Spring Meeting of the AIECE
(Association of European Conjuncture Institutes)
Geneva, 12-13 May 2005
Speaking notes for the Executive
Secretary
Mr. Chairman, Ladies and Gentlemen:
I am very pleased to welcome
you here to the Palais des Nations for the
Spring 2005 meeting of the AIECE. If I am
not mistaken, this is the first time that
you are meeting here in Geneva on the premises
of the United Nations.
Allow me to very briefly
introduce my organization, the UNECE, to
you. The Economic Commission for Europe
was created in March 1947 and was a pan-European
organization from its inception. Gunnar
Myrdal, who was awarded the Nobel Prize
in Economics in 1974, became its first Executive
Secretary, a function that he occupied till
1957.
From the onset, and influenced
by Myrdal’s vision, UNECE has been
a two-track organization. The first track,
which absorbs most of UNECE’s resources,
consists of close intergovernmental cooperation
on a wide range of practical and technical
issues, which is reflected in the development
of conventions, norms and standards in the
areas of environment, transport, trade facilitation
and energy. UNECE also contributes to the
harmonization of international statistics
under the auspices of the Conference of
European Statisticians.
In a more general way,
all this work, which is frequently quite
unknown to outsiders, has helped to ensure
that international economic relations in
the region are non-discriminatory and market-extending,
often leading to significant reductions
in the transaction costs of international
trade and investment.
The second pillar of UNECE’s
work is economic analysis, which is carried
out under the sole responsibility of the
Executive Secretary. Its conclusions do
not therefore necessarily reflect the views
of our member States. This work is published
mainly in the Economic Survey of Europe,
which is UNECE’s flagship publication.
Since the collapse of central planning,
the transition to market economies in Eastern
Europe has been the major focus of our research
work. But we have also continued to contribute
to the analysis of economic developments
and economic policies in the developed market
economies of our region.
Perhaps the major achievement
of the UNECE until the collapse of communism
in eastern Europe was to keep alive the
idea of a larger Europe that went beyond
the boundaries of what was to become the
European Economic Community. In fact, UNECE
helped to build a bridge between the eastern
and western halves of Europe, when no one
else was willing or able to do so and when
the prospects of uniting them were so distant
as to appear quixotic.
The political changes
in eastern Europe and the recent enlargement
of the European Union will therefore, not
surprisingly, also have an impact on UNECE’s
programme of work in the future, which will
be agreed upon by UNECE member governments.
In any case, UNECE will put greater emphasis
on its operational and analytical work on
the countries of south-east Europe and the
CIS.
At the same time, UNECE
should remain a neutral pan-European forum
in which all member countries can express
their views and work towards a deeper integration
of the wider European economy.
This meeting is taking
place at a time when the global economy
appears to be weakening and the short-run
outlook is clouded by important downside
risks, especially the development of oil
prices and the sustainability of the huge
United States current account deficit.
The European economy will,
in the aggregate, continue to experience
below average growth, and the euro area
is set to remain the soft spot of the world
economy in 2005 and 2006.
But the average moderate
growth performance in Europe masks continued
solid growth in eastern Europe, both in
the new EU Member States and in south-east
Europe, driven by a combination of robust
domestic demand and strong export competitiveness.
At the same time, as the economies in eastern
Europe want to catch up with the western
Europe economies they have to grow faster
and in a sustainable manner.
They have to move faster
in their structural reforms, modernize their
infrastructure, education systems, health
care and social sectors etc. all of which
should help them to reduce unemployment
and meet the challenges of transforming
their economies into knowledge-based economies.
More generally, the focus on short-term
economic developments and cyclical fluctuations
should not deflect policy makers from the
importance to understand the long-term determinants
of economic growth and sustained macroeconomic
stability.
In the short-term, in western
Europe, growth appears to be increasingly
restrained by the adverse effects of the
strong euro and the global slowdown on exports
in a context of persistent low domestic
demand. This appears to hold especially
for the three major economies of the euro
area.
Weak domestic demand –
in my view – mirrors negative expectations
of businesses and consumers motivated by
different factors. Some are of a short-term
nature and might be provoked by inadequate
government policies, others appear to be
of a structural character and may be addressed
by in-depth reforms. [some are of a psychological
nature?]. It seems that consumers in the
“old Europe” lose confidence
much more easily than consumers in the USA
in spite of the fact that they benefit from
lower job uncertainty and, on average, higher
social security.
I agree – as noted
recently by political leaders in Germany
and France – that there is currently
a lot of pessimism in Europe and, I would
like to add, that there appears to be also
a lack of willingness to take risks and
associated with that, a lack of “entrepreneurial
spirit”.
Against this background,
policy challenges differ. In the euro area,
the major challenge in the short run is
to achieve a sustained recovery, which will
hardly be possible without a stronger growth
of domestic demand. The persistence of low
growth makes it difficult to achieve the
desired progress in the consolidation of
government budgets, to obtain the required
levels of finance for the public pension
and health systems and to improve the situation
in the labour markets. The medium-term challenge
in the euro area is to raise potential output
growth and to undergo reforms.
The discussion on reforms
has so far been mostly limited to areas
such as labour market reform, pension reform
and the liberalization of services in the
EU. I think we owe a lot to these discussions.
New innovative approaches are needed that
address issues which are going beyond the
“ conventional wisdom”. These
new approaches are associated with higher
spending on R&D and innovation, with
policies to raise employment in the face
of changes in the structure of demand for
labour, and it also includes the need to
adapt to in-depth changes in production
and consumption patterns, as well as acknowledging
the role of a well-designed social model
in promoting competitiveness, etc.
To put it in a different
way: The reformed Lisbon Strategy rightly
puts more emphasis on policies for strengthening
competitiveness and raising employment and
productivity growth in the face of intensifying
adjustment pressures from globalization
and the progressive population ageing in
the decades ahead. Raising R&D expenditures,
fostering innovation and raising the quality
of education are key factors to achieving
the Lisbon goals.
Sustaining higher rates
of growth is a conditio sine qua non for
preserving the European social model with
its strong concern for social cohesion which
needs to be reformed in the face of population
ageing, the intensification of international
competitive pressures, etc. But the challenge
is to avoid severe cutbacks of the welfare
state, which would risk increasing social
tensions by creating growing economic disparities
within countries with negative implications
on consumer demand, on risk taking and eventually
on competitiveness.
In eastern Europe, the
challenge is to sustain the current high
growth path in order to promote the process
of catching up with levels of real incomes
in the developed market economies. At the
same time, it is also important to maintain
sound government finances and to be aware
of the potential risks associated with quite
high external deficits. The long-term challenges
that I touched upon earlier are much more
complex and will not be easy to achieve.
In the medium- and long-term
the European economy has to cope not only
with the challenges and tensions from globalization
but also to continue to adjust to the ongoing
integration of the east European economies
into the wider European division of labour.
In view of the relatively low labour costs
in eastern Europe, this process has created
its own tensions, especially in a context
of low growth and high unemployment in western
Europe, and what politicians have dubbed
social and fiscal dumping originating in
eastern Europe, due to low wages, low labour
protection, low taxation, etc.
These frictions were illustrated
by the recent controversy over the European
Commission’s Services Directive. These
adverse reactions and fears should, however,
be put into a proper perspective. It should
be recalled that the process of integrating
the east European economies into the international
division of labour has had and will continue
to have beneficial effects for the more
advanced European economies both in terms
of output and employment growth in the long
run. Secondly, all this further stimulates
discussion on the harmonization of social
security and fiscal systems, which, no doubt,
will allow further integration of the single
European market.
Ladies and Gentlemen,
While there is wide agreement
that supply side reforms are needed to improve
the performance of the European economy
in the longer run, there is also the issue
of having a sufficiently flexible macroeconomic
policy framework to support economic growth
in the short run.
A question that should
be raised at present is to what extent can
demand-side policies help in raising growth
and employment in the European economy.
What kind of lessons can we draw from the
recent experiences with expansionary fiscal
policies in the United States and the United
Kingdom? Is this not evidence that fiscal
policy can be an effective instrument to
support economic activity and that government
intervention is not necessarily doomed to
be ineffective?
The success of any economic
policy strategy designed to overcome a period
of economic weakness depends, of course,
on a differentiated, balanced analysis of
the issue, to what extent a demand gap or
supply side factors are responsible for
it.
What is needed is a “constructive
scepticism”, which looks closely and
critically at the conventional wisdom to
confirm, reject or qualify it on the basis
of the available evidence. We should not
forget that economics is an uncertain science
and that question marks are therefore as
useful as conclusions, especially for those
who have to take the decisions.
This points to the clear
practical purpose of economic analysis carried
out by national research institutions, such
as the members of the AIECE, and international
organizations such as the UN. The general
aim is to improve the information base on
which economic policy is based and to contribute
to the policy discussion by suggesting different
perspectives and alternative views.
Two aspects of this can
be emphasized: the first is the obvious
one of learning from others, and for that,
sorting out what is common from what is
nationally specific. The other is reminding
national governments of the increasingly
international context in which they must
formulate policy, and trying to set out
the true nature of their economic interdependence.
International networks
such as the AIECE can certainly make important
contributions to this kind of economic analysis,
which should be regarded as a public good.
Let me conclude by wishing
you a stimulating and successful meeting.
I also hope that you will
find some time to discover the attractions
of Geneva, including the Palais des Nations.
Thank you.
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