European turnaround Plan: in this excerpt from their new book, economists Anders Aslund and Simeon Djankov lay out the steps for an additional one percent growth.

Author:Aslund, Anders
Position:Excerpt
 
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Europe can break out of its low growth trap and grow faster again. We suggest steps to increase annual GDP growth by one percentage point. If national governments and European institutions implement the policies suggested in this book, Europe can become as competitive as the United States, so that it can maintain its high living standards and social welfare state.

After eight years of stagnation, most Europeans want change. Europe has been confronted with a major inflow of refugees from North Africa and the Middle East, which offers an additional impetus for change. The result of the Brexit referendum in June 2016 is the starkest manifestation yet that Europe's economic and migration policy deserves a thorough rethink. In each area, some European countries have good practices that can be adopted as benchmarks by the rest of Europe as well.

The aim of this book is toformulate a reform agenda suggesting how the European economy can speed up its anemic growth. Our intention is to bring the attention of policymakers and European citizens to key changes that could make a difference. The following list of recommendations is a summary of the key insights of this book, focusing on common factors that can promote growth.

  1. Lim it public expenditures to 42 percent of GDP. Public expenditures in Europe are on average one-tenth of GDP higher than in other highly developed countries. These excess public expenditures go almost entirely to social transfers, which should be tightened since they distort incentives. Controlling for other conditions, very high public expenditures depress growth.

    Most EU countries have allowed their public expenses to swell simply because they could collect the taxes or sell bonds without considering whether the spending would be beneficial for their economic growth or welfare. Poorer European countries need to be careful not to expand public expenditures excessively to avoid fiscal crises and high levels of unemployment.

    A level of public expenditures in the range of 35^-2 percent of GDP seems optimal for Europe. One-third of Europe already fulfills this criterion (Bulgaria, Estonia, Ireland, Latvia, Lithuania, Romania, Slovakia, Poland, and the Czech Republic), and these countries grow faster than the rest. We suggest a European-wide ceiling of public expenditures in peacetime of 42 percent of GDP, like the Maastricht criteria of annual budget deficits of no more than 3 percent of GDP and public debt of no more than 60 percent of GDP.

  2. Open up services and digital trade. Trade in services offers the greatest growth potential for Europe, because services account for 70 percent of modem economies, but service trade remains fragmented and has been surprisingly neglected. The situation is even worse for fast-growing digital services. The European Parliamentary Research Service found that the greatest cost of weak EU cooperation in 2014--2019 was the missing digital single market ([euro]340 billion, 1.8 percent of EU GDP) and single market for services ([euro]330 billion, 1.8 percent of...

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