independent Annual Growth Survey (iAGS) 2016: GIVE RECOVERY A CHANCE
This is the fourth independent Annual Growth Survey, each a response to the European Commission's AGS.
The ongoing recovery of the EA economy is too slow to achieve a prompt return to full employment. Despite apparent improvement in the labour market, the crisis is still developing under the covers, with the risk of leaving long-lasting “scars”, or a “scarification” of the social fabric in the EA. Moreover, the EA is lagging behind other developed economies and regardless of a relatively better performance in terms of public debt and current account, the current low rate of private investment is preparing a future of reduced potential growth and damaged competitiveness. So far, the Juncker Plan has not achieved the promised boost to investment. The internal rebalancing of the EA may fuel deflationary pressure if it is not dealt with through faster wage growth in surplus countries. Failure to use fiscal space where it is available will continue to weigh down on internal demand. Monetary policy may not succeed in the future in avoiding a sharp appreciation of the Euro against our trade partners’ currencies. Such an appreciation of the real effective exchange rate of the Euro would lock the EA in a prolonged period of stagnation and low inflation, if not deflation.
A window of opportunity has been opened by monetary policy since 2012. Active demand management aimed at reducing the EA current account combined with internal rebalancing of the EA is needed to avoid a worrying “new normal”. Financial fragmentation has to be limited and compensated by a reduction of sovereign spreads inside the euro area. Active policies against growing inequalities should complement this approach. Public investment and the use of all policy levers to foster a transition toward a zero carbon economy are ways to stimulate demand and respect the golden rules of public finance stability.
The fourth edition of the iAGS is divided in three chapters. The first chapter analyses the recovery, which is ongoing but fragile. It explores the impact of various economic shocks, including the fall in oil prices and the slowdown in the Chinese economy, as well as looking at the tools we have to get out of the crisis, such as the Juncker Investment Plan.
The second chapter describes the evolution of the European labour market and the impacts of the crisis on it. It also seeks to demonstrate that economic growth is deeply affected by inequality in the European Union, while making some recommendations.
The third chapter highlights the difficulties in achieving simultaneously objectives such as closing the unemployment gap, reaching public finance sustainability, reducing macro-economic imbalances and ensuring the liquidity and solvency of financial institutions. The euro area risks being forced into an equilibrium of low growth and low inflation that will make it more painful to reduce the external and public disequilibria. Against this scenario, the responsibility of countries with high surpluses is substantial and solutions must be sought in the area of coordinated macroeconomic policy.
We hope you find the iAGS 2016 report a stimulating read, on behalf of the iAGS team.
The team involves 4 institutes: AK Wien (Austria), ECLM (Denmark), IMK (Germany) and OFCE (France).
The authors are Franziska Disselbacher, Georg Feigl, Markus Marterbauer, Christa Schlager, Matthias Schnetzer, Sepp Zuckerstätter (AKw) ; Lars Andersen, Thea Nissen, Signe Dahl (ECLM) ; Peter Hohlfeld, Thomas Theobald, Andrew Watt (IMK) ; Guillaume Allègre, Christophe Blot, Jérôme Creel, Bruno Ducoudré, Raul Sampognaro, Aurélien Saussay, Sébastien Villemot, Gilles Le Garrec, Hélène Périvier, Vincent Touzé (OFCE) ; coordination by Xavier Timbeau (OFCE).