Yannis Karamitsios and Christos Bezirtzoglou delve into the structure of how it works in Europe as well as presenting ten commandments on how to change the economy of the EU for the better.
A good year for the European economy – but are we ready for the rest of the century?
The EU economy has shown good signs of recovery since the euro-crisis of the early 2010s. In 2016, it achieved for the first time after many years a higher growth rate than the United States. Public deficits of member states are reduced to less than 2% of their annual GDP (gross domestic product) and 8 million new jobs have been created in the last three years.
This is all welcome news but on the other hand, it is not yet clear whether they constitute part of a new momentum. European economic policies remain too much focused on the small picture. There is constant discussion on how to improve some indicators here, or how to keep a balance between fiscal discipline and social expenditures there. Is this however what we really need to talk about in the long-term?
We are worried that Europe is pushed to the margins of critical arenas where the global economy and world politics are going to be materialised over the next decades. According to one estimate, not a single EU member state will count among the top 8 economies of the world by 2050 . Research and innovation in the areas of automation or artificial intelligence are dominated by North America and East Asia. The universities of continental Europe remain outside the top-20 of the world . The European population is getting smaller and older compared to the rest of the world and increased public and private debts are expected to undermine our growth prospects. Climate change and overpopulation are likely to cause serious food and ecological crises in our territories. Trade competition is also going to be fierce: we have to compete with countries that produce more and cheaper products, and usually under very low environmental, safety or labour standards. It seems that there are many trains that are departing and we are not catching anyone of them.
We have thus good reasons to be alarmed, but not frustrated. The hopeful recovery mentioned above might offer a good incentive to rethink our strategy in a broader context. This is perhaps the right time for European member states, institutions, business, trade unions and civil society to press the re-start button and agree on a new set of principles for Europe’s economic future.
We are thus attempting in this piece to propose those principles; due to their symbolic number (ten!) we could also call them the “Ten Commandments” of the future European economic policy.
1. Business first
Wealth is created by enterprises, more than by any other source. Enterprises produce the vast majority of goods, services, jobs and taxation that we need to function as an organised and civilised society. A country with few or weak businesses is a poor country. Therefore the “business – first” idea must be placed on the top of all economic policies of the EU and its member states.
2. Knowledge-based economy
Economic activities must follow the advances of science and human knowledge and European universities and research institutes must come closer to every-day business and production. Their activities should focus as much, if not more, on practical applications as on theoretical research. Commercial chambers and business associations should actively inform and train their members on the latest opportunities that have emerged through scientific progress (such as on 3D printing, quantum computing or new energy efficiency methods).
3. Simple and low taxation
Taxation must become simpler and lower. Wealth should remain in the hands of the people who produce it, and they should use it as they wish. This is what we perceive as fair policy and in line with our vision for a more liberal Europe. The same tax rates must apply throughout the EU, otherwise competition would remain seriously distorted. We would propose the establishment of only three taxes: VAT (value added tax), income tax and corporate earnings tax. Tax rates must be progressive per taxable amount, but never higher than 25%. It would be especially important to harmonise corporate taxation as much as possible to promote healthy competition.
4. Reduction of public spending
General government spending (or ‘public spending’) is usually defined as the spending of central, state and local governments, as well as social security funds. In 2015, EU-28 public spending amounted to 47.3% of EU’s annual GDP . We would propose that this is reduced to lower than 45%. It is important to stay below that level to offer more space to the development of private economy. This is also necessary to keep our debts and deficits at sustainable levels. Europe is the region with one of the highest rates of public debts in the world and that situation must change, even it means austerity for some sectors. Certain sacrifices are necessary – we need to realise that there are no easy solutions.
5. Business clustering and hubs of excellency
Economic sectors usually benefit more if their enterprises are clustered and developed in the same area. By operating next to each other, business interact in a more dynamic fashion and grow altogether into something bigger than the sum of its parts. Let us only think about Silicon Valley and Hollywood in America. We should further reflect on the cases where clustering could work in Europe: fashion business in north Italy, engineering in Germany, info-tech business in the Baltics, financial services in the UK and Ireland, wood/paper industry in Scandinavia, and many more. A lot of European areas and sectors could host world-class hubs of excellence, where special favourable production and investment conditions could apply.
6. Attraction of foreign direct investments
Europe should become the magnet of world’s money and trust for doing business. Creating a favourable environment for foreign direct investments should become one of the Europe’s central economic policies. Europe should send a clear welcoming signal to the entire world. Foreign direct investments should enjoy tax breaks for the first few years, investment procedures and rules must be simplified, mergers and acquisitions of companies through fresh foreign money must be facilitated.
7. Export-driven economy
It is good to attract world’s money into Europe through foreign direct investments, but it is equally good to receive money through the activities of extrovert European business. Europe must become again a leader that exports its high value goods to the rest of the world. This is a realistic prospect, because many parts of the planet are getting richer and keener in consuming the high quality goods and services produced in our continent. European public authorities must develop a coherent economic diplomacy. They could play a role in supporting European firms to establish and invest in the international markets through dedicated European web portals, European business missions, European road shows and specialised advice.
8. Public – private investment banks
A lot of European firms would need access to financing and capital, under the guidance of specialized institutions. In this regards, we would support the creation of several “sister” European Banks to boost growth and jobs. We propose the establishment of financial institutions with sectorial focus, namely:
(a) European Bank on Primary Industries (focusing on agriculture, forestry, fisheries);
(b) European Bank on Secondary Industries (focusing on industries producing finished goods);
(c) European Bank on Tertiary Industries (focusing on services, as well as advanced technology and research);
(d) European Bank on Entrepreneurial Development (focusing on microfinance and financing of Small and Medium Enterprises).
9. Focus on ecological development
European economy must serve the increasing wish of European citizens to live in mutual respect with their environment. Economic development should also be ecological development. Circular economy must become the bedrock of our new production and consumption models; it saves a lot of money after all. Public investments and business incentives must strongly focus on clean energy and transport. The highest tax rates must be imposed on the production and consumption with the highest environmental and health costs.
10. Completion of the internal market and monetary union
In certain areas, the EU internal market remains incomplete. For instance, there is still work to be done in the areas of digital services, insurance and intellectual property rights. This situation must finish. Uniform marketing rules for all sectors must apply directly and throughout the EU and EEA territory without differentiation. This is important to ensure fair competition, legal certainty, business confidence and also foreign investments. For the same reasons, Eurozone must cover the entire EU to complete the monetary union and offer to all of its people the same access to cheap borrowing and the second reserve currency of the world.
No complacency – Time to leave our comfort zone
We know that those “Ten Commandments” are easier written than implemented. But they first need to be articulated in a clear manner and agreed upon as a consensual new approach by the EU institutions, member states and stakeholders. We are aware that the “business-first” principle, the principle of low and simple taxation or the principle of restricted public spending could go against the instincts of many politicians or activists. However they are necessary, together with some sacrifices that we need to make, in order to move on as a financially robust block. The rest of the world population is swiftly getting larger, richer and smarter – and Europe has to leave its comfort zone in order to remain relevant to what is going to happen in this century.
The “Ten Commandments” introduce the authors’ personal vision for a common Fair, Open and Sustainable European Economic Policy. They do not represent, by any means, the positions of the European Commission.