Call for Fair Growth and a New Pact for Europe
PES Fair Growth Conference –
I thank the PES for organizing this important conference on „Fair Growth“. It is the logical follow-up of another conference I had the honor to participate in and which was organized by the Progressive Economy. We had the opportunity to discuss the third Independent Annual Growth Survey. This Report has become a crucial contribution to a more critical approach towards mainstream economic and fiscal policies in the European Union. It is not enough to regularly repeat in all kinds of conclusions that we are heading for a solid recovery and that the economic policies that have been implemented are about to be successful. We have to face the reality.
As the Independent Annual Growth Survey clearly shows, the European economy is lagging behind the more robust recovery of the United States. Furthermore divergences between and among Member states are widening.
At the end of 2014 and contrary to the US, economic activity in the EU is still below its pre-crises level and far from its potential. Unemployment is at an exceptionally high level although some Member countries are close to full employment. Even if it is true that growth is gaining momentum, as Mario Draghi told a few days ago the European Parliament, this recovery will only have a weak impact on unemployment which stands at 11,2 % in the Euro-zone and might go down to about 10 % by the end of 2017. How can we tolerate such a high and dangerous level of unemployment? In the US this would be unacceptable. The losses– human, economic and financial – are tremendous. This also leads to a deskilling of part of the labour force – namely the young. But by losing those skills we also lose the engines of future growth. It is absolutely unrealistic to believe that it is enough to promote structural reforms on the labour markets to reduce decisively the unemployment rate.
This gloomy outlook should not hide the fact, that there are positive signs despite the fragilities and new threats. Both the oil price, which has dropped dramatically, as well as a weaker euro have a positive impact on growth perspectives. Low interest rates and Quantitative Easing should foster investment although this is not yet clearly the case. The risk of deflation and particularly of a Japan-like long-lasting stagnation remains real. We have to be aware that such developments would threaten the cohesion of the European Union, and particularly the survival of the Euro-zone.
Therefore it is of utmost importance for Europe and for social-democrats to work out realistic alternatives helping the European economy to return on a sustainable growth path. The European project is intimately linked to a twofold commitment: peace and prosperity. The geopolitical context shows that peace and stability on the European continent are less self-evident than we had believed. Europe’s prosperity has been threatened by the financial and economic crises. Unemployment, growing inequalities and poverty risk are becoming the new normal of our societies.
There is a serious discussion on secular stagnation and the risk that Europe might enter into a long period of low growth and high unemployment. The perspective of dwindling income for the majority of our citizens and on ever bigger heterogeneity between member states is very worrisome.
As social-democrats we have to show our citizens that this is no fatality: growth is possible but not at any price. Our objective has to be fair growth. This is not just a nice slogan. This has to be a concrete way to give millions of Europeans a perspective for a better life. We have to rebuild confidence in the European Project. That’s the challenge we are facing. What does “fair growth” mean?
- Growth is fair if it is fairly shared between member states. Macroeconomic imbalances are considerable. The divergences between member countries are dangerous. Growth has also to be fairly shared between regions. This has always been the objective of the European cohesion policy.
- Growth is fair if it is socially fair. There is a risk that the rich, the speculators become richer and that the wage-earners do not benefit from recovery. Inequalities in our societies are growing. We have dramatically missed our objective of reducing poverty and growing numbers of children are living in households experiencing poverty
- Fair growth should be bringing back people into work. Not any kind of work: quality jobs, this means fair working conditions, wages that guarantee a decent life; namely by the means of minimum wages which do not transform workers into “working poor”. Recession and austerity have also a negative impact on gender equality. In several countries female workers are more deeply hit and social services – like child care – have been reduced. It means also that we have to take the big changes on the labour market very seriously: talking of structural reforms on labour markets cannot mean less security, more flexibility, total precarity. We do not want a labour market of millions of freelancers without social protection: “workers on tap” as The Economist called this new development. Fair growth certainly means also fair chances for young people to start their professional life and for older workers not to be excluded from the labour market.
- Fair growth also means fair taxation of private persons as well as of companies. We have to put an end to fiscal dumping in Europe but also at the global level. We need more transparency and European as well as international tax regulations preventing these kinds of practices which put our social systems under threat.
- Fair growth finally means a sustainable growth: climate change is about global fairness, ultimately about the survival of our earth.
These are the main issues we are standing for. Our policies should aim at achieving them. Some ideas how this can be done:
- Europe needs solidarity, solidarity not being a one way street. A politically, economically and socially divided Europe has no chance to overcome our common challenges and to build a common and better future.
- It is a myth that austerity policies lead to growth. Reality show us that in societies which are divided, political extremism is growing and the economy remains stuck with high unemployment. Inequality is growing. Is it normal that in Greece, due to austerity, 10 % of the less wealthy households have lost 86 % of their income when the 30 % of the wealthier households have seen their income reduced by only 20 %?
- A loose monetary policy as practiced now by the European Central Bank is certainly useful in the short run as a powerful response to deflation threats. But it has its limits and its risks. Do these billions of euro end up within the real economy, sustaining investment – public and private – or are they creating new bubbles, pushing asset prices up, making investors wealthier without creating new jobs for the millions of unemployed. We have to be cautious on these developments which might divide even more our societies.
- How can we restore growth in Europe and prevent a secular stagnation that would certainly become a major divisive factor for Europe’s integration? It is absolutely right, as Martin Wolf, has put it that “Nearly all future growth depends on a productivity resurgence”. The crisis has had a terrible impact on productivity. Productivity is fuelling the growth potential which has been affected negatively in all Member States. There is certainly not one single policy to enhance productivity. There is a combination of policies that is needed.
- Investment is certainly key to promote fair and sustainable growth through an improvement of productivity. The Commission program might be a first step, a kind of trigger, but it will not be able to relaunch investment in Europe which has dramatically fallen. This is particularly true in the southern member countries where investment is down by more than 50 or 60 %. We have to go far beyond and study less orthodox ways of financing. Think of the 800 billion dollars of the American Recovery and Reinvestment Act the US government launched which was a real stimulus on growth. There is by the way no improvement of private investment without an improvement in demand, and demand cannot merely be based on exports! If we want the investment strategy to be successful we have to get our macroeconomic and fiscal policies right. It would be a mistake to limit our economic discussion to competitiveness and fiscal deficits. Investment in infrastructure is important: digital networks, but also roads, bridges and other public infrastructures.
- Fair growth cannot be achieved without promoting innovation, R and D, education and skills. This is at the heart of a fair growth strategy. The biggest structural reforms lie here. This is the field where Europe has to rebuild or improve its competitiveness in the global economy. But in many countries investments in R and D, in education, in skills have been dramatically reduced. This is the result of blind austerity policies. This is also the consequence, despite of some additional flexibility, of a growth and stability pact which does not enough differentiate between different types of public expenditures. Mr Juncker recently remarked that there are cuts in public expenditures which have no major impact on growth. That’s right. But it also should mean that there are cuts – mainly in innovation, R and D, education - that have not only a serious negative impact on growth but also on the potential output of an economy.
The Social Investment Package is in this respect an indispensable part of an investment strategy which aims at fair growth. A country where poverty is increasing, where health insurance is not anymore available for an ever bigger part of the population, where inequalities are exploding, where funding for education is seriously capped etc, will have no serious perspective to stabilize, to become competitive again and to grow.
Investing in people is therefore key. We have to make sure that our policies are socially sustainable. This should also be the frame for structural reforms. Better vocational skills will foster productivity. We have to pay a special attention to digital skills. According to the ILO 90% of all jobs will require digital skills by 2020. There is on one hand an important shortage of people with such skills and on the other hand high levels of unemployment – especially among the young. Reskilling them is a major challenge.
Talking about fair growth emphasizes the issue of rising inequality. Wealth and income distribution become more unequal. As the independent Annual Growth Survey but also the Commission Report on Employment and Social Development in Europe mentioned “living standards of Europeans are diverging, … poverty and material deprivation is rising …”. These are unacceptable developments for social-democrats. Our historical fight has been devoted to reduce inequality and to guarantee equal chances of opportunity.
Therefore we have to put the fight against poverty and inequality firmly on our but also on Europe’s political agenda! I quote the independent Annual Growth Survey.
“Present fiscal rules are putting pressure on expenditure such as investments in education and active labour market policies. These kind of social investments are investments that are changing the long-term because they are investments in the future of Europe. Downgrading social investments will therefore have long-lasting consequences for Europe.”
This leads me to the recent OECD Report on “Trends in Income Inequality and it Impact on Economic Growth”. Rising disparities in the distribution of household incomes are not favorable to sustainable growth.. This trend which was there before the crises has been amplified by the recession. The “middle class economics” President Obama is talking about is also a relevant and important issue in Europe.
In comparison to capital earnings real wages have grown very modestly in the last 15 to 20 years. Studies by two US economists have shown that “shared capitalism boosts productivity”, because sharing profits encourages people to work harder and to be more efficient. A low wage economy does not lead to sustainable growth! We also need, according to Verdoorn’s law, a strong demand which will raise productivity.
Inequality is directly linked to investment in developing human capital – essentially education and skills. It is bad for a highly competitive and innovative economy. Inequality is bad for growth, because it creates a vicious circle of growing exclusion and unemployment leading to poverty, contributing to a weak final demand.
This is not just theory. Economic analyses explain why certain countries grow and others are stuck in a several-year-long recession. One major explanation lies with investment in research and development and in education, and thus in the capacity to promote high-tech production sectors.
By the way it shows also that the more highly skilled people leave their country, the worse the domestic economic performance becomes. The objectives of the 2020 strategy remain more than valid. At the same time mobility should therefore not be considered as a sustainable response to high unemployment in depressed economies.
Finally promoting the social economy which has proved more resilient, it is creating new decent job and contributes to fair growth. The Luxembourgish Presidency of the Council of the European Union wants the EU take a clear position on the development of social entrepreneurship.
What should we do on the political side to face the challenge of restarting fair growth?
The Commission program on investment runs too short: financially but also politically. It remains a very technocratic initiative far from the European citizens. It is up to us – social-democrats – to develop a new vision for Europe, focused on fair growth, jobs, social justice and democracy. This means that we have to profoundly change the economic governance. The social dimension has to be an integral part of it. Although rules are important, you cannot run economic policy by rules only and in a purely legalistic framework.
We have to involve stakeholders. A genuine social dialogue has to be rebuilt at a European level as well as at the national level. We have to work on an economic and social Pact for Europe, which by no means should be a formalistic or bureaucratic exercise. It should involve the European institutions including the Committee of Regions and the European Economic and Social Committee. Social partners should have an active role as well as national Parliaments. We should embed a revised and strengthened Europe 2020 strategy in such a Pact for Europe. This idea has been put forward by a large transnational consortium of European think tanks. It clearly states that consolidating past achievements and a policy based on “doing less but doing it better” will not be enough to give the EU a new start. Indeed such a Pact – a new grand project – for Europe able to reverse the negative tide of public opinion should be based on 3 pillars:
- An enabling Union focused on sustainable and fair growth leading to more quality jobs and
- a supportive Union enhancing the EU caring dimension through social convergence.
- A participating Union strengthening the ties between the EU and its citizens, increasing democratic legitimacy.
There is now a new role for our political family to play. Some may say this is not realistic; it may be a nice dream. But that’s precisely the point. The Schuman Declaration was it realistic? Wasn’t it a dream turned into real?
We should not miss this opportunity. Let’s start working on it.