Some challenges ahead for the EU
Abstract
In the euro area growth is holding up but the general outlook is less bright than in
recent years. The anticipated slowdown largely results from the gradual attenuation of the
post-Great Recession recovery momentum and the convergence of growth rates towards
a lower potential growth path. It also coincides with a revival of political turmoil, consequently emphasizing the urgency to deal with external downsize risk by strengthening
internal sources of growth—investment and private consumption. The sun has been
shining but the opportunity for structural repair has not been taken. Hence, imbalances
within the euro area need to be addressed in order to achieve sustainable development.
The increase of public debt is one of the main legacies of the crisis. While it is currently
declining, long-run simulations suggest that without further consolidation, the public
debt-to-GDP ratio will not reach the arbitrary 60% target by 2035 in a number of countries. To top it off, countries that are concerned are those whose unemployment rate
remains above its pre-crisis level, yet the implementation of a new fiscal consolidation
would result in higher employment. It thus raises the question of this rule's sustainability.
The euro area as a whole has a large trade surplus, which favors pressures for the appreciation of the euro, which can reduce growth prospects. Unlike the period before the crisis,
the imbalance is clearly concentrated in surplus countries.
Finally, the aforementioned imbalances make governance reforms more urgent than
ever. Until now, progress in this area has proved rather timid.
This work led us to three key policy insights. First, the structural adjustment needed to
bring back public debt to its target would weigh on the reduction of unemployment.
Euro area countries can pursue an additional fiscal consolidation provided output gap is
closed, and countries with fiscal leeway should use it to sustain growth in the euro area as
a whole.
Secondly, the ongoing debate on the reform of the economic governance of the euro
area must pay more attention to the evolution of nominal prices and wages, in order to
reduce the sources of divergence. In the same time, the need to strengthen wage
bargaining systems by giving the social partners a greater role is important. Finally yet
importantly, the need for a greater automatic stabilization, including of a cross-border
nature, in monetary union is undisputed. The proposals under discussion do go to some
extent in this direction and deserve support.
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