Europe’s recovery in the real economy has taken hold and is becoming self-sustaining. But this good news is still offset by the continued crisis in sovereign bond markets. In order to secure the recovery, therefore, uncertainty in the markets must be overcome.
The European Commission presented its Annual Growth Survey on Wednesday, as part of this comprehensive response. This kicks off the so-called “European semester”, a new attempt to provide effective prior co-ordination of national and EU economic policies, before governments create their 2012 budgets. This will present a range of bold policies that address the problems in sovereign bond markets.
First, each member state must put its own fiscal house in order. This is already happening but there can be no back-sliding.
Greece and Ireland are already engaged in programmes of unprecedented adjustment and structural reform. Since last spring, Greece has demonstrated a remarkable commitment to economic stabilisation – one certain to yield lasting returns.
Spain is now also pursuing a broad reform agenda by restructuring its savings banks, taking new fiscal measures and accelerating pension and labour market reforms. Portugal has passed a rigorous budget for 2011 and has also announced bold measures to improve its overall competitiveness.
In parallel, we must ensure that the financial support mechanisms put in place last May are fit for purpose. The effective lending capacity of the current European financial stability facility should be reinforced and the scope of its activity widened. Here we need to review all options for the size and scope of our financial backstops – not only for the current ones, but also for the permanent European stability mechanism too.
Second, Europe urgently needs structural reforms that permanently boost its capacity to create jobs, increase productivity and ensure sustainable public debt. It must make the most of Europe’s single market, especially in the areas of services, energy and intellectual property; make all of its tax and benefit systems more conducive to employment growth; reform the labour markets and pension systems; invest in knowledge and innovation; and simplify the regulatory environment to help enterprises and to encourage them to grow.
The national reform programmes that EU member states are preparing will push forward these reforms. But there is insufficient ambition and a lack of urgency in implementation. That needs to change before the programmes are finalised in April.
Third, repair of the banking sector must be completed to ensure credit reaches the real economy. Another round of bank stress tests will be conducted in the months ahead. Lessons will be drawn from the 2010 exercise and make these tests even more rigorous. They will also benefit from the new EU architecture of financial supervision, which began this year. The results will guide the necessary restructuring of the banking sector.
Finally, the foundations of EU economic governance must be strengthened to pre-empt crises. The financial crisis hit Europe hard because the fiscal houses were not in order. Good times were not used to stabilise budgets. Macroeconomic imbalances were allowed to accumulate. This is why the EU must conclude fundamental reform of its economic governance by next summer and maintain the high level of ambition of the Commission’s original proposals.
Looking ahead, 2011 will undoubtedly be challenging for Europe. But it could also be the year that Europe overcame the sovereign debt crisis, lifts its growth potential and reforms its economic governance. This calls for a comprehensive response by the whole EU and for bold fiscal and structural measures in all member states.
© Financial Times
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article