Friday, September 11

Presenter
Karl Pichelmann, Senior Advisor, DG ECFIN, European Commission

Summary
On September 11, Karl Pichelmann, Senior Advisor to the European Commission Directorate General for Economic and Financial Affairs, presented his views regarding recent progress on the Europe 2020 strategy and its future prospects.

Mr. Pichelmann expressed concern about growth performance in the EU: the gap in GDP per capita in purchasing power parity terms between the U.S. and Europe has been widening over the past two decades, and especially so since the onset of the global financial crisis in 2007. He noted that the gap could be decomposed into two parts: a “structural” gap and a “crisis-induced” gap. The former can be understood as the gap arising from an extrapolation of the pre-crisis trend, reflecting the fact that growth is weaker in the euro area because of economic developments beyond the effects of the business cycle. The latter demonstrates that although both the euro area and the U.S. went through a crisis, the recovery has been weaker in Europe, thus widening the gap in income levels. A growth strategy, Mr. Pichelmann explained, should aim to close both gaps. The Europe 2020 strategy has been mainly directed at the structural side.

Based on a growth decomposition analysis in the economy of the EU, Mr. Pichelmann noted that in a “no policy change” scenario, the outlook in the region in the medium term looks to be only a modest 1 per cent annual growth in GDP. The Europe 2020 strategy constitutes a vision to reinvigorate growth in Europe by making it smart, sustainable, and inclusive. As such, it envisages support for new technologies and innovations to encourage greater efficiency and stronger competition to stimulate growth. The strategy also aims to create more employment opportunities and stronger social and territorial cohesion.

To achieve these objectives, the Europe 2020 strategy identifies pro-growth structural policies that can stimulate investment and economic rebalancing. Mr. Pichelmann gave examples of reforms some member states have made in such areas as taxation, pensions, the labor market, and the business environment. According to a recent study, identifying best performers among EU countries in various areas could help others identify opportunities for reforms. Closing gaps by adopting best practices is estimated to have significant growth effects.

Mr. Pichelmann reminded the audience of the five targets of the Europe 2020 strategy: 75 per cent employment, 3 per cent investment of EU GDP in research and development, climate/energy targets, reduction in school dropout rates, and less risk of poverty. He then admitted that the EU was likely to fall short of targets in almost all areas except for the climate/energy objectives, partly because the strategy is only a recommendation and so the EU cannot enforce the targets. He suggested that one potential solution to this problem could be closer European economic coordination. Some major moves have already been made. For instance, in 2010 the European Semester was adopted as a framework for economic and fiscal coordination that provides for timely analysis of the fiscal and structural reform policies of every EU member state.

During the discussion that followed the lecture, audience members were interested in a wide array of European economic issues, such as what the priorities to boost economic growth should be, what the role of regional disparities was, and which of the Europe 2020 goals would be most difficult to achieve. Mr. Pichelmann agreed that each EU country faces different circumstances and would therefore have different priorities for structural policies and reforms. He also noted that while there is still a good chance that the climate change and education targets could be met, achieving pension reform objectives would be difficult.

Asel Isakova
Junior Economist, JVI