The independent Annual Growth Survey group (iAGS) highlights the need for investment, in order to secure Europe’s economic recovery. French economist Xavier Timbeau says that Juncker Plan has not delivered.
Xavier Timbeau is an economist and the director of the French Economic Observatory (OFCE), one of the four institutions that make up the iAGS group. The others are the Vienna Chamber of Labour, the Danish Economic Council of the Labour Movement (ECLM) and the German Macroeconomic Policy Institute (IMK).
Timbeau spoke to Editor-in-Chief of EURACTIV France, Aline Robert.
How will the European economy look in 2016?
For the next two years, economic growth could reach almost 2% in the eurozone, which may appear to be a good sign. But there are some real dangers. The falling price of oil is temporary, and the development of emerging economies is a potential threat.
The most worrying factor is that the speed of the recovery is too slow to have a significant effect on the labour market. We are observing rising under-employment. Many people across the eurozone have become so discouraged that they are have given up looking for work, especially in Spain, Italy and France.
They end up dropping out of the unemployment statistics, which gives a false impression.
Is this positive economic growth without growth in employment a short-term thing or is it linked to the structural evolution of the economy?
It is possible that it could be a structural situation. If this is the case, wages will fall in the long term to account for the new situation. But this is not what we see in the United States or the United Kingdom, where economic growth does not necessarily imply fewer jobs. On the other hand, the real difference between the two continents is in our levels of investment.
Europe is a continent with well educated workers and good infrastructure. So why is investment so low?
Be careful what you say about European infrastructure. Germany has under-invested in infrastructure in order to cut its public debt, for example, and many there countries have been forced to do the same, like Ireland, Greece, Italy and Spain. Public investment has clearly been sacrificed.
And household investment is also at a low point. The bursting of the property bubble and the fear of unemployment are pushing households to save.
But it is private investment that I find particularly worrying. It has stayed very weak, leaving a gaping investment gap compared to the situation in the United States. This is a source of future problems for the eurozone economy.
Why is there such a gap?
The lack of investment is also a symptom of the uncertainty that surrounds the future of the eurozone. There is an enormous question mark hanging over this union. The eurozone has a considerable current account surplus: at $40 billion, this is double that of China! Europeans are saving rather than consuming, as though they were worried about the future.
Who is responsible for this?
The eurozone’s current account surplus is mainly down to Germany, so the country urgently needs to start investing again. As other countries share the same currency, the negative consequences of this surplus spill over onto them too.
Monetary policy is very efficient in this situation. We have seen this for two years. The ECB managed to re-establish a favourable exchange rate for the euro. But that won’t last for ever. As soon as the ECB puts an end to its expansive monetary policy, we could be plunged into deflation, like Japan in the 1990s. This is why we need active policies to increase demand in the eurozone.
What would such a policy look like?
We have to relaunch investment. And in a big way! The European Commission made the same diagnosis. It’s just… the Juncker Plan launched a year ago is not working! The promised leverage effect, about which we had our doubts, has not materialised at all, and the private investment they promised are just not being made.
Why is it not working?
The eurozone has a basic credibility problem. Will the euro still exist in a few years’ time? Nobody knows. So there are big doubts over what the future holds for budgetary policy. And then there are questions over unemployment rates, which are worrying.
But the European Investment Bank has accelerated its investments thanks to the Juncker Plan.
That’s true, but it is investing mainly in areas where the demand is less urgent. For example, since 2009, it has invested heavily in Austria. This is all very well, but the real need is in Spain, Ireland and Italy…
Has the process of economic integration in the eurozone been put on hold?
Let’s say that inequality has been growing since the crisis. There are big differences between countries and regions. The process of integration, which was one of the main glues holding the European constructing together, has been interrupted. The promised prosperity has not come about.
On top of regional inequalities, we have also seen greater social inequality.
Adverse wealth effects hit the rich first. Now that the bubbles have burst, prices are stable or are beginning to rise again, but unemployment is long-term and the under-qualified cannot find work. In this situation we are beginning to see cases of significant poverty.
The children of people in low-paid work have more difficulty in accessing education, for example. This means inequality is increasingly creeping into the European landscape, and it is a very strong destabilising factor. This also explains the temptation of many to get rid of the EU altogether.
You paint a dark picture!
The outlook may be bleak, but we have opportunities to turn things around. We could re-think public investment, which would be a useful lever. State money invested in assets does not lose value, because the assets and liabilities balance out. But they have to make real investments, not useless airports that will have no value in the long term. Wind turbines would be better!
Can the energy transition save the euro?
Climate change is a priority sector for investment. If we put a high price on carbon, we could unleash a wave of investment in the energy transition. With 2% of European GDP invested in the energy transition, we would have no chance of getting stuck in the deflation trap, which could lead to the break-up of the eurozone and the European Union.
Unfortunately, the European Commission seems to have rather a suicidal attitude in this regard. Rather than offering a way out, it has been paralysed, and is running the risk of pulling apart the eurozone.