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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of the European Union published on 21 September 2009.
Europe has experienced its worst post–war recession but must pursue its reform agenda to return to sustainable growth
The European Union is facing severe challenges from the financial crisis and the deep recession. The European economy has been heavily affected by ongoing financial turmoil and the associated deep and synchronised recession in the global economy, reflecting the strong commercial and financial linkages between European economies and between Europe and the rest of the world. Output is projected to decline by around 4% this year, making this Europe’s worst post–war recession. The actions taken by central banks, member state governments, the Commission and other EU institutions have stabilised financial markets and supported the economy. It is important that these policy actions do not imperil the prospects for subsequent recovery or endanger the single market. The recession itself will result in a considerable loss of capacity in the European economy, adding to the pressures on long–term growth prospects that will come from population ageing, and has disrupted the progress that was being made towards achieving the objectives of the renewed Lisbon Strategy for Growth and Jobs. Reforms undertaken through the Lisbon strategy since 2005 have helped the EU to improve the resilience of its economy. These results can be attributed to the overhaul of the Strategy in 2005 marked by the introduction of clear “governance” mechanisms. There have also been improvements in the fiscal position in many countries that allowed for a co–ordinated fiscal impulse to support demand and boost confidence as part of the EU’s recovery plan. The speed and depth of reforms, however, still vary among member states. This can be remedied by further improving governance which would bring more ownership and a substantial policy response of the member states to these policy recommendations. Tackling these "delivery disparities" should be a key objective for the upcoming revision of the Lisbon Strategy for the period after 2010. Structural reforms remain essential for the European economy, and the Lisbon Strategy will need to ensure that reforms are accelerated and deepened, thereby limiting the medium–term effects of the crisis on potential output. This Survey reviews recent developments and the measures introduced in response to the economic and financial crisis. It then identifies some of the key structural policy challenges that the European economy will face in the coming years. These include strengthening innovation performance, deepening the single market, making the transition to a low–carbon economy and further opening European markets to the rest of the world.
Prompt and effective implementation of the European Economic Recovery Plan is essential
The crisis presents substantial challenges to European policymakers, with prompt action needed to revive financial markets and cushion the impact of the recession on demand and employment. EU–level actions have also been needed to provide additional financial support to some of the member states that have faced considerable economic and financial headwinds since the onset of the financial crisis. The short–term challenges to European policymakers are magnified by the need to press ahead with the implementation of structural reforms that will help to prevent future financial crises, enhance resilience to adverse economic shocks and improve both longer term growth prospects and the long–term sustainability of the public finances, in the context of ageing populations.
The Commission has a central role in monitoring and co–ordinating the actions taken by member states in response to the economic crisis and ensuring they are implemented effectively. The European Economic Recovery Plan, which combined short–term measures with an acceleration of structural reforms as set out in the Lisbon strategy country specific recommendations was a welcome answer to the crisis. Total support to demand from member states and EU–level authorities will amount to around 5% of EU GDP in 2009 and 2010. Discretionary fiscal measures in these two years amount to a total of 1.8% of GDP, augmenting the significant stimulus coming from the relatively large automatic stabilisers in the EU. Past structural reforms and, in particular, fiscal consolidation in good times, have allowed most member states to launch fiscal stimuli within the framework of the European Economic Recovery Plan. Measures taken to underpin the financial sector and direct assistance from the Commission and other European bodies are also supporting activity. Further measures may be announced by member states that have sufficient budgetary scope. However, taking into account the contingent liabilities linked to the financial sector rescue operation and the implicit liabilities related to ageing, the fiscal space has been narrowing across the EU. In some member states, fiscal space has been virtually exhausted owing to already high budget deficit and public debt levels, which are reflected in rising interest rate spreads on government bonds. It is vital that the Commission and the Council, through the Stability and Growth Pact, ensure that clear and credible plans for fiscal consolidation are implemented by the member states.
The crisis is an opportunity to promote structural reforms
Past experience shows that growth–enhancing structural reforms are often initiated at times of economic crisis. But careful thought is necessary in designing such reforms to ensure that they offer long–term benefits rather than just a short–term palliative. The European Economic Recovery Plan rightly combines short–term measures with structural reforms in order to meet the Union's medium–term objectives. In particular, it is essential that policies to support local jobs and businesses do not endanger the European single market or hamper external access to the European Economic Area. The Commission has already intervened promptly against measures that favour selected subgroups of companies and violate single market principles and must continue to do so. The Commission also needs to stand ready to ensure time–limited state aid and other fiscal supports are withdrawn promptly at the appropriate juncture as the economy recovers.
Nonetheless, the fiscal easing underway in many European economies has provided an opportunity to facilitate some worthwhile structural reforms. Well–founded investments in infrastructure, including broadband and new low–emission technologies will offer long–term supply–side and environmental benefits as well as a short–run boost to activity. The activation of labour market programmes, development and better matching skills with the market needs, reductions in social security contributions and support for low–income households will dampen the impact of the recession on labour markets and the necessary adjustments that will arise from other structural reforms. Maintaining, and even increasing, investment in education and training is a lever for helping to get through, and overcome, the challenges of the recession, thus helping to ensure that the workforce holds on to and upgrades its skills, and that people are equipped for opportunities that will arise once the crisis is over. The Commission needs to continue to monitor the effectiveness of these measures, provide guidance on policy design and facilitate the exchange of information about policy experiences.
Progress is being made towards implementing an EU–wide system of financial supervision
While most financial market segments have become well integrated, financial supervision has remained predominantly national in scope. This may hinder the single market for financial services and increase the chances that financial risks related to the EU–wide activities of systemically important cross–border institutions will not be detected and acted upon. It also complicates financial crisis management and resolution, as the financial crisis has revealed. In early 2009, the de Larosière Group made proposals on how the European financial supervisory system could be improved, including: (i) measures to establish a European System Risk Council (ESRC) to oversee the stability of the financial system as a whole, and (ii) for the supervision of individual financial institutions, a European System of Financial Supervisors (ESFS), consisting of three European Supervisory Authorities (ESA), replacing the existing three Level 3 committees and working in tandem with the national financial supervisors. The ESRC would pool and analyse all information relevant for financial stability, and a macro–prudential risk warning system would be put in place. The ESFS would represent an evolutionary reform. The ESAs would have, in cases clearly specified in Community legislation, the means to ensure coherent application of Community legislation, including the power to resolve disputes between national supervisors. They would also be given the responsibility for the authorisation and supervision of certain entities with pan–European reach, such as credit rating agencies. This should better balance the interests of home and host supervisors and better take into account the EU–wide impact of cross–border activities The ESRC should make it more likely that systemic risks are quickly recognised and acted upon. In May 2009, the Commission published a Communication fleshing out the recommendations put forward by the de Larosière Group. The intention of the Commission is to present all necessary legislative proposals in the course of autumn 2009. It is essential that the proposed powers and independence of the new authorities are retained in the legislative proposals.
The Commission has announced further measures to counteract the financial crisis and has set out an ambitious agenda for financial services reform. Based on earlier roadmaps, many measures have been adopted, including a Regulation on Credit Rating Agencies and a review of the Capital Requirements Directive (CRD). Furthermore, the Commission has indicated how it intends to apply state aid rules to state support schemes and individual assistance for financial institutions; has provided guidance on the treatment of asset relief and impaired assets; and has presented proposals for establishing regulatory and supervisory standards for alternative investment fund managers. Further revisions to the CRD will be proposed in October 2009. As regulatory changes are made it will be important to remember that unnecessary or badly–designed regulation could impair the functioning of financial markets and increase instability. In the shorter term, concerns that the scale of impaired assets has not been fully recognised and that banks may be insufficiently capitalised to deal with a further deterioration in economic conditions need to be addressed.
How to obtain this publication
The complete edition of the Economic Survey of the European Union is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the European Union Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat’s report was prepared by Nigel Pain and Jeremy Lawson under the supervision of Peter Hoeller. Research assistance was provided by Isabelle Duong.