A growth programme for industrial renewal in Europe Towards a European industrial recovery
1. European industry in the global competitionEurope risks falling behind
The financial crisis, the sovereign debt crisis, macroeconomic imbalances, and intra-European tensions are leaving their mark. Europe is in danger of falling behind in the global competition. International rivals in East Asia and North America are revealing Europe’s weaknesses. While countries around the world are making up ground, the European economy will shrink by 0.5 per cent this year – the United States (up 1.8 per cent) and China (up 8.2 per cent) will grow.
This development is not just an economic risk for Europe. Economic weakness will also damage Europe’s reputation and reduce its influence on the world stage. The image of the European integration project and its function as a role model for other regions of the world is in danger of being damaged. Centrifugal forces in Europe are getting stronger and are threatening to destroy the integration success that has been achieved so far. Europe’s geopolitical influence in the international community is waning. And European values – which combine the market economy with democracy, freedom and solidarity – are losing their attractiveness for other parts of the world.Economic strength is essential for consolidating government finances
The escalation of the eurozone crisis poses the greatest threat to Europe’s prosperity today. Since the fall of the investment bank Lehman Brothers in 2008, the collapse of deregulated financial markets and their highly speculative products, and the subsequent sharp downturn in the real economy, more and more countries in the eurozone have been falling into the vicious circle of debt, refinancing crises, recessions, and ever-higher debt quotas. There is an urgent need to consolidate public budgets. Yet restrictive fiscal policy alone will not suffice. The anti-crisis strategy of issuing emergency loans and making budget cuts has increased risks for creditors rather than reduced them. The first bailout package for Greece in spring 2010 cost Euro 110 billion. Two years later, aid programmes for Greece, Ireland, and Portugal now total Euro 403 billion. Two years ago Germany had to guarantee Euro 22.5 billion in emergency loans. Today it is backing a sum of Euro 211 billion. The introduction of a
permanent European Stability Mechanism (ESM) means that this amount will continue to grow. In addition, the ECB has amassed serious risks amounting to more than Euro 1 trillion as a result of buying government bonds in the secondary market and handing out low-interest loans to hard-hit banks.
Unless there is a breakthrough in the current recessionary spiral, no one will be able to guarantee repayment of these loans. Europe, and especially creditor nations like Germany, are banking on a trend shift that they hope will provide new economic verve. The EU and IMF rescue packages assume that the countries receiving emergency loans today will soon be able to generate primary budget surpluses. If that fails to happen, they will keep needing new loans to prop them up. This will put the eurozone countries to a test of fiscal strength and, above all, political endurance. Ultimately, it could lead to the collapse of the monetary union.
Setting a course that focuses on the real economy
The debt sustainability called for by the adjustment programmes will only be achieved when Europe regains its capacity for economic growth. That will not happen by itself. Europe will need a growth programme if the consolidation of government finances is to succeed. However, this must not lead to a new round of government debt for the sake of short-lived economic stimulus measures. Instead, Europe needs a comprehensive investment and development programme that overcomes the financial crisis, sets a course that focuses on the real economy, modernises structures, improves competitiveness, increases value added, and strengthens European unity.
The financial crisis exposed the source of European imbalances. If we do not work to fix them, they will lead to a deeper, more serious split. Europe has lost its equilibrium. While countries like Germany and Poland manoeuvred through the crises relatively safely, the economies of countries in the southern eurozone are nose-diving. There is no end in sight to their downward spiral. No wonder growth forecasts diverge so widely between countries in Europe. Poland and Lithuania are expected to grow by 2.5 per cent and 2.3 per cent respectively, while Greece and Portugal are set to shrink by 3 per cent and 3.2 per cent respectively.
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by Frank-Walter Steinmeier
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