Spring Meeting of the AIECE (Association of European Conjuncture Institutes)
Geneva, 12-13 May 2005
Speaking notes for the Executive Secretary
Mr. Chairman, Ladies and Gentlemen:
I am very pleased to welcome you here to the Palais des Nations for the Spring 2005 meeting of the AIECE. If I am not mistaken, this is the first time that you are meeting here in Geneva on the premises of the United Nations.
Allow me to very briefly introduce my organization, the UNECE, to you. The Economic Commission for Europe was created in March 1947 and was a pan-European organization from its inception. Gunnar Myrdal, who was awarded the Nobel Prize in Economics in 1974, became its first Executive Secretary, a function that he occupied till 1957.
From the onset, and influenced by Myrdal’s vision, UNECE has been a two-track organization. The first track, which absorbs most of UNECE’s resources, consists of close intergovernmental cooperation on a wide range of practical and technical issues, which is reflected in the development of conventions, norms and standards in the areas of environment, transport, trade facilitation and energy. UNECE also contributes to the harmonization of international statistics under the auspices of the Conference of European Statisticians.
In a more general way, all this work, which is frequently quite unknown to outsiders, has helped to ensure that international economic relations in the region are non-discriminatory and market-extending, often leading to significant reductions in the transaction costs of international trade and investment.
The second pillar of UNECE’s work is economic analysis, which is carried out under the sole responsibility of the Executive Secretary. Its conclusions do not therefore necessarily reflect the views of our member States. This work is published mainly in the Economic Survey of Europe, which is UNECE’s flagship publication. Since the collapse of central planning, the transition to market economies in Eastern Europe has been the major focus of our research work. But we have also continued to contribute to the analysis of economic developments and economic policies in the developed market economies of our region.
Perhaps the major achievement of the UNECE until the collapse of communism in eastern Europe was to keep alive the idea of a larger Europe that went beyond the boundaries of what was to become the European Economic Community. In fact, UNECE helped to build a bridge between the eastern and western halves of Europe, when no one else was willing or able to do so and when the prospects of uniting them were so distant as to appear quixotic.
The political changes in eastern Europe and the recent enlargement of the European Union will therefore, not surprisingly, also have an impact on UNECE’s programme of work in the future, which will be agreed upon by UNECE member governments. In any case, UNECE will put greater emphasis on its operational and analytical work on the countries of south-east Europe and the CIS.
At the same time, UNECE should remain a neutral pan-European forum in which all member countries can express their views and work towards a deeper integration of the wider European economy.
This meeting is taking place at a time when the global economy appears to be weakening and the short-run outlook is clouded by important downside risks, especially the development of oil prices and the sustainability of the huge United States current account deficit.
The European economy will, in the aggregate, continue to experience below average growth, and the euro area is set to remain the soft spot of the world economy in 2005 and 2006.
But the average moderate growth performance in Europe masks continued solid growth in eastern Europe, both in the new EU Member States and in south-east Europe, driven by a combination of robust domestic demand and strong export competitiveness. At the same time, as the economies in eastern Europe want to catch up with the western Europe economies they have to grow faster and in a sustainable manner.
They have to move faster in their structural reforms, modernize their infrastructure, education systems, health care and social sectors etc. all of which should help them to reduce unemployment and meet the challenges of transforming their economies into knowledge-based economies. More generally, the focus on short-term economic developments and cyclical fluctuations should not deflect policy makers from the importance to understand the long-term determinants of economic growth and sustained macroeconomic stability.
In the short-term, in western Europe, growth appears to be increasingly restrained by the adverse effects of the strong euro and the global slowdown on exports in a context of persistent low domestic demand. This appears to hold especially for the three major economies of the euro area.
Weak domestic demand – in my view – mirrors negative expectations of businesses and consumers motivated by different factors. Some are of a short-term nature and might be provoked by inadequate government policies, others appear to be of a structural character and may be addressed by in-depth reforms. [some are of a psychological nature?]. It seems that consumers in the “old Europe” lose confidence much more easily than consumers in the USA in spite of the fact that they benefit from lower job uncertainty and, on average, higher social security.
I agree – as noted recently by political leaders in Germany and France – that there is currently a lot of pessimism in Europe and, I would like to add, that there appears to be also a lack of willingness to take risks and associated with that, a lack of “entrepreneurial spirit”.
Against this background, policy challenges differ. In the euro area, the major challenge in the short run is to achieve a sustained recovery, which will hardly be possible without a stronger growth of domestic demand. The persistence of low growth makes it difficult to achieve the desired progress in the consolidation of government budgets, to obtain the required levels of finance for the public pension and health systems and to improve the situation in the labour markets. The medium-term challenge in the euro area is to raise potential output growth and to undergo reforms.
The discussion on reforms has so far been mostly limited to areas such as labour market reform, pension reform and the liberalization of services in the EU. I think we owe a lot to these discussions. New innovative approaches are needed that address issues which are going beyond the “ conventional wisdom”. These new approaches are associated with higher spending on R&D and innovation, with policies to raise employment in the face of changes in the structure of demand for labour, and it also includes the need to adapt to in-depth changes in production and consumption patterns, as well as acknowledging the role of a well-designed social model in promoting competitiveness, etc.
To put it in a different way: The reformed Lisbon Strategy rightly puts more emphasis on policies for strengthening competitiveness and raising employment and productivity growth in the face of intensifying adjustment pressures from globalization and the progressive population ageing in the decades ahead. Raising R&D expenditures, fostering innovation and raising the quality of education are key factors to achieving the Lisbon goals.
Sustaining higher rates of growth is a conditio sine qua non for preserving the European social model with its strong concern for social cohesion which needs to be reformed in the face of population ageing, the intensification of international competitive pressures, etc. But the challenge is to avoid severe cutbacks of the welfare state, which would risk increasing social tensions by creating growing economic disparities within countries with negative implications on consumer demand, on risk taking and eventually on competitiveness.
In eastern Europe, the challenge is to sustain the current high growth path in order to promote the process of catching up with levels of real incomes in the developed market economies. At the same time, it is also important to maintain sound government finances and to be aware of the potential risks associated with quite high external deficits. The long-term challenges that I touched upon earlier are much more complex and will not be easy to achieve.
In the medium- and long-term the European economy has to cope not only with the challenges and tensions from globalization but also to continue to adjust to the ongoing integration of the east European economies into the wider European division of labour. In view of the relatively low labour costs in eastern Europe, this process has created its own tensions, especially in a context of low growth and high unemployment in western Europe, and what politicians have dubbed social and fiscal dumping originating in eastern Europe, due to low wages, low labour protection, low taxation, etc.
These frictions were illustrated by the recent controversy over the European Commission’s Services Directive. These adverse reactions and fears should, however, be put into a proper perspective. It should be recalled that the process of integrating the east European economies into the international division of labour has had and will continue to have beneficial effects for the more advanced European economies both in terms of output and employment growth in the long run. Secondly, all this further stimulates discussion on the harmonization of social security and fiscal systems, which, no doubt, will allow further integration of the single European market.
Ladies and Gentlemen,
While there is wide agreement that supply side reforms are needed to improve the performance of the European economy in the longer run, there is also the issue of having a sufficiently flexible macroeconomic policy framework to support economic growth in the short run.
A question that should be raised at present is to what extent can demand-side policies help in raising growth and employment in the European economy. What kind of lessons can we draw from the recent experiences with expansionary fiscal policies in the United States and the United Kingdom? Is this not evidence that fiscal policy can be an effective instrument to support economic activity and that government intervention is not necessarily doomed to be ineffective?
The success of any economic policy strategy designed to overcome a period of economic weakness depends, of course, on a differentiated, balanced analysis of the issue, to what extent a demand gap or supply side factors are responsible for it.
What is needed is a “constructive scepticism”, which looks closely and critically at the conventional wisdom to confirm, reject or qualify it on the basis of the available evidence. We should not forget that economics is an uncertain science and that question marks are therefore as useful as conclusions, especially for those who have to take the decisions.
This points to the clear practical purpose of economic analysis carried out by national research institutions, such as the members of the AIECE, and international organizations such as the UN. The general aim is to improve the information base on which economic policy is based and to contribute to the policy discussion by suggesting different perspectives and alternative views.
Two aspects of this can be emphasized: the first is the obvious one of learning from others, and for that, sorting out what is common from what is nationally specific. The other is reminding national governments of the increasingly international context in which they must formulate policy, and trying to set out the true nature of their economic interdependence.
International networks such as the AIECE can certainly make important contributions to this kind of economic analysis, which should be regarded as a public good.
Let me conclude by wishing you a stimulating and successful meeting.
I also hope that you will find some time to discover the attractions of Geneva, including the Palais des Nations.