European Policy Centre

How do we handle the economic crisis? Policy implications for the

European Union

17 June 2009

Dr Fabian ZuleegSenior Policy Analyst

Introduction

• Fabian Zuleeg, Senior Policy Analyst, responsible for the programme ‘Europe’s Political Economy’ (EPE) at the European Policy Centre (EPC) • Professional economist with private sector, public sector and academic experience• Contact: F.Zuleeg@epc.eu

• EPC: Brussels-based think-tank with 400+ member organisations• Mission: To make European integration work • Independent, providing objective and impartial analysis, focus on concrete policy recommendations• EPE priorities: Competitiveness & innovation, Social Europe (Well-being 2030), Climate Change, Better Policy Making & Economic Governance

The financial crisis

• Long term underlying global imbalances: US triple deficit, speculative bubbles (but not simply a US problem)

• Triggered by sub-prime mortgage/property markets• Something rotten in the financial sector – leverage, risk, return• Crisis building throughout 2008• Lehman Brothers collapse in mid September• Danger of systemic collapse in October• Governments injecting liquidity• Taking over banks’ assets and liabilities• Underwriting loans, guaranteeing deposits

The economic crisis• Spill-over from financial to real economy (jobs and

growth)• Worst economic crisis for developed world since WWII• Variability in the impact on developing countries• Structural change in US and EU – away from export-

oriented manufacturing and debt-financed consumerisms• Clearly more than a cyclical downturn – need to use a

wide range of instruments: monetary, fiscal, structural reform, social, green etc.

• But towards what goal?• What can policy do?

Policy responses so far• Decreasing interest rate and monetary policy mechanisms • Defence of currencies in some countries (not necessary in

Eurozone)• Fiscal stimulus: national & European recovery programmes• Coordination for financial and economic measures (Single Market

rules)

But - Monetary policy insufficient- Deficit and debt levels soaring- Hard to spend sensibly and quickly- Some countries struggling- Long term policies?

Emerging difficulties• A year of change – new EP (more extremism), next Commission• Are the current agreements being implemented?

– Lack of green, knowledge economy investment– Slow to get spending going– Rising protectionist/economic nationalism tendencies

• Variable impact on different countries– Cost of dealing with climate change – too much in the current crisis? (for

manufacturing and for lower income member states) – Tensions within Eurozone – higher risk premium for Irish, Greek, Italian

debt– Difficulties for countries outside the Eurozone to defend currency - who

and how to assist? Some countries close to the brink…• How can a repeat be avoided?

– How to supervise and regulate financial markets and at what level?

The real impact of the crisis

• Europe’s economies not (no longer?) in danger of immediate collapse• But there will be pain, especially in some countries• Need for real change in the EU economies

– Acceleration of structural change– Emerging knowledge economy– Global shift of economic activity

• Low growth – for some time to come• Unemployment, worklessness and poverty• Negative impacts: health, crime, social cohesion• Sustainability of social Europe – pensions, healthcare, education, social

protection• Long term public finance issues• What will Europe’s future competitive advantage be?

How can we save the real economy?• Crisis might be mitigated but can’t be avoided• Fiscal stimulus needed but must invest in the future, not the past

(green economy, innovation and education, not old manufacturing)• Put the money where we said we would put it…• Longer term limits of debt-financed spending so we should spend

the money wisely…• Must also clean up financial sector but, as crisis eases, stop

throwing good money after bad • Need for structural reform in the medium to long term: Public

finances, public services, labour markets etc.• Lisbon+ is needed urgently• Common action to avoid negative spillovers (given interdependence)• More Europe needed to deal with the crisis, not less! Not least

because there are more difficulties than ‘just’ the current crisis

Europe’s future economic challenges

• The financial and economic crisis• Climate Change/energy • Globalisation (competition, migration, new economic powers,

technological change)• Demographics (and impact on the sustainability of EU’s social

models) • Income disparity (between and within countries)• Global conflict and terrorism• Changing societies and integration• International development• Diseases and emergencies

Where will we be in 2030?• The perfect storm? Interrelated and mutually reinforcing challenges• Increasing in complexity and magnitude• Europe is falling behind in its policy responses …

Under-investment in human capital, lack of spending on commercial innovation, public debt, mobility, retirement policies, etc.

• Europe’s choice: Act together (decisively) or go under (slowly)• All EU member states too small to survive on their own in the global

economy• Need to safeguard the Single Market – greatest achievement so far• Common action to safeguard our way of life in many difficult policy

fields (energy, taxation, public finances, social security etc.)• Need leadership and vision for the future