For a stronger and more integrated Europe

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On 19 June we were pleased to host OECD Secretary-General Ángel Gurría who presented the Economic Survey of the European Union 2018 and Economic Survey of the Euro Area 2018.

The Surveys, prepared every two years by the OECD Economics Department, assess the state of the European Union and Euro Area economies as well as the policies and reforms that can help ensure strong, sustainable and inclusive growth as the European project moves forward.

The European Union Survey looks more specifically at how to ensure a greater integration of European economies, notably through more efficient cohesion policies, a reformed EU budget and completing the single market.

The Euro Area Survey discusses reforms to buttress the Monetary Union by completing the banking union, establishing a common fiscal capacity in the form of an unemployment reinsurance scheme and revisiting fiscal rules.

Mr Gurría was joined by Pierre Beynet, head of the OECD Economics Department division responsible for the EU and Euro Area, OECD senior economist Aida Caldera-Sanchez. The seminar was moderated by Bruegel senior fellow Zsolt Darvas.

“More Europe, more Europe, more Europe”

After years of crisis, growth in the EU has picked up momentum. While the improved economic conditions are welcomed news, they are still some risks for economic growth: Trade tensions have dented business confidence and created uncertainty which delays investment and consumption decisions, Europe is ageing rapidly and productivity growth is weak.

The policy toolkit to complete the monetary union involves a fiscal backstop for the single resolution fund, reinforcing the guarantee of bank deposits and breaking the negative feedback loop between banks and states through the creation of a “safe asset”. Briefly put: better supervision, regulation and integration.
Growth in the medium to long-term should rely on investment on education, innovation, regulation, competition, flexibility in the labour and product markets and R&D. The underdevelopment of capital markets is also an issue to be solved. The persistence of zombie companies and the lack of new companies leads to misallocation of resources and lack of job creation. Above all, going forward growth must be inclusive.
The OECD also supports a broader and stronger EU budget. It was put forward that there is room to reallocate common agricultural policy funds to digital policy and structural changes, with an emphasis on the lagging regions.

A common European unemployment reinsurance system

One of the proposals of the OECD Surveys is the common European unemployment reinsurance system. This instrument is designed to respond to big shocks (e.g. if the unemployment is above a long-term average and increasing above a given threshold) with a 1% GDP transfer. These transfers can provide a cushion against shocks and smoothen economic fluctuations. As the OECD shows, not only southern European countries, but all countries would have benefitted from such a scheme during the 2002-2016 period, although different countries would use the scheme in different moments in time. The scheme is also set to return progressively to equilibrium. As the scheme would be financed by borrowing and later paid back by countries, it would not imply any cross-country transfers.

Rethinking cohesion policy

Europe is now growing… asymmetrically. The crisis not only reduced convergence across countries but also among regions. While regional policy absorbs a sizeable share of the budget, results of studies evaluating its effectiveness are mixed. It was proposed that cohesion policy is rethought in a time when going forward there will be less money in light of other priorities such as migration or defence policy.
Regions lagging behind should receive most of the funding. Appropriate targeting of spending is also needed – cohesion policy funding is dispersed across objectives. Though important, some of them, such as climate change, should be managed with another tool and free up funds for cohesion priority areas such as investment in education and innovation. Another issue that was identified was the pace of spending – often countries spend funds only when close to the end of the programs. A suggested solution was to increase the co-financing share of countries so as to better financial planning and spending. A final remark was that more analysis is needed on how funds are spent.

Event Materials

2018 OECD Economic Surveys of the Euro Area and the European Union