European Union Tries Rebooting the Economy

SINGAPORE: The recent freefall of the euro, untethered from Swiss franc, underscored the dire straits of European economies mired in stagnation despite strenuous efforts for revival

Over the four year period, 2011 to 2014, the U.S. economy grew 8.4 percent, over-shadowing the eurozone’s 1.3 percent, weighed down by contraction in 2012 and 2013. The hitherto uncontested idea of European integration is under fire. Even before the Charlie Hebdo murders and new concerns about terrorism hitting Europe, disappointment was palpable that prosperity has not resumed. In a populist narrative, immigrants are scapegoats. Debt haunts Europe with uncertainty about Greece and the decisive win of the anti-austerity Syriza party. Russian President Vladimir Putin has handily split the fragile consensus around the EU response to the intervention in Eastern Ukraine.

Still, the European Union is the only government attempting to reconfigure the economic model put in place by industrialized countries expecting high growth to continue despite 21st century challenges such as lower growth, less favorable demographics and aging populations, climate change, and the increasingly demanding theme of sustainability.

So far, voters still support of this course, as illustrated by EU and national-level decisions and the ability to implement policies.

The debt crisis has forced Europeans to rethink social welfare, reconciling reforms with the exigencies of global competition. Despite strong resistance even the French socialist government is moving crabwise towards a less generous pension system. Italy has eased rules on firing workers and opened industries previously closed to competition. Spanish companies can now opt out of central wage deals and negotiate directly with unions, as new pension requirements reduce early retirements. Italy, Ireland, Portugal and Spain have taken measures to liberalize professional services.

Mario Draghi, president of the European Central Bank, has continually stressed the need for structural reforms. His decision to launch an “expanded asset-purchase program” to the tune of €1.1 trillion can be taken as an indication that in his opinion the weak eurozone countries are headed in the right direction. He may be right. The following day the flash composite index for business activity increased to 52.2, the highest level in five months, with the strongest upturn registered in the weaker countries hit by the debt crisis.

The response to the debt crisis was forced on Europeans, but the next and more crucial reform is “homemade” – analyzing what needs to be done to turn EU into a smart, sustainable, inclusive economy. Concretely, the EU has set five ambitious objectives on employment, innovation, education, social inclusion and climate/energy – to be reached by 2020. Each member state has adopted its own national targets. The basic idea is to link innovation, qualitative growth and less use of resources to make the EU more competitive by tapping into the vast global market for new industries in these sectors, reaping the benefit of spinoffs, and delivering a better environment for citizens.  

For this strategy, protection of the environment and resource efficiency play crucial roles. Undoubtedly, these policies will attract criticism, some perhaps warranted. But unlike other major economies, Europe has economic and social goals that encompass more than economic growth and employment. These goals may not be equally shared. Most support is in Northern Europe while Southern Europe and most new member states from Central and Eastern Europe are more reluctant. The ability to reach a consensus despite conflicting views confirms the EU’s resilience.

Resource efficiency, a flagship of the Europe 2020 strategy, cuts across many sectors. The basic idea is to decouple economic growth from resource use, by pushing the economy toward creating more with less, delivering greater value with less input, using resources in a sustainable way, while minimizing waste and environmental impact. Specific policies are increased recycling and reduced energy as well as synenergy in the use of raw materials. One instrument brought into play at an early stage is tradable permits to reduce greenhouse emissions through the market mechanism and polluter-pays principle.

In March 2014, the heads of state and government who make up the European Council confirmed that sustainable and inclusive growth is a priority, admitting that the crisis had slowed down progress towards the key goals of the EU 2020 strategy. The council will review the strategy once again this year, underlining its value and the need to keep momentum amidst a political environment not very propitious for long-term strategies  

One way for Europe to realize this ambition is to adopt a definition of productivity as more output with less input instead of higher production per work hour and manage resources more efficiently over their life cycles. This requires changing regulatory frameworks and incentives compared to the state of economics one or two decades ago and a fundamental reorientation of research and development, innovation, technology, and inventions shifting focus from saving manpower to conserving resources.The EU has the most advanced legislation on chemicals in the world – Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). All chemical substances manufactured or imported into the EU must be registered with the European Chemicals Agency. In the long term such safety standards may turn into a competitive advantage as global consumers become aware of potential risks from lax rules.

Analysis suggests that a determined and systematic effort will enhance EU competitiveness and contribute to a sustainable, reindustrialized European economy reaping benefits. Requirements include reducing total material requirements by 17 percent to 24 percent, boosting GDP and creating at least 1.4 million jobs. This is not loose talk. The recycling industry has already created 500,000 jobs in the EU. A study for Germany suggests that resource efficiency gains in manufacturing could generate cost savings of between 20 and 30 percent plus create a million jobs. The German Efficiency Agency assists small- and medium-sized manufacturing enterprises to improve resource efficiency. In Austria, Vienna has introduced ÖkoKauf Wien, or Eco-buy Vienna: sustainable public procurement with estimated savings of €17 million and considerable reduction of carbon emissions.

EU core industries in environmental actions in a broad sense have revenues of more than €300 billion, contributing to more than 2 percent of the Union’s GDP in 2011. These industries provide nearly 3.5 million jobs and global market share of up to 40 percent. The sector grows more than 8 percent every year.

The response to the debt crisis and determination to reconfigure the economic model reveals a determination to reform the eurozone economies and a deeper understanding of the character of the crises. New ideas are in short supply, but the European soul-searching over welfare, competitiveness and resource efficiency plus plenty is already yielding new approaches. There is tangible evidence that the strategy is starting to work.

Europe faces many obstacles. Its leaders have elected to tackle policies that are costly in the initial phase. Results are anticipated to be huge, but registered far down the road. The time horizon and an angry electorate do not bode well for long-term strategies or big future plans. Europe needs time and tangible evidence that it is moving in the right direction, as well as confidence in the future and its leaders. Unfortunately, such confidence is in short supply.