John Bruton

Opinions & Ideas

Category: European Prosperity

NINE FACTORS THAT WILL DETERMINE EUROPE’S RATE OF ECONOMIC GROWTH IN FUTURE

The growth rate in Europe, in comparison that in the rest of the world, will be determined by the following nine factors

  1. the age structure of Europe’s working population. Most EU countries have more elderly populations than the global average and this, inevitably, reduces Europe’s relative growth potential. Older populations tend to resist the use of innovative technologies. The burden of large retired populations will lead to higher taxes on the working age population, which could lead to tax evasion or investment flight. An older population will tend to use Europe’s housing stock less fully, creating housing pressures for younger people.
  2. the educational level of its population. Generally speaking, the educational level of Europe’s population is above average and this increases Europe’s growth potential. Questions do arise as to the appropriateness, from an economic growth potential point of view, of some of the education provided. Digital skills will be very important in future, as will financial literacy. The educational efficiency of Europe’s universities will come in for scrutiny, as will the astronomical cost of university education in some elite universities in the US.
  3. whether the structure of the economy and of the labour and capital markets allows human, technological and financial resources to be reallocated relatively easily from low to high growth sectors. This is a problem that has been tackled in Greece. But some wealthier economies, like France and Germany, have a distance to go is clearing the arteries of their economies. Structural rigidities contribute to Germany’s historically low propensity to import, which has contributed to the imbalances in the euro zone
  4. whether there is a possibility of relatively easy technological “catch up” in a  particular European economy. A country, like Greece, which has been held back by financial problems, should have significant catch up possibilities. Central European countries are already experiencing catch up, but this will be limited by their demographic and emigration problems. Countries using mature technologies may face difficulties competing with new market entrants.
  5. a successful strengthening of the governance system of the euro zone could give a boost to confidence. Countries, like Germany and Netherlands, will only agree to this, if countries with weaker banking systems have either cleaned up their banking systems, or if the risk sharing is limited in a way that requires financial markets to recognise that some sovereign bonds are riskier than others.
  6. regional policy can help growth, but it can also inhibit it.  Tilting infrastructural spending in favour of more remote regions may lead to sub optimal use of limited resources. Younger people all over the world are tending to gravitate towards big cities for social reasons, and it may be that this trend cannot be arrested. This is reflected in expensive housing in some areas and empty houses elsewhere. Regional policy priorities will tend to be set on the basis of political priorities, which may not yield the best economic rate of return. On the other hand, more spending in more remote regions may have environmental and tourism benefits, which are harder to measure.
  7. transformative combinations of technologies ( eg. artificial intelligence, machine learning, enhanced connectivity, new forms of human machine interaction) may lead to a rapid spurt in growth in areas which can adopt them. But some existing jobs may be displaced and income inequalities increased. Simultaneously encouraging new technologies, while mitigating the inequalities they bring, will be a major challenge for states, given the ease with which capital can move from country to country. If one country increases its taxes to mitigate inequality, better off people will move to other countries with lower tax rates.
  8. future trade policy. Brexit has the potential to introduce major uncertainties and barriers within Europe. President Trump’s “America First“ policy could lead to a trans oceanic trade war, which is a symptom of the growing military competition between the US and China. Rejection of rule based international trade could stop economic growth in its tracks.
  9. migration pressures. Immigration can increase economic growth, but it can also lead to severe social friction and political upheavals. African agriculture needs new export opportunities in Europe, if Africans are not to seek to emigrate to Europe in increasing numbers. There is a trade off between trade policy and migration policy. Anti immigrant identity politics is a high emotional appeal, but could prove to be economically destructive for Europe

This list of factors that influence relative rates of growth shows that economic growth comes at a cost. Some societies may decide that they do not want to pay those costs, and opt for a lower rate of growth.

 

BETTER PRODUCTIVITY IS THE KEY TO EUROPEAN PROSPERITY……… PRODUCTIVITY IN THE LEGAL SYSTEM AND IN THE HEALTH SERVICE IS AS IMPORTANT AS THAT IN EXPORT SECTOR

Raising productivity should be Europe’s top goal for the next ten years.

A recent OECD report highlighted low productivity growth as the key challenge facing the European Union.

It pointed out that, since 2000, labour productivity in the EU countries had risen by only 0.6% per year, whereas the average productivity growth, in OECD countries not in the EU, was 1.2% per year…twice as fast. 

Lagging productivity growth is even a bigger problem than the debt aftermath of the banking crisis. Economic growth that derives from increases in property prices and associated consumer spending is inherently temporary, whereas growth derived from productivity increases will last.

If EU countries become more productive, they will generate the revenue to reduce their private and public debts to manageable proportions. But if productivity remains low, debts will accumulate.

Since the crisis, EU countries have focussed on reducing costs, but have neglected investments that might boost long term productivity. 

Germany, for example, has a low level of public investment, even though it can borrow very cheaply to invest. In Ireland, public investment is still at two thirds the level it was in 2007.

Given that most EU countries will have to have big medium term increases in Government spending to pay pensions and provide healthcare to an ageing population, it is necessary for them to curb deficits now.  Already the EU has only 7% of the world’s population, but 48% of the world’s social spending by government.

Life expectancy in the EU is expected to increase from 76 years in 2010 to 84 years by 2060, which means a longer period during which pensions will have to be paid, and healthcare provided.

But cutting deficits, by reducing investments that might generate the revenue to meet those medium term expenses, is unwise.

One concrete step that could be taken to privilege investment over current spending, would be to amend the EU Stability and Growth Pact, to exempt from the deficit calculations co financing by member states of investments being jointly financed with the EU. 

The number of employable age in the EU will peak in 2022 at 217 million. After that, the number will fall. So if tax revenues, and services, are to be maintained, productivity must be continually improved.

The productivity of an economy is determined by the efficiency of the entire economy, not just of the export sector.

If Government services, the professions, the courts, or the transport system are inefficient, that can do just as much damage, as lack of research or unduly high wages in the export sector. 

Ireland, in particular, needs to look at the productivity of its health services, of its training systems, and of its legal system, all of which appear to be performing relatively poorly, and are shielded from external competition.

In Germany, the delays in setting up a new business are big barrier to improved productivity. Full scale EU wide competition in the services sector is a key to solving this problem.

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