improvement in the labour market will continue, but the mood has not yet lifted among those who have experienced unemployment or are still in fear of it. For that to happen, we need to strengthen the recovery.
You can find the present and the past editions of Euro Plus Monitor in our Library’s catalogue.