European View (2010) 9:19–22 DOI 10.1007/s12290-010-0118-2 ARTICLE
Europe needs a new development model John Bruton
Published online: 15 June 2010 Ó Centre for European Studies 2010
Abstract With the relative decline of the European economy, the governments of Europe have used deficit spending to shield themselves from structural economic change. This deficit spending has proven unsustainable and European governments need to seriously re-evaluate public expenditure. There is a need to re-evaluate how public services such as health care and education are funded, and to better manage the Eurozone so as to avoid a second debt crisis. European states need to re-examine how public money is spent, and the current economic crisis could be the catalyst for the necessary structural changes. Keywords
Economic crisis Health care Education Debt Eurozone
Europe needs a new development model. The credit crisis is a symptom of a shift in the world economy that will not reverse itself. In the past 15 years, three billion new competitors have entered the global marketplace. They live in India, China and Latin America. They can produce goods and services at a fraction of the costs they obtain in Europe. They will not be excluded from our market at this stage. It is too late to think of protectionism. The revolution in transport, in containerisation and in the ability to provide all sorts of services remotely over the internet has irrevocably changed patterns of production. We have come to depend on goods and services produced on the other side of the globe in ways that would have been unthinkable a few years ago. We cannot reverse that now. We need a new approach that faces these realities of globalisation as they are, not as we might wish them to be. In many European countries, we shielded ourselves from the consequences of this structural change. For the past 10 years we have used the freely available credit to sustain our living standards at levels well above those we ought to have enjoyed on the basis of what we were actually earning by exporting to the rest of the world, and we came to think that this was normal. What we once considered ‘normal’ conditions were unsustainable and will not be returning, ever. There were, of course, exceptions to this, such as Germany, J. Bruton (&) Dublin, Ireland e-mail:
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which undertook a major cost-cutting exercise in the wake of reunification and which foreswore cheap credit. It is in a different position from many of its EU partners, which explains why it is so difficult to forge a common European economic policy at the moment. We in Europe should not focus on defending our individual positions against change. Nor should we simply wait for something to turn up. Instead we should focus, not on ourselves and our needs, but on what we have to offer the rest of the world that they might be willing to pay for. In Europe, we will have to get used to the fact that we now have to compete with new competitors for ever-more-scarce resources. There will be a scarcity of energy, clean water, arable land and other raw materials. As our population ages, there will also be a shortage of trained workers, especially in care services. As other parts of the world continue to grow, catch up with our living standards and look for investment funds, there will also be a global scarcity of investable funds, and thus there will be higher interest rates. This means that we can afford to waste nothing. We will not be able to afford to waste energy, water or land. We will not be able to afford to waste human talent, through involuntary unemployment or needless bureaucracy. And we will not be able to afford to waste money, for which we will have to pay a higher price than we are paying today. Europe’s new development model will have to be based on the principle of using scarce resources of labour, land and capital in the most effective way, and of being able to reallocate resources quickly to their optimum use.
Keeping skilled youth active must be a key goal The greatest risk we now face is that we may lose a whole generation of young people to emigration or unemployment, our best-educated generation yet. In Ireland’s case, there is a comforting assumption that, just as previous generations of emigrants returned in the 1970s and the 1990s, this generation of potential emigrants too will return in 10 or 15 years. This is unrealistic. If you look at the papers published by the Bank for International Settlements and last year by the European Commission on the impact of ageing populations on the fiscal position of developed countries, you will see that unless entitlements for the elderly change, Ireland, Greece, Spain, the UK and a number of other European countries will face a bigger fiscal problem between 2020 and 2050 due to ageing than will other European countries. A European Commission paper identifies the ‘sustainability gap’ in the budgets of EU Member States at an average of about 7% of GDP, but the annual sustainability gap for Ireland is 15% of GDP, for Greece 14%, and for Luxembourg, Spain and Britain 12%. That gap will have to be bridged every year by those countries by increases in taxation or by cuts in spending, just to meet the extra costs arising from the ageing of their societies. For these countries this is a problem that dwarfs anything that has been brought about by the banking crisis. To support its aged population at present levels of entitlement, these countries would require levels of taxation far above what they now have. So people who leave today to find work abroad would not want to return to pay those extra ageing-related taxes, unless we do something very significant now to change the entire dynamic of our public and private sectors. Young people who become chronically unemployed will have little hope of finding jobs in future years because the burden of taxation caused by ageing will sap away the energy of the societies in which they live.
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A Green paper on public finances and ageing We need to have an honest debate in Europe on how this very large additional long-term fiscal burden of ageing can be borne. Changes will be necessary and difficult, but these should not be sprung on people. If people have time to think, they have the capacity to support difficult changes. In Spain, for example, there is a proposal to raise the retirement age to 67. This is the sort of measure that needs to be brought forward and acted upon, on the basis of a genuine public understanding of why it is needed. Since in the future we will have proportionately far more older people in our population, the long-term (2020–2050) public-finance implications of continuing present policies need to be laid out fully for the people of all European countries by their governments, including spelling out the tax implications for those of working age. All the options should be explained, including the advantages and disadvantages of each. This should be mandatory for all EU countries. People are reasonable and will be able to face difficult decisions, as long as all the cards are put on the table. Health care: is it absorbing too many resources? Health care, which might more accurately be described as illness care, is absorbing an ever-increasing share of our resources in the West—25% of US federal government spending today, as against 11% in 1980. Europe does not spend quite as much, but the upward trend in Europe is just as pronounced as it is in the US. I was really surprised to see that the then main opposition party in the UK—the Conservative Party—had promised to cut spending in every area, presumably including education, but to exempt health spending. That is the wrong priority. Not all health care expenditure is equally useful. The US spends ten times as much per capita on health care as Costa Rica or Chile do and yet has about the same life expectancy. If we take note of the fact that the baby boomer generation will soon retire, and that their health care and pensions will have to be paid for by a much smaller generation of people of working age, a promise to make major spending cuts in all sectors except health care makes little sense. It is not the best use of scarce resources. Of course this could give rise to conflict between generations. Older people are greater users of health care than are younger people, and they also tend to vote more than younger people do. But if we are to have resources to pay for health care, we must first invest in the people who will earn those resources by the work they do—young people. Cutting back on the education of young people to pay for more health care would be the wrong choice. Instead, the emphasis should be on making our educational systems more productive. We should ask ourselves if it might not make sense to keep our universities operating all year round by introducing a dual year, which would allow young people to work part of the year while they are going through college. We also need to look at pupil–teacher ratios. Depending on the subject and the age of the student, we may be able to have higher pupil– teacher ratios at some stages in the process in order to release teachers to work one to one with students at earlier ages when that is necessary. The euro That brings me to the problem of Greece and the Eurozone, and to the problems of Portugal, Spain, Ireland and other Eurozone countries with large deficits and debts. The
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issue may present itself as a problem of borrowing or of exchange rates. But that is only a symptom of the real problem, which is the misallocation of increasingly scarce resources. Scarce resources have been committed to the wrong things in Greece and the other countries in difficulty. In Greece, people can retire too early on a state pension, taxes are not collected efficiently and the bureaucracy is overstaffed. That is poor use of scarce resources. In Spain and Ireland, too many resources were ploughed into building houses, again a poor use of scarce resources in a notoriously cyclical sector of the economy.
Improving the way the euro is managed The pact that governs the euro, the Stability and Growth Pact, needs to be improved so as to help countries to use their resources wisely and to change the way they are using them when that needs to be done. The assumptions on which national budgets are prepared must be consistent and honest. They should be independently vetted by the European Commission. Opposition parties need to be made part of that vetting process by the Commission, so they are not taken by surprise by the state of the finances when they take power. The mystery and the secrecy should be taken out of budget making in Europe. That will go a long way towards introducing greater discipline, because no one really wants to be seen to be passing on huge liabilities to the next generation. A European Monetary Fund to provide fiscal policy insurance to members of the Eurozone should be established, and it should involve higher premiums being paid by countries which are running excessively large deficits. Just as China cannot run a policy that privileges exports, neither can Germany. An export-led policy will work only as long as other countries can afford to import. German consumers can help the Greek recovery by taking a holiday in Greece and buying some Greek wine! That is the best way to ensure that the German banks that have bought Greek bonds get all their money back, with interest!
Using the crisis as a lever for change We should make full use of the opportunity the crisis has created. The crisis should make it possible to make changes that it would be harder to get people to agree to in calmer times. Let us not forget that 50% of today’s Fortune 500 companies were formed during a bear market. Microsoft was formed in the bear market of 1979 and the 1991–1993 recession in Finland led to the creation of Nokia. Every segment of our society—our political system, our educational system, our health care system—must ask itself if it is contributing all it can to innovation, to cost cutting and to the building up of Europe’s human and material capital in order to meet the huge economic challenge of the emerging economies.
John Bruton is a former Taoiseach (Prime Minister) of Ireland (1994–1997) and was the Ambassador of the European Union to the United States from 2004 to 2009.
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