Europe’s ‘moment of truth’: how the Europe 2020 strategy must transform the Union
The crisis has made the task of securing Europe’s future economic growth more difficult and exposed some structural economic weaknesses. A lack of concerted action could consign Europe to relative decline. The Europe 2020 Strategy is a fresh approach designed to help Europe exit and move beyond the current crisis by emphasising smart, sustainable and inclusive growth and improving the governance structure needed to make it happen.
Europe now faces its ‘moment of truth’. The unprecedented economic crisis has wiped out the steady gains in economic growth and job creation achieved over the past decade. European GDP fell by 4% in 2009, industrial production dropped by 20% to 1990s levels, and 23 million people, or 10% of the active population, are now unemployed.
The crisis has also made the task of securing future economic growth much more difficult. The still fragile financial system is holding back recovery as firms and households have difficulty borrowing, spending and investing. Moreover, public finances throughout the EU have taken a beating. Deficits now stand at 7% of GDP, on average, and debt levels at over 80% of GDP. Two years of crisis have erased twenty years of fiscal consolidation. As a result of the crisis, Europe’s growth potential has halved. 1“EUROPE 2020 A strategy for smart, sustainable and inclusive growth”, Brussels, 3.3.2010, COM(2010) 2020.
Europe’s structural weaknesses exposed, as global challenges intensify
Even a return to the pre-crisis situation will not solve Europe’s long-term challenges. Europe’s average growth rate has been structurally lower than that of its main economic partners, largely due to a productivity gap that has widened over the last decade. Europe has also lagged behind in R&D, spending just 2% of GDP compared to 2.6% in the US and 3.4% in Japan.
Demographic ageing is also accelerating. From 2013, the working age population will start to shrink. The number of people over age 60 is now increasing twice as fast as it did before 2007, by about 2 million every year. The combination of a smaller working population and a higher share of retired people will place additional strains on welfare systems and public finances.
In the financial sector, distress following the bursting of the real estate bubble after summer 2007 has led to significant distress. Much has been done, but more action is still needed if credit flows, and hence spending and investment, are to return to something approaching normality. Meanwhile, global competition is intensifying. Europe has lost export market share to emerging economies such as China and India. Last but not least, Europe faces climate and resource challenges that require drastic action.
Europe must act to avoid decline
Europe now faces clear choices. The Union can collectively meet the immediate challenge of economic recovery as well as the long-term challenges of globalisation, pressure on resources and ageing, or continue with the status quo. A proactive, collective approach would enable the EU to regain competitiveness, boost productivity and ultimately return to an upward path of prosperity. A largely passive approach risks putting Europe on a permanently lower growth trajectory and would entail a permanent loss of wealth. In a ‘lost decade’ scenario Europe would experience high levels of unemployment and social distress, and a relative decline on the world scene.
Lessons learned from the crisis
While Europe’s current position is challenging, the crisis has underscored the fact that all 27 EU economies are highly interdependent and proved that coordination within the EU works. Indeed, EU-level measures such as full implementation of the Services Directive could add close to EUR 300 billion to EU GDP through 2020.
‘The beauty of the Single Market Programme is that Europe can get an economic kick without it costing any money,’ says Declan Costello, head of unit for coordination of structural reforms and of the economic service.
Assessing the Lisbon Strategy
Even the much maligned Lisbon Strategy was more successful than many realise. Eighteen million new jobs were created before the crisis hit, and the EU employment rate reached 66% in 2008, just 3 percentage points shy of the 70% target rate. Moreover, public finances improved in many countries for most of the past decade.
‘It was working,’ states Costello, referring to the Lisbon Strategy. ‘We were focusing on the right topics; it was more a delivery problem.’
EU targets, adopted by the European Council on 25-26 March
- Increase the employment rate: the employment rate of the population aged 20-64 should increase from the current 69% to at least 75%, including through the greater involvement of women, older workers and the better integration of migrants in the work force.
- Improve R&D and innovation intensity: the current EU target of investing 3% of GDP in R&D should be kept, but the focus should be on impact rather than input. The Commission proposes developing an indicator which would reflect R&D and innovation intensity.
- Achieve the 20-20-20 environmental goals: reduce greenhouse gas emissions by at least 20% compared to 1990 levels or by 30%, if the conditions are right; increase the share of renewable energy sources in our final energy consumption to 20%; and a 20% increase in energy efficiency.
- Raise educational levels, in particular by reducing school drop-out rates and increasing the share of the population having completed tertiary or equivalent education. Targets will be set in June 2010.
- Promote social inclusion, in particular through the reduction of poverty. Further work is needed on the indicator for this target. Heads of State and Government will return to this issue in June 2010.
The Europe 2020 strategy
The Europe 2020 strategy is a fresh approach designed to help Europe exit the current crisis and move beyond. Three priorities lie at the heart of the new strategy:
- Smart growth: developing an economy based on knowledge and innovation.
- Sustainable growth: promoting a more resource-efficient, greener a nd more competitive economy.
- Inclusive growth:strong> fostering a high-employment economy that delivers economic, social and territorial cohesion.
In contrast to the Lisbon Strategy, Europe 2020 focuses on a limited number of headline targets for 2020. Moreover, the Commission will ask Member States to commit to national targets. This should both increase the likelihood of successful implementation and ensure that each Member State tailors the Europe 2020 Strategy to its particular situation. To meet the targets, the Commission has proposed a Europe 2020 agenda consisting of a series of flagship initiatives.
A stronger emphasis on economic coordination and surveillance will also be essential. ‘Up until now, we monitored fiscal policy and structural reforms,’ notes Costello, ‘but we missed everything related to imbalances. We need to pay more attention to divergences in real effective exchange rates.’ The new approach will also be more integrated. Rather than looking at individual economic policy elements in isolation, all elements will be examined together at a single moment in time.
Governance: the key role of the European Council
Full ownership of the Europe 2020 strategy by European leaders is essential to its success. In the present governance structure, an issue often either gets bogged down in debates among technical experts and interest groups, or comes to deadlock because it is simply too big to solve at the working level. Contrary to the present situation, therefore, the Europe 2020 strategy should be steered by the European Council so that EU leaders take personal responsibility for the strategy’s success, while council formations retain responsibility for implementing the programme.
Ultimately, however, it will really be up to national, regional and local authorities to implement the strategy. ‘Good governance at the national level, and a willingness to implement reforms, will always determine a country’s economic future,’ says Costello.
Looking to the future
The European Council kicked off the Europe 2020 Strategy at its spring 2010 meeting on 25-26 March by agreeing on the thematic priorities for the strategy, setting a number of headline targets and eliciting proposals for flagship initiatives from the Commission. European leaders also agreed that ‘the European Council must improve the economic governance of the European Union’ and ‘increase its role in economic coordination and the definition of the European Union growth strategy.’ They called upon Herman Van Rompuy, the European Council president, to head a working group tasked with proposing, by the end of this year, ways to strengthen the legal framework for the surveillance of economic and budgetary risks, as well as the instruments for their prevention.
The economic crisis has made the task of securing Europe’s economic future more difficult, but it has also been a catalyst for change. Now it is time to set an ambitious agenda and move the Union forward.