This is the third annual report by the European Economic Advisory Group at CESifo. It includes six chapters, each addressing a set of emerging policy issues in the euro area and in the European Union as a whole. In this press release we briefly provide the main conclusions of the group as regards both analysis and policy proposals.
While growth in Europe was disappointing in 2003, there are indicators that point to a moderate recovery in 2004. The European economy is finally experiencing an upturn: in our forecast, European GDP will grow at a rate as high as 2 percent in 2004, once again lagging significantly behind the United States and also Japan.
However, the recovery is extremely fragile. The global macroeconomic imbalances imply a risk of further dollar depreciation, undercutting European growth and potentially creating tensions about the appropriate fiscal and monetary policy mix in the euro area.
There is a strong need for a common fiscal framework: the EEAG group presents its proposal for an improvement of the Stability and Growth Pact.
Political constraints prevent governments from implementing labour market reforms, but policies exist that could be effective in reducing unemployment without encountering strong political opposition. As an important example, existing employment protection rules could be replaced by a single, simple system of financial compensation for dismissed employees.
Pay-setting arrangements have significant implications for both macroeconomic performance and economic efficiency. Systems and reform achievements differ across Europe. In some cases collective bargaining has not contributed to growth and macroeconomic stability, but many small European countries have achieved real wage moderation through co-ordinated collective bargaining. In all cases, however, existing systems could be substantially improved by allowing for more diversity in relative wages.
Accession countries mostly have decentralised wage bargaining systems. They should be encouraged to maintain their own systems: measures to promote common social policies across the Union are quite inappropriate in this area.
The elimination of racism, the advancement of women in public and business life, greater support for disabled people, and the establishment of a true common market in which national origin ceases to be of economic relevance are important objectives for Europe that we fully share both as individuals and as a group.
Would these objectives be best pursued by provisions for non-discrimination that are actively promoted by the Commission and which are repeatedly referred to in the draft constitution? We are concerned with the risk that such provisions would transfer inappropriate policy-making powers from democratic institutions to the Courts.
We examine specific provisions in the areas of gender discrimination in goods and services, disability and nationality discrimination, and conclude that the legitimate objectives of those who oppose discrimination are likely to be better achieved by pragmatic policies than by rhetoric and semantic interpretations of what exactly constitutes discrimination.
The report contains detailed comparisons between the economies of existing EU states and acceding countries, including income levels, differences in economic structure, and policies for growth, immigration, public finances, trade, foreign direct investment and capital mobility.
Extending the Union to include ten countries with very different economic structures and experiences is a major gamble for the EU and the risks involved are more likely to be tackled successfully if frankly acknowledged.
Income convergence is a slow process. Fiscal sustainability and financial stability are likely to become an issue in the next few years.
Acceding countries are experiencing a rapid growth of their financial sector, while fiscal problems are emerging in many countries. With liberalised capital markets, financial and fiscal fragility poses a substantial challenge to macroeconomic stability during the convergence process.
Early adoption of the euro by accession countries is a goal that requires careful evaluation. High volatility of capital flows is a threat to temporary regimes of limited exchange rate flexibility. Euroisation and dollarisation of net foreign liabilities makes exchange rate movements a potential major threat to a smooth transition.
The EEAG consists of a team of eight economists from seven European countries. It is chaired by Giancarlo Corsetti (European University Institute, Florence) and includes Lars Calmfors (University of Stockholm), Seppo Honkapohja (Universities of Helsinki and Cambridge, vice chairman), John Kay (St. John’s College, Oxford), Willi Leibfritz (OECD, Paris), Gilles Saint-Paul (University of Toulouse), Xavier Vives (INSEAD, Fontainebleau), and Hans-Werner Sinn (Ifo Institute, Munich). The aim of this report is to comment on the state and the prospects of the European economy. With the support of the Ifo Institute it provides a European economic forecast and discusses topical economic issues that are of general interest to policy makers, managers, academics and the European public in general.
For further information please refer to the EEAG Main Page with links to
Report on the European Economy Presentation and ordering information
EEAG European Economic Advisory Group at CESifo Information and current members
Presentation: EEAG Video, 4 min.
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