The EU is (still) an economic success story and should not abandon its growth model

By Katja Mann. Originally published on Apr 7th, 2012

The World Bank recently pub­lished a report which served as a reminder of a fact that is eas­ily for­got­ten these days: The European Union is a suc­cess story when it comes to eco­nomic growth and stand­ards of liv­ing. The key to suc­cess has been regional eco­nomic integ­ra­tion: The European Single Mar­ket has allowed enter­prises and work­ers to make use of busi­ness and job opportunities.

The European “con­ver­gence machine”

Richer European coun­tries have helped their less developed neigh­bours become eco­nom­ic­ally suc­cess­ful by fos­ter­ing insti­tu­tional reforms, bestow­ing fin­an­cial aid and eco­nomic expert­ise. This pro­cess benefited the coun­tries of South­ern Europe in the 1980s as well as the ex-Socialist coun­tries of Cent­ral East­ern Europe in the 1990s. Suc­cess­fully under­go­ing reforms, these regions became attract­ive to the private sec­tor and sub­sequent invest­ment allowed for long-term eco­nomic growth and a rise in liv­ing stand­ards – not only in the peri­phery, but also in the core of Europe. The spill-over dynamic exper­i­enced by European coun­tries is unpre­ced­en­ted: Nowhere in the world has eco­nomic growth promp­ted a com­par­able con­ver­gence effect, redu­cing income dif­fer­en­tials between the EU mem­ber states. This pro­cess cre­ated wealth, allowed Europe to nar­row the pro­ductiv­ity gap towards the United States, and made the European Union the most open eco­nomic area in the world.

But more than simply a highly developed region, Europe has become what the World Bank report calls a “life­style super­power”: When becom­ing rich, Europeans have bought them­selves leis­ure. They can afford to work less than people else­where, in terms of hours per week, weeks per year and work­ing life­time. European states spend more on social pro­tec­tion than the rest of the world com­bined, provid­ing an almost uni­ver­sal access to social ser­vices and health systems.

21st cen­tury challenges

How­ever, weak­nesses of the European eco­nom­ies have become evid­ent – not just since the fin­an­cial and eco­nomic crisis that star­ted in 2008.

Dur­ing the last 15 years, Europe has lost com­pet­it­ive­ness vis-à-vis the United States and Japan. While in the US the IT revolu­tion cre­ated thou­sands of new jobs, European technology-intensive sec­tors have per­formed poorly and heavy reg­u­la­tions put obstacles in the way of set­ting up new busi­nesses. (For example, it takes 6 days to open a busi­ness in the US, but 32 days in Poland and 47 days in Spain.) European firms are facing more and more com­pet­i­tion by East Asian com­pan­ies enter­ing the global mar­ket. The situ­ation is par­tic­u­larly wor­ri­some in South­ern Europe: In Greece, Por­tugal, Italy and Spain labour pro­ductiv­ity has been declin­ing dur­ing the last ten years, for the first time widen­ing the pro­ductiv­ity gap between the dif­fer­ent parts of Europe.

Not only is the private sec­tor facing prob­lems, but it has also become clear dur­ing the crisis that high sov­er­eign debt is unsus­tain­able when eco­nomic growth is low. Fin­an­cing part of Europe’s life­style by extens­ive bor­row­ing has brought Greece to the verge of insolv­ency while many other European coun­tries are facing reces­sion and wor­ry­ingly high levels of unem­ploy­ment.

Yet another prob­lem that Europe will have to deal with in the next dec­ades is demo­graphic change. The decline of the work­ing pop­u­la­tion is likely to cre­ate ser­i­ous prob­lems for pen­sion and health care systems.

Europe has to face these chal­lenges if it doesn’t want to give up its place as a “life­style super­power”. There is no doubt that European eco­nom­ies have to undergo struc­tural reforms that will be pain­ful. But when dis­cuss­ing pro­pos­als for reforms, one thing needs to be kept in mind: Europe shouldn’t make the mis­take of giv­ing up what in the past has been the corner­stone of its eco­nomic suc­cess: its unique growth model based on the idea of regional integration.

Exploit­ing Europe’s strengths

An “ever closer union” should still be the guid­ing prin­ciple for EU mem­ber states. Above all, the pro­ject of the Single Mar­ket needs to be com­pleted. While it is well developed in goods trade and fin­ance, the ser­vice sec­tor is still not suf­fi­ciently integ­rated. The need to over­come reg­u­lat­ory bar­ri­ers is par­tic­u­larly press­ing here because three quar­ters of the national income of developed coun­tries is nowadays gen­er­ated in the ser­vice sector.

Labour mobil­ity should be pro­moted more vig­or­ously. Of course lan­guage bar­ri­ers are an obstacle for many Europeans. It will never be as easy for employ­ees in Europe to move to another EU coun­try as it is, for example, for US cit­izens to take a job in another state. Still, fully imple­ment­ing the free­dom of move­ment for cit­izens of the recent EU acces­sion coun­tries will be a first step in the right dir­ec­tion. Fur­ther­more, the EU has to make it easier for qual­i­fied migrants to par­ti­cip­ate in the labour mar­ket in order to coun­ter­bal­ance its own shrink­ing work­ing population.

Pla­cing lim­its on the Schen­gen area, or even threat­en­ing to exit as the French Pres­id­ent Nic­olas Sarkozy has done in his elec­tion cam­paign, is exactly the wrong sig­nal for regional eco­nomic integ­ra­tion.

Work­ing together more closely in fiscal mat­ters is import­ant not only for Euro­zone mem­bers. A com­mon single instru­ment to con­trol for excess­ive gov­ern­ment debts is there­fore cru­cial. In this regard, the European Fiscal Com­pact intro­duces use­ful mech­an­isms, but it should be signed by all mem­ber states.

Spill-over dynam­ics are still low in research and devel­op­ment, cooper­a­tion in this area should be fur­ther pro­moted in order to enhance innov­a­tion in the European Union.

The list can eas­ily be con­tin­ued. Policy-makers in Brus­sels are aware of all this. The European Commission’s growth strategy “Europe 2020” recog­nises the need for pro­mot­ing the com­pet­it­ive­ness of the European Union. Unfor­tu­nately, its suc­cess has been lim­ited so far and tend­en­cies of dis­in­teg­ra­tion rather than of fur­ther integ­ra­tion can cur­rently be observed. This, how­ever, would mean a ser­i­ous draw­back for restor­ing eco­nomic growth and secur­ing the long-term prosper­ity in Europe.The EU is (still) an economic success story and should not abandon its growth model