Four recommendations for the EU summit

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This article is part of our special report Building the way out of the crisis.

EU leaders should emphasise that the best way to achieve competitiveness is innovation, education and excellence in energy efficiency. The European carbon trading system should be restored, the lower efficiency of innovation systems and universities in Europe relative to the US should be tackled, and Europe should lead in energy efficiency and alternative energies, writes Karl Aiginger.

Karl Aiginger is director of the Austrian Institute of Economic Research (WIFO).

"In spite of superficially looking better than a year ago, the current European situation is one of extreme inherent instability:

  • Europe is the only region in the world where economic output will be smaller in 2013 than in 2008.
  • Unemployment is at 12% and rising, whereas there is no business upturn in sight which could reduce it.
  • Young people in many European countries face a lost decade which could permanently weigh on their opportunities, fuelling populism.
  • Debt is increasing in most countries, notably those which already have a high debt.

As a result, it is crucial for the summit to produce measurable results which influence the second half of 2013, not just 2014 and beyond. Initiatives which are able to influence the second half of 2013 have to be made operational before the summer recess. This urgency is not at all reflected in the documents accompanying the EU June summit.

The existing evaluation of the European Semester by the Commission (to be approved by the Council) focus primarily on budget consolidation. The “country specific recommendations” should give guidance for countries to comply with all strategy lines, including the EU 2020 goals.

In its evaluations, the Commission does neither mention lacking investment of member countries to foster employment, insufficient education expenditures, nor the increasing distance to poverty or climate goals.

While it is unrealistic for the Council to change the existing recommendations, it should first of all emphasise the employment/innovation/poverty reduction goals from the Europe 2020 strategy, and secondly stress the need for focusing and frontloading EU funds.

Remember that the “convergence and competitiveness contracts” (where countries get extra money for reforms) had been proposed last year and are shelved since then.

Now each country which presents within a month a proposal for a “competitiveness and convergence contract” which supports the EU-2020 goals and becomes effective as early as in the second half of 2013 should get a reform programme funded.

Proposals could be sketched in a short version before the summer recess and fine-tuned in September.

No indicators are provided for the summit showing that funds for regions with high unemployment have increased. Project bonds are mentioned in the summit document, namely nine project bonds for six countries. The majority goes to high income countries (Germany, Britain, Belgium) and to motorways and gas storage facilities (low labour intensive projects).

The European Investment Bank got extra money of €60 billion over the period 2013-15, but spending planned for 2013 to 2015 lie below the actual lending in 2009 and 2010 (which were the high, while decreasing in 2012 and 2013).

Admittedly, youth unemployment has got some priority, regional programmes and social funds are much better focused today on employment and training issues.

However, the actual use of the funds in the 12 months since the launching of the new policy is not documented; Nor what funds will be spent in the second half of 2013.

This difference between budget cuts being closely and quantitatively monitored and the soft monitoring of proactive goals has to be changed. No big multinational enterprise could exist not knowing its investment expenditures along different strategy lines in the current year.

The summit should encourage countries to submit proposals. Available and underutilised funds should be clearly named, since most regional actors start from the presumption that there is no money for new investment and for reforms needing upfront finance.

The summit should set measurable goals for the second half of 2013 concerning investment into employment and growth.

Financing new investment and even current activities is expensive in Southern Europe. Possibilities for self-financing via profits decreases, firms depend on bank loans in the South. The banking sector itself is restructuring and tries to bolster up own assets by increasing spreads and interest rates up to 10%.

There are proposals in the summit documents regarding cheaper SME finance. Member countries may need a slightly different solution for the problem, depending on its banking system and quasi-governmental institutions available.

Prior to the summer recess, each country should decide which strategy to use against the credit crunch for SMEs out of the choices presented. Again targets should be set concerning the desired and feasible level of loan rates and the amount of expected credit growth.

The summit documents announce an “initial exchange of views on industrial competitiveness and policy”. Some member countries want to revert backwards the direction of industrial and energy policy: Commission documents on “new” industrial policy out of 2010 and 2012 focus on innovation and puts "sustainability at the centre stage".

Long-term energy policies call for the decarbonisation of the European economy by doubling energy efficiency and increasing the use of alternative energies. These prudent policies should be reverted in favour of the old strategy where cheap energy and labour are central elements of competitiveness.

The Council should emphasise that the best way to achieve competitiveness is innovation, education and excellence in energy efficiency. The European carbon trading system should be restored, the lower efficiency of innovation systems and universities in Europe relative to the US should be tackled, and Europe should lead in energy efficiency and alternative energies.

Fossil energy subsidies – which are currently larger than those for alternative energies – should be made transparent and reduced. Europe has in contrast to the US no trade deficit, and should stay on the “high road” towards competitiveness, competing by quality and innovation being able to pay high wages and a decent social and ecological system.

In short, Europe should promote the “high road to competitiveness” and refrain from the enticement of a low-road, low-wage path."