EU Policies for Economic Growth in 2013

The EU has recently entered a double dip recession, with southern Eurozone countries particularly badly affected. As a consequence of the recession, EU unemployment continues to rise. Over the last twelve months, the number of unemployed people has increased by 2 million,
to reach more than 25 million. The unemployment rate is up to 10.6% in the EU and 11.6% in the euro area.

eu unemployment

To restore economic growth, the EU has produced an Annual Growth Survey 2013 to try and deal with these issues. They have suggested concentrating on:

  1. Pursuing differentiated, growth-friendly fiscal consolidation
  2. Restoring normal lending to the economy
  3. Promoting growth and competitiveness for today and tomorrow
  4. Tackling unemployment and the social consequences of the crisis
  5. Modernising public administration

Differentiated, growth-friendly fiscal consolidation

The EU report states that, in recent years,  sovereign debt in the EU has increased from 60% to 90% of GDP, and therefore debt levels need to be reduced quickly. However, they admit that fiscal consolidation (tax increases and spending cuts) might lead to lower growth. However, they argue that some types of fiscal consolidation may have a smaller negative impact on economic growth. For example.

  • Reducing taxes on labour could help create employment. Lower labour costs could help improve competitiveness. This is important for countries like Portugal who are relatively uncompetitive. (see also: Fiscal devaluation)
  • They state reducing  government spending has a lower negative multiplier effect than increasing taxes.
  • Consider raising retirement ages and prevent early retirement being taken – this can reduce government spending with less impact on economic growth..

Evaluation of ‘Growth-friendly fiscal consolidation’

  • ‘Growth friendly fiscal consolidation’ seems a contradiction in terms. The basic problem is that fiscal consolidation has significantly reduced economic growth. There has been a large negative multiplier effect within the EU
  • Spending cuts do have a large negative multiplier effect. Cuts to welfare benefits have led to lower spending and greater poverty amongst the unemployed.
  • The EU claim the stability and growth pact has flexibility. ‘For example, during 2012, the deadlines set for Spain and Portugal to bring their government deficits back below 3% of GDP were extended by one year, giving them until 2014 to achieve this goal.’ But, this really isn’t flexibility. A country with the depth of recession of Spain and Portugal shouldn’t be trying to achieve a budget deficit of 3% of GDP in 2014, when private spending is falling.
  • There is no mention of monetary policy (e.g. some form of increasing the money supply). If correctly implemented, monetary policy could provide a boost to aggregate demand as fiscal consolidation reduces AD.

2.Restoring normal lending to the economy

The recession, credit crunch and sovereign debt crisis has caused a fall in bank lending, the EU hope to improve lending through certain initiatives such as – more money for the European Investment bank, greater use of EU structural funds, and greater efforts to co-ordinate the recapitalisation of commercial banks.

Evaluation

  • It is not guaranteed that these measures will be sufficient to deal with the fundamental deleveraging occurring in European banks. The scale of bank losses is much greater than EU efforts to overcome it.
  • Even if bank lending does increase, it is only part of the equation, and doesn’t solve the lack of aggregate demand.

Promoting growth and competitiveness for today and tomorrow

This involves supply side policies, such as increasing competition in transport, encouraging investment in broadband internet technology and greater spending on R&D.

These supply side policies are well meaning, but it will take a long time to have an effect. Also, there is no mention of the more fundamental competitiveness issue occuring from membership of the Eurozone.

Tackling unemployment and the social consequences of the crisis

This involves supply side policies for dealing with labour market inflexibilities and mismatch of skills. It involves policies, such as greater flexibility (e.g. easier to hire and fire workers), evaluating whether minimum wages are too high, spending money on education and training to improve skills of the long-term unemployed.

The EU definitely has issues with structural unemployment arising from mismatched skills and inflexibilities in labour markets. THerefore, there is scope for tackling some of this unemployment. However, the significant rise in unemployment in recent months and years is due to deficiency of aggregate demand and the on-going recession. Supply side policies will not solve this type of unemployment

5. Modernising public administration

Basically, greater efficiency in government.

Conclusion

There are good ideas in the growth pact of 2013. There is scope for reducing structural unemployment with suitable supply side policies; some types of fiscal consolidation may have less impact on economic growth.

However, the overall package misses the essential component which is a deficiency of aggregate demand within the Eurozone (and especially the south). Changing the nature of fiscal consolidation is not really going to help. Within this document for growth, there is no mention of:

  • the need to boost aggregate demand
  • The need for a greater role for monetary policy to deal with the economic shock facing the EU
  • the problem of misaligned exchange rates in the Eurozone.
  • The need for aggressive bond purchases to stabilise bond yields and give countries substantially more time to deal with debt issues.
  • The fact that austerity far from resolving the bond crisis, is causing a deflationary debt spiral with rising debt to GDP ratios – despite fiscal consolidation

 

One of the greatest ironies is that the EU state their policies for 2013 are the same as 2012. Yet, there is no recognition that in the past 12 months, there strategy is woefully inadequate.

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3 Responses to EU Policies for Economic Growth in 2013

  1. Ralph Musgrave January 10, 2013 at 7:06 am #

    Looks to me like a mish mash of ineffectual policies being proposed by a bunch of highly paid EU bureaucrats and economists who have to make it look as though the EU elite are doing something about the problem.

    I particularly liked one of the elements in “EU Policies for Economic Growth in 2013”. That was No 3: “Promoting growth…for today and tomorrow.”

    If I was aiming to improve road safety, one of my priorities would be . . er . . “improving road safety”. How do I get a highly paid job announcing that sort of inspired stuff to the world?

    I also like No.5: “Modernising public administration”. Tony Blair got to power by repeating the word “modernise” like a demented parrot. You can’t go wrong with that word.

    • Tejvan Pettinger January 11, 2013 at 9:29 am #

      >Looks to me like a mish mash of ineffectual policies being proposed by a bunch of highly paid EU bureaucrats and economists who have to make it look as though the EU elite are doing something about the problem.

      Yes. Though and there admission, the policies were exactly the same as 2012 hardly inspires confidence…

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