Probing Europe's economic challenges and boosting growth

The Great Recession and the European debt crisis caused grave and ongoing damage to European economies. Now an EU-funded group of researchers is advocating policy solutions that could place the EU on the path to faster innovation, lower inequality, higher employment and sustainable growth.

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Countries
Countries
  Algeria
  Argentina
  Australia
  Austria
  Bangladesh
  Belarus
  Belgium
  Benin
  Bolivia
  Bosnia and Herzegovina
  Brazil
  Bulgaria
  Burkina Faso
  Cambodia
  Cameroon
  Canada
  Cape Verde
  Chile
  China
  Colombia
  Costa Rica
  Croatia
  Cyprus
  Czechia
  Denmark
  Ecuador
  Egypt
  Estonia
  Ethiopia
  Faroe Islands
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  France
  French Polynesia
  Georgia


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Published: 10 May 2019  
Related theme(s) and subtheme(s)
Innovation
International cooperation
Research policyHorizon 2020
Science in societyGovernance
Countries involved in the project described in the article
France  |  Germany  |  Italy  |  Slovenia  |  Switzerland  |  United Kingdom  |  United States
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Probing Europe's economic challenges and boosting growth

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© EtiAmmos #178187166, 2019 source: stock.adobe.com

Since the European debt crisis began in late 2009, European Union economies have been suffering from sluggish growth compared to some of their industrial peers, while investing less in innovation. According to the OECD, for example, South Korea and Japan regularly out-spend EU Member States on research and development as a percentage of GDP. If this gap continues, it could condemn the EU to anaemic future growth.

To deal with the crisis, European leaders settled on a policy of austerity intended to cut debt levels by pulling back on spending. At the cost of substantial short-term budget pain, austerity apparently stabilised EU economies. But a group of EU-funded researchers believes austerity policies were not worth the cost and could harm long-term growth in the EU, and that the time has come to chart a new course.

The ISIGROWTH project studied the causes and consequences of the European debt crisis and the 2008-09 Great Recession that preceded it. It concluded that EU needs new policy prescriptions that will boost growth by encouraging innovation, lowering burgeoning inequality and addressing environmental concerns such as climate change.

‘After the crisis subsided, the EU settled on a policy mix of fiscal austerity combined with structural reforms to make labour markets more flexible,’ says project coordinator Giovanni Dosi, director of the Institute of Economics at the Scuola Superiore Sant’Anna in Pisa, Italy. ‘Our research shows that such a policy mix is not able to jump-start inclusive and sustainable growth in Europe.’

A toolkit for faster growth

ISIGROWTH began with two broad goals. The first was to study and chart the relationships between innovation, employment and growth in a globalised world economy. The second was to deliver a policy toolkit for achieving the Europe 2020 strategy’s objective of smart, sustainable and inclusive growth.

With its final report, the project revealed its toolkit, in which researchers envisage a ‘New European Deal’ consisting of a four-pronged strategy.

First, they call for the ‘de-financialisation’ of European economies. Financialisation describes, in part, the increasing importance of the financial sector vis-à-vis the real economy, as well as the trend among firms to perform increasing share buy-back instead of investing in R&D and innovation. Unregulated financialisation is widely believed to have been one of the causes of both the Great Recession and the European debt crisis.

Moreover, fewer resources allocated to innovation could mean lower growth in the future. In practice, de-financialisation would mean setting more stringent controls on how financial companies operate and disincentivising share buy-back practices.

Second, researchers believe that austerity policies have contributed to widening income inequality. For that reason, labour movements should now have more power to demand higher wages. And well performed structural reforms in the labour market should reduce flexibility, to support consumption and cut labour turnover which could reduce innovation. Allowing workers a larger share of the economic pie would foster more inclusive economic growth. In particular, researchers note that wage growth has lagged behind productivity growth and that future policies must create a firmer link between the two.

Third, the project calls for ‘mission-oriented’ innovation policies that support high-value and innovative industries. The idea is for public and private actors to come together to agree on missions or concrete innovation goals.

Environmentally sustainable policy solutions

To achieve sustainable growth, the climate change threat should be tackled with policies creating and supporting industries transitioning away from fossil fuels and towards renewable energies and green production. The researchers make three main observations about environmental policies: to have an impact, environmental policies must be timely and big enough; government-led investment constitutes the most effective form of renewable energy financing; and mission-oriented policies for clean growth help to stimulate innovation, employment and potential output.

The project brought together researchers from eight major academic institutions. It published more than 100 working papers, of which 23 have appeared in international peer-reviewed journals, with more in the pipeline. It also produced five policy briefs.

‘I think we were successful in giving a big picture of the dynamics of Europe’s economic transformation,’ says Dosi. ‘We reached some very unconventional results concerning, for example, the fact that austerity policies are self-defeating.’

Project details

  • Project acronym: ISIGROWTH
  • Participants: Italy (Coordinator), UK, France, Germany, Slovenia, Switerland, Untied States
  • Project N°: 649186
  • Total costs: € 3 073 610
  • EU contribution: € 2 498 610
  • Duration: May 2015 to June 2018

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