The Solution Is More, Not Less Europe

By Antonio Borges

(Versions in عربي,  中文, 日本語EspañolFrançais)

It is hard to hold the course in the middle of a storm, but European policymakers need to if they want European integration to succeed. The sovereign debt crisis is a serious challenge, which requires a strong and coordinated effort by all involved to finally put it behind us.

Surviving the storm will be of little consequence if the euro area finds itself trapped in the perpetual winter of low growth. Germany may be expanding at record speed right now, but it wasn’t so long ago when it grew much more slowly—just 1.5 percent per year between 1995 and 2007. In contrast, Sweden grew by 3 percent a year and the United States by 2 percent during the same period.

Many experts fear that without reforms, growth in Germany could drop even lower in the next 5‑10 years and beyond when global trade cools again. The situation is worse in the countries that currently find themselves in the eye of the storm.

High growth―that relies on both strong exports and healthy domestic demand―is a must to preserve the stability and resilience of the region’s Economic and Monetary Union.

Reforms to deepen economic governance

The course to higher growth leads through structural change and deeper economic integration. All of this is easier said than done, of course.

Governance reform to deepen integration can be grueling work. But in light of recurring sovereign debt troubles, it will be crucial to improve collective fiscal discipline. This will require:

  •  A stronger Stability and Growth Pact
  • National fiscal institutions with more say
  • Completing the budding European financial stability framework

Stronger economic governance will support confidence in the euro area and help calm down volatile markets that threaten to deter investment and lower growth.

How to lift growth

Yet, the even bigger worry is that the euro area could fail to lift growth. Higher growth is crucial, not only because it would make for a stronger currency union, but also because the potential for improvement is large. Research conducted as part of the IMF’s regular euro area surveillance suggests that the right reforms could lift annual growth by about ½ -1¼ percentage points depending on a country’s starting condition—no small feat.

The key will be to make labor and capital more productive through better technological progress, with the help of deregulation and investment in workers’ skills. Growth also tends to be much higher where market integration is deeper, likely reflecting the beneficial impact of competition on investment and innovation.

Seizing the moment

All this suggests that higher growth is not only feasible but linked to very specific reforms, including national efforts to make product and services markets more flexible and completing the single European market. The mobility of equity capital is particularly crucial, not least in the financial sector where the desire to protect “national champions” has limited cross-border takeovers in the past. The key will be to seize these opportunities while the memory of the crisis remains.

Europe has faced rough weather before. As the IMF’s John Lipsky recently remarked, the story of European integration since the Second World War has been an incredible success―not least because the leaders that built the European Union and the euro area looked beyond the crises of their day.

If today’s policymakers want to successfully stay the course, they will have to press ahead with structural changes and deeper economic integration. Many welcome initiatives are under way—from planned improvements to the Stability and Growth pact, to the measures promised under the Euro Plus Pact to improve competitiveness and strengthen fiscal discipline. But the reforms are not yet strong enough to ensure success, and politicians and the public remain reluctant to renew their vows to the European project. Additional steps are needed to make them succeed.

To put the crisis behind us, we need more Europe, not less. And we need it now.

17 Responses

  1. […] recovery. The poor state of public finances in several European countries has been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  2. The IMF itself proclaims that it stands for diversity. Competition and arbitrage is what make Europe unique. So much cultural and economic differences and yet integration on its own. Unfortunately that is gone and we will all be synchronised towards a ( and only ) political elite. That is already the beginning of the end if you haven’t noticed yet. Of course for you it will work out just fine until you realise that the pyramid that is supposed to feed you has been turned up-side-down and already falls apart. We are back in the EUSSR.

  3. […] been made and what’s been broken). Yet things seem to be moving, grudgingly, toward “more Europe” as the solution. Britain’s chancellor of the exchequer signalled that the UK now fully […]

  4. […] recovery. The poor state of public finances in several European countries has been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  5. […] recovery. The poor state of public finances in several European countries has been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  6. […] as well. The poor state of public finances in several European countries has been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  7. […] as well. The poor state of public finances in several European countries has been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  8. […] as well. The poor state of public finances in several European countries has been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  9. […] as well. The poor state of public finances in several European countries have been cited as a chief risk to the world financial system, and doubts about the ability of these countries to repay hundreds of billions of dollars in bonds […]

  10. […] is this widespread belief that the EU should be more determined in enforcing the Stability and Growth Pact (SGP), so as to prevent states from behaving in a fiscally irresponsible way. This is established […]

  11. […] International Monetary Fund has warned that Europe’s problems could put the global recovery at risk if they undermine banks and financial institutions in the key European […]

  12. […] International Monetary Fund has warned that Europe’s problems could put the global recovery at risk if they undermine banks and financial institutions in the key European […]

  13. […] This post originally appeared at iMFdirect  […]

  14. We need more common sense and integrity, instead of ‘more Europe’.

    A ‘one fits all’-currency does not seem to fit all at all. Governments keep on spending way too much on expense of their children. Goldman Sachs (where mister Borges has worked between 2000 and 2008) and Greece are responsible for their own fraud and have to pay the price instead of blackmailing innocent taxpayers from the core and take away democracy from innocent people from de periphery.

    More Europe means a Fiscal Transfer union in which taxpayers from the core lose their own money for ever and in which people from the periphery lose their democracy and their own say. The people of Europe just don’t want that. Period.

    The Eurozone has to break up. The ECB has to be recapitalized for once. Greece needs a haircut and should go back to the Drachma and devaluate their own currency. France and Germany and the rest of the Eurozone need to implement the Stability Pact and Treaty of Maastricht again and stop spending and lending too much.

    We need more common sense, so taxpayers from the core will not be overtaxed and people from the periphery will not lose their democracy forever. That’s what’s at stake.

  15. “We need more common sense and integrity, instead of ‘more Europe’.

    A ‘one fits all’-currency does not seem to fit all at all. Governments keep on spending way too much on expence of their children. Goldman Sachs (where mister Borges has worked between 2000 and 2008) and Greece are responsible for their own fraud and have to pay the price in stead of blackmailing innocent taxpayers from the core and take away democracy from innocent people from de perifery.

    More Europe means a Fiscal Transferunion in which taxpayers from the core lose their own money for ever and in which people from the perifery lose there democracy en their own say. The people of Europe just don’t want that. Period.

    The Eurozone has to break up. The ECB has to be recapitalized for once. Greece needs a haircut and should go back to the Drachma and devaluate their own currency. France and Germany and the rest of the Eurozone need to implement the Stability Pact and Treaty of Maastricht again and stop spending and lending too much.

    We need more common sense, so taxpayers from the core will not be overtaxed and people from the perifery will not lose their democracy for ever. That’s what’s at stake.”

  16. I’d like to know why the debt of countries is not removed the value that is the result of greedy speculation of American international rating agencies. Why?
    Why is knowing this, continue to squander the heritage of the countries, some because everyone should and, moreover, to weaken and diminish the quality of life.

    The world is selfish and international bodies which parasites live this way.

    The world needs to know there are international institutions that help solve problems and are not part of the problem.

  17. You will absolutely not be able to grow in Europe as long as you allow your bank regulators, for no good reason at all, to impose an arbitrary and discriminatory risk-adverseness-tax on your economies most basic and dynamic participants.

    Currently you allow banks to have much less capital when lending to those who are perceived as “not-risky” triple-A rated borrowers, than when lending to those perceived as “risky” like small businesses and entrepreneurs. That causes the latter to have to pay, on top of already higher risk and cost of transactions adjusted spreads, an additional interest rate, that I estimate around 270 basis points, just in order to provide the banks with the same return on equity that a triple-A rated client does.

    And this does not even consider the fact that in these days when bank capital is so scarce, those to whom lending requires more capital, can effectively be locked-out from all access to bank credit.

    Poor Europe, where so much has been written about the need to take risks, has now turned more risk-adverse than ever, in their old-baby-booming days. That is in effect the best way to guarantee a submerging Europe.

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