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What EU needs are structural reforms
By Dan Steinbock |
November 28, 2012, Wednesday
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IN the past few days, Brussels has been swept by a EU budget debate for the years 2014 to 2020, and the continuing saga of the Greek bailout.
What Europe really needs are structural reforms.
In the EU budget debate, the net payers demand substantial cuts, hoping to limit the budget to 1 percent of the EU economic output. That would require slashing 200 billion euros from the proposed budget.
In contrast, net receivers - the countries that get back more than they pay in - oppose the cuts.
Chancellor Angela Merkel (Germany) seeks a middle-ground. She does want some cuts in the medium-term.
However, Berlin wants to get the budget talks out of the way so that structural reforms can be initiated in Europe.
The second debate involves Greek debt. Both the eurozone and the IMF want Greece to reduce its debt load from a current level of 170 percent of GDP to a ratio of 120 percent by 2020.
The IMF, however, insists that Germany and other creditors should again forgive a portion of Greece's debt - which is not acceptable in Berlin.
Both debates reflect Europe's tacit divisions.
In the first case, the divide is between the net payers in the West and the net receivers in East Europe.
In the second case, it is between northern Europe, which suffers from bailout fatigue, and southern Europe, which is struggling with austerity fatigue.
The polarizing divides do reflect increasing political frustration - and especially diminished economic prospects. In the past, Germany's export engine was thriving and France avoided stagnation. Now Germany is heading toward stagnation, while France is flirting with recession.
In Germany, the slowdown of economic activity in the second half of 2012 is likely to morph into recessionary conditions in early 2013.
President Francois Hollande has opted for redistributionist taxation policies, which will discourage French business, and he is trying to foster budget discipline, which will discourage consumption. Neither the Elysee Palace's subsequent policy readjustment nor its proposed competitiveness plan will be enough to overcome the impending stagnation. France needs structural labor market reforms.
Dr Dan Steinbock is research director of international business, India, China and America Institute (USA); Visiting fellow, Shanghai Institutes for International Studies (China); and Visiting Fellow, EU Center (Singapore). Shanghai Daily condensed the article.
What Europe really needs are structural reforms.
In the EU budget debate, the net payers demand substantial cuts, hoping to limit the budget to 1 percent of the EU economic output. That would require slashing 200 billion euros from the proposed budget.
In contrast, net receivers - the countries that get back more than they pay in - oppose the cuts.
Chancellor Angela Merkel (Germany) seeks a middle-ground. She does want some cuts in the medium-term.
However, Berlin wants to get the budget talks out of the way so that structural reforms can be initiated in Europe.
The second debate involves Greek debt. Both the eurozone and the IMF want Greece to reduce its debt load from a current level of 170 percent of GDP to a ratio of 120 percent by 2020.
The IMF, however, insists that Germany and other creditors should again forgive a portion of Greece's debt - which is not acceptable in Berlin.
Both debates reflect Europe's tacit divisions.
In the first case, the divide is between the net payers in the West and the net receivers in East Europe.
In the second case, it is between northern Europe, which suffers from bailout fatigue, and southern Europe, which is struggling with austerity fatigue.
The polarizing divides do reflect increasing political frustration - and especially diminished economic prospects. In the past, Germany's export engine was thriving and France avoided stagnation. Now Germany is heading toward stagnation, while France is flirting with recession.
In Germany, the slowdown of economic activity in the second half of 2012 is likely to morph into recessionary conditions in early 2013.
President Francois Hollande has opted for redistributionist taxation policies, which will discourage French business, and he is trying to foster budget discipline, which will discourage consumption. Neither the Elysee Palace's subsequent policy readjustment nor its proposed competitiveness plan will be enough to overcome the impending stagnation. France needs structural labor market reforms.
Dr Dan Steinbock is research director of international business, India, China and America Institute (USA); Visiting fellow, Shanghai Institutes for International Studies (China); and Visiting Fellow, EU Center (Singapore). Shanghai Daily condensed the article.
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