Europe needs a new economic reform agenda

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Gunnar Hökmark [European Parliament]

Europe’s governments must make tough reforms to bring back competitiveness and prosperity to EU economies, writes Gunnar Hökmark.

Gunnar Hökmark [Moderaterna] is a Swedish member of the European Parliament.

Stimulus packages, artificially low interest rates, quantitative easing, and calls for flexibility regarding the implementation of the stability pact and its rules. These are some of the methods recently used to attempt to jumpstart the struggling European economy, or at least overcome the problems. They have all failed. This is because none of them actually address the underlying problem: a lack of competitiveness.

For a long time now, there has been a fierce debate between those who argue for more government spending, allowing for bigger deficits and increased lending, and those who defend budget consolidation and the respect for the stability pact. True, there have been real economic problems in many of the member states of the European Union and many Europeans have suffered greatly. Increased spending and increased debt burden have not helped, but have worsened the problems: lost credibility and lack of investment. One should keep in mind that the average government gross debt of all EU countries rose from 44.3% of GDP in 2007 to 72% in 2013. This increase has undermined welfare, social stability, employment and growth.

Budget consolidation and cost adjustment are unavoidable consequences of having consumed more than you earn for a long time. Without such action, countries would be stuck in austerity, with no money and no lenders.

Such austerity will always hurt the most vulnerable groups, such as the unemployed and the poor. This is because the cutbacks take place in the easiest places, which happens to be in programmes like unemployment insurance schemes and social welfare payments. Reduced public spending is not a sign of control or a measured budget process, but a sign that a government has lost control.

More importantly, neither this austerity nor ‘spenderity’ will work without ‘reformity’. Absent reforms for a better functioning economy, Europe will not escape its troubles.

An illustrative case in point is the initial crisis management of the three Baltic States compared to that of Portugal, Spain and Greece (PSG). Whereas the former carried out determined policy adaptations, the latter decided to spend themselves out of the crisis, without fundamentally changing the way their economies function. The result is telling.

The income gap between the Baltic States and the PGS average has narrowed significantly. Moreover, the average employment rate of the Baltic States started to rise as early as 2010, whereas the PSG rate kept going down at least until 2013.

Another comparison can be made between Germany and France. Many pundits take it for granted that Germany is the economic powerhouse of the Union. But this has not always been the case. Just a little over a decade ago, Germany was considered the sick man of Europe, with slow growth and a bloated welfare state. In 2005, the unemployment rate was 11.3%, significantly higher than in France, where it stood at 8.9%. Now, German unemployment is all but half of what it is on the other side of the Rhine.

This is not surprising, given what has happened in the two countries. In early to mid-2000s, a number of significant reforms were carried out in Germany. Income and corporate taxes were cut and unemployment benefits were lowered, made more restrictive and merged with the social welfare scheme. Also, labour laws were made more flexible. Germany did its homework and is now cashing in on the efforts.

France, on the other hand, has failed to push through any fundamental reforms to increase its competitiveness, its business sector or the functioning of its labour market. Just like his predecessor of the 1980s, François Mitterand, French President François Hollande has had to turn away from the policies on which he ran to win his office. Reality is always a stumbling block for populists. But even though he has switched to a more realistic middle-of-the-road path, Hollande is very unlikely to carry out measures that would fundamentally change the way the French economy works. France is ranked number 73 in the global list of the Index of Economic Freedom, between South Africa and Kuwait. ‘Flexibility’ with the budget rules does not give growth; it makes the hopes for jobs, investments and growth more flexible, at best.

It’s all very simple. Instead of trying to spend us out of the present problems, from day to day and year by year, we need to do what we know we need to do: structural reforms in each member state, characterised by freedom of establishment, freedom of contracts and agreements, competition and where we have public services, public financing for the individuals to use them, not subsidies to the companies.

In order to achieve that, we do not need institutional change at EU level. In the Treaty of Rome, we all subscribed to an open economy, market reforms, competition over the borders, limits to state aid, and competition laws allowing challengers to enter the market.

In the Stability Pact, the member states subscribed to the need for and the importance of stable public finances, including discipline in this field, understanding that deficits are not a way to finance investments, but to undermine them. And in the Treaty of Lisbon, we all stressed that we needed closer integration and rights for all Europeans, no matter where in the Union they come from.

Instead of deficits and public plans subsidising investments, we need to create the demand for investment. That’s why we need an era of reforms and liberalisation, in order to defend and develop the economic freedom that is the precondition for our prosperity. We need economic strength to be able to stand up for European freedom in a world of new challenges and threats.

The only way forward is through reforms for better functioning markets. Europe needs a new agenda that actually deals with our problems in a serious way. We need an era of liberalisation for our citizens, our economies and our societies, so that the best of entrepreneurship, innovations, investment, work, employment, welfare and prosperity can flourish. This type of action is the most social policy we can perform because there is no other way to prosperity, social security and new jobs.

There is a need for an agenda of reforms aiming to make the European Union one single internal market characterised by a high level of economic freedom, room for new ideas, deregulation paving the way for Europe to become the global leader for start-ups and for small companies, while also providing our big companies with the best opportunities to operate globally with their centres in Europe.

We must not only identify and discuss the real problems, and the underlying causes of our troubles, but also suggest credible solutions. It is quite simple: a lack of competitiveness reduces the prosperity of our countries, firms and people. We need reforms aimed at making the EU economies more competitive. Europe needs a new agenda. It was formed already in the treaty.

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