The Brussels Economic Forum: Renewal in Europe
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The economic outlook: weighing the risks
The main risk to world economic growth today is 'global imbalances', meaning the record US current account deficit that is financed by high savings elsewhere, particularly in Asia and more particularly in China. While the cause and effects of this 'imbalance' are contentious, the risks are not. A disorderly rebalancing of these deficits and surpluses could stall world economic growth. “So we start with the easy part – weighing the risks,” was the ironic opening comment of Christine Ockrent, French television journalist and Chair of the first session.
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| © European Communities |
Dr Gang Fan, Director of the Chinese National Economic Research Institute, highlighted the complexity of the imbalances and how the opening of the Chinese economy may have played some role, although not enough to explain the US deficit. He also shared ideas on the wider issue of a global currency asymmetry arising from the preponderance of the US dollar as an international currency – a factor that allows the US to spread risk more than other countries. The sustainability of the imbalances was analysed by Malcolm D. Knight of the Bank for International Settlements who identified the reluctance to revalue Asian currencies, the amazingly high savings in that region, and low long-term interest rates worldwide that fuel consumption, as reasons for their persistence. As a solution he proposed 'homework' for policy-makers, including: improving the US fiscal deficit, dampening US consumption, strengthening euro-area growth and, given that Chinese savings will remain high because of low social benefits, possibly making policies to make Chinese investment more efficient.
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| Malcolm D. Knight and Gang Fan © European Communities |
Mario Monti, former European Commissioner, laid out the internal risks to growth in the EU, and in particular in the euro area. Highlighting the divergence of economic performance among EU Member States, he dismissed the offered excuses of differing tax regimes and in-or-out of the euro area as causes – pointing out that these show no correlation with growth performance. Rather, he claimed, the issue comes down to reform and the single market – or the lack of these. “The euro area has less single market than some outside,” he claimed, “and it seems to want even less, particularly the larger members who have diluted the single market energy and services directives – this reluctance at the core is a cultural problem, he said, reflecting growing unease in these countries. He called for France, Germany and Italy to reacquire ownership of the market economy that they, as founding members of the Union, created in the first place.
Secretary-General designate of the OECD, Angel Gurría, continued this theme of the need for reform. While growth is looking more sustainable, he said, the income gap with the US is widening, not closing. Measures to encourage competition, productivity and innovation are needed. The choice of a particular social model is less important than whether it actually works by contributing to higher growth. “Reform is difficult,” he admitted. “The costs are upfront and the losers are vocal.” And suggested reforms are presented as win-win packages to gain acceptance. Professor Daniel Cohen of the Council of Economic Analysis of the French Prime Minister said that the 1.5% growth gap between Europe and the US is explained by demographics, low implementation of ICT, and 'residual reasons'. Among the latter he contrasted the more effective concentration of R&D into a few universities in the US and the fragmented distribution in the EU. This, he said, needs a pragmatic response involving EU-funded universities.
“Europe need not fear the challenges ahead, they are no bigger than those in the past,” Commissioner Joaquín Almunia told an audience of over 1000 participants at the 2006 Brussels Economic Forum. Later, he gave EEN his views on the key issues raised by the participants.
“Growth is ahead, we can see the signs, but renewal needs more than growth in a fast changing world – we have to keep moving and this means change. Both Mario Monti and Angel Gurría made this point forcibly in their speeches, as many others do daily, in the Commission, in the Council, in the Member States. But the time for talking really is at an end, reforms may be difficult and there is resistance – but we cannot stand still. We must evolve and adapt: evolve into a more competitive economy and adapt our social models to support this while preserving European values of solidarity and fairness. For this, the public’s trust and support is vital, and the ideas on win-win reform packages raised by Poul Rasmussen are a good way of changing people’s mindset. But we are not looking for ‘standardisation’ in reforming social models, each Member State will evolve and adapt in its own way, as several speakers pointed out. Finally, we must remember that Europe is not just about economics; it is also a political project. Politically, we should be generous with enlargement as Javier Solana said, particularly towards the Western Balkans that have suffered so much, and there are sound economic arguments as well, as we know, that enlargement benefits all Member States. The issues raised in the Forum are pressing and growth is not enough. As I said, the main issue is our willingness to adapt, our willingness to get our act together – and act together.”
Competition and innovation: making it happen
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| Poul N. Rasmussen © European Communities |
Chaired by Mario Monti, the second session considered the complex matter of encouraging the innovative activities needed to raise growth and productivity and thus raise living standards. Ian Davis, Managing Director of McKinsey & Company, kicked off by answering the question 'What should be the drivers of innovation?'. There is much hope invested in innovation as a driver of growth he said, so the issue is how to turn these hopes into reality. For Davis this lies in the link between competitiveness and innovation, in which the former drives the latter to produce productivity-driven growth. Competitive intensity is the main driver of this process, he told the audience. And to really impact productivity, innovations must be done 'at scale', he said, citing Wal-Mart’s IT supply chain investments which, although innovative, only really influenced national productivity figures when retail sector competitors took up the same technologies to remain competitive. His key message is that take-up of innovation is driven by competitive pressure and policies must allow innovation at scale.
Professor Philippe Aghion of Harvard University dispelled some myths about innovation in his presentation, such as that it is a homogeneous activity (it is not, he said) or that macroeconomic policy has little role to play (it does, he explained), and argued overall for more targeted policies rather than spreading resources thinly. Donald Kalff, former KLM board member and biotech entrepreneur, made the case for the important role large companies should play in the innovation process. They should be acting as a resource for innovative smaller companies, through partnerships, funding or takeovers, which would bring their particular advantages of scale, experience and management to the innovation process. Rachel Griffith, Deputy Director of the Institute for Fiscal Studies in London, reported research into the substantial R&D spending of EU companies outside the EU and argued that it is not always effective to target policy at encouraging relocation to Europe.
Social models: fostering faster growth
“Reform means change, and change raises questions and concerns among EU citizens,” said Alexander Italianer, Deputy Secretary-General of the European Commission in his opening address to the third session. So, when communicating with EU citizens it is important to get across that change is not an end in itself. It has a purpose, which is to fuel and fund EU social systems, he emphasised. Chairing the session, Brigitte Ederer, former Austrian State Secretary, noted that the EU is not a uniform bloc and contains several social models that show us that growth is compatible with welfare – but that a commitment to reform is vital. Critically, Ms Ederer concluded, win-win reforms that balance rights and obligations must be sought.
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| Pervenche Berès © European Communities |
Poul N. Rasmussen, MEP and former Prime Minister of Denmark, spoke on the successful introduction of reforms in Denmark in the 1990s. The important element was the encompassing approach that packaged labour market changes, intelligent public investments and tax reforms together, which were presented as a ‘deal’ including rights and obligations. While some say that Danish-type reforms can only be implemented in smaller countries, Poul Rasmussen sees no evidence for this. But it is not just a case of transposing the Danish model, he said; rather, the philosophy, the coherence of reform 'packages', and the inclusiveness – these are the important elements to take over. “Globalisation is bringing a new tempo – permanent and accelerating change which needs a response,” he told the audience. “So, for example, people need to feel good about changing jobs several times over their career – not a fantastic message,” he admitted, “but we have too few leaders who dare to tell people the truth.” The compatibility of high social welfare provision and growth was also highlighted by Susanne Ackum-Agell, Director General of the Swedish Ministry of Finance, who pointed out the correlation between regulated labour markets and openness to trade. In this sense, high social welfare provision can be seen as an insurance for people in an open, globalised economy – part of a 'risk management' approach. Further, to overcome resistance to change, packages of reforms are needed, not a piecemeal approach.
Commenting on the session, Pervenche Berès, MEP and Chair of the Economic and Monetary Affairs Committee, questioned whether Nordic-type reforms can be implemented in large countries, suggesting that smaller, more open economies are more accustomed to reforms than inward-looking larger countries. Former President of the Federation of German Industries, Professor Hans-Olaf Henkel, supported this contrast, pointing out that there are 25 economies that are in competition with each other, each of which will make its own balance between freedom and equality in choosing an appropriate social model to suit its comparative advantages. The complexity of the situation was also cited by Andrew Watt of the European Trade Union Institute who reported that the 'EU no jobs vs US bad jobs' view is becoming more nuanced in recent research as the imperfections of markets and actors are taken into account.
Enlargement: will the magic work again?
“I would like to underline two words in the title of this session – 'magic' and 'again'” said Javier Solana, Secretary General of the Council of the EU and High Representative for the Common Foreign and Security Policy, in his opening statement. “The magic of enlargement is the political stability that brings economic development. There is no doubt that the reconciliation of Europe has been a great political success, and an economic success that has benefited all,” he explained. However, he emphasised that it was crucial to communicate to citizens the scope of recent achievements. Turning to 'again', he warned that it was crucial not to repeat the mistakes of the 1990s by lack of engagement in the West Balkans. “We must be generous to all the Balkans,” he said, “and Serbia is central to bring stability to the Balkan region.”
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| Javier Solana © European Communities |
Chairing the session, Carl Bildt, former Prime Minister of Sweden, spoke on whether South-East Europe is on the road to sustained growth or not, drawing on his experience as High Representative for Bosnia-Herzegovina. Starting in the north, he recalled, “Under communism there was a single weekly ferryboat from Stockholm to Tallinn, now there are 40 departures daily – which gives an idea of the changes. Enlargement has created a zone of peace and stability in the EU-10 with open and dynamic economies, massive trade, exploding productivity and double digit growth.” Turning to South-East Europe, “The Balkans, with 100 million people, can offer a similar scenario – although it will involve much more building – so there is a dynamic road ahead.” Deputy Governor of the Croatian National Bank, Boris Vujčić, offered more detail on the region, citing 5%-6% average growth driven by investments on the upside, but persistent 14%-40% unemployment on the downside. Both Ali Babacan, Turkish Minister of State for the Economy and Klaus Liebscher, Governor of the Austrian National Bank, highlighted the same point, that the acquis is more than a formal requirement – it brings real practical gains.
Closing the final session, Olli Rehn, Commissioner for Enlargement, thanked the participants. “We have tested your absorption capacity,” he commented. But magic is not the key, he said, rather the right future policies are. Enlargement fatigue is a challenge. “We cannot ignore it, we cannot capitulate, and we must engage with the public in the Member States.” Klaus Regling, Director-General of DG ECFIN, emphasised that it is reform that will allow Europe to take a leading place in the world economy – and it is time to deliver results on reform. More has been achieved since 1957 than anyone would have believed possible at the time. Our capacities for regional integration are admired worldwide. “Despite the doomsayers, Europe is renewing itself, he claimed, “not enough, not fast enough, but reforms are in process to ensure a prosperous and inclusive society.”
