Professor Clemens Fuest, CESifo, Munich.
“EU doesn’t have the instruments to bring about convergence, as convergence depends on the policies of the member states,” said Professor Clemens Fuest at a seminar in Stockholm presenting this year’s EEAG report. He explained that 95% of economic and fiscal policies are executed by national governments. “Some times in the public debate it is said, as a promise that the EU will bring about convergence. This I believe is very dangerous. If you promise something and don’t deliver you undermine trust. I think we should be clear that the EU offers opportunities. The EU can’t and should not promise convergence.”
Launching the seminar Professor Fuest disclosed to the audience that the motivation for this year’s EEAG report was that the EU is in a crisis, but also in transition into something new. Brexit entails that the power within the EU will shift, as will the balance of influence, of economic and so on. "We are now intensively discussing changes within the Eurozone. Part of this debate is the worries about diverging views within Europe on economic and political issues,” said Fuest. He pointed to the fact that the European Commission – in its reflection paper on the future of the EU – has changed. Fuest explained that the Commission used to make proposals, but now for the first time is offering five models or concepts for the future of Europe and ask the member states and citizens to discuss these models. “This is a good idea as it conveys the insight that Europe is not something that happens from the center but belongs to the states and citizens,” he said.
Lars Calmfors, researcher at IFN and Professor Emeritus at Stockholm University.
About the EEAG report in general Clemens Fuest declared that the macroeconomic outlook for Europe is positive. “For the last two years the IFO world economic survey has been going up,” he said admitting that these are average growth rates and some heterogeneity can be found behind the numbers. Still, he argued, it is not such a bad economic situation. “The unemployment rates are going down even in the crises countries.”
What people say about trusting the EU is one of the topics in the EEAG report 2018. Clemens Fuest showed the audience a number of charts displaying that trust in the EU in for example Great Britain was very low 20 years ago and has not really changed until today. The same goes for Germany where the trust has even dropped “even though the economic development was very positive”. Also in Sweden the level of trust is low but not declined. “Countries such as Greece and Spain that have been hit very hard by the economic crisis which has made trust decline, but not just in European institutions, but also in national institutions,” Fuest explained. He also mentioned the “club question”, I e that countries can join a club (Schengen, Euro zone, etc.) they like and stay out of clubs they don’t like.
Chapter four in the EEAG report 2018 was the main focus of the seminar, titled its “OK to Be Different: Policy Coordination and Economic Convergence”. What is convergence, Clemens Fuest asked and explained: Input convergence is for example convergence in economic policies, that all do the same policy. Outcome convergence is something else; it is for example income per capita and unemployment. “Outcome convergence is a political objective of the EU and it is hard to achieve. Input convergence is different. One idea is that having one policy means that we want a leveled playing field – in Europe we want similar economic policies so that we don’t distort competitions. This is not necessarily the right way to look at it, explained Fuest. Another way, he said, is to say that countries are different and need different economic. “In the report we say that outcome convergence is more plausible than input convergence.”
Katarina Areskough Mascarenhas, Head of the European Commission Representation in Stockholm.
“Looking at outcome convergence we can see that the income has been in the poor countries, more so than the once that were already rich in 1995. This is good news that the poor countries are catching up.” These numbers refer to the 28 EU countries. “But if we take away the middle- and Eastern European countries you see no convergence between the north and the south. This means that the poor countries have not been catching up on the rich countries between 1995 and 2017.” In other words, the convergence is driven by Middle- and Eastern Europe. The picture was quite different before the 1990s. Professor Fuest said that there was convergence within the EU 15 until the 1990s but then it stopped. “It didn’t stop in the financial crisis. It stopped long before,” he said adding that Italy is the most extreme case: The growth of labor productivity was the same in Italy as in Germany, Great Britain and France for two decades, before 1990s. “Then it stopped and nobody knows why.”
Looking at input convergence the authors of the report look at institutional quality. Not an easy task as different institutions is needed in various countries. Fuest explained the different indicators that tell us about institutional quality:
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Economic freedom
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Corruption
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Business indicators
In regards to economic freedom Professor Fuest said that “what we see here is mostly divergence. The North is improving and the South is stagnating.” The same goes for corruption, he argued, the institutions in the south are to some extent getting worse, but not in all dimensions. “If you look at the doing business indicators you have some convergence.”
Panel discussion with, from left, Thomas Gür, Lars Calmfors, Katarina Areskough Mascarenhas and Clemens Fuest.
So what does the EU do about this? One instrument is the EU budget. “In the EU budget in general convergence is gaining importance, agriculture subsidies are going down while regional and structural policies are gaining in importance (see figure 4.21 in the report). The overall picture is that the rich countries including Sweden pay and the poor countries receive quite a lot of money. But how effective is the use of this money? “This is subject to debated,” said Clemens Fuest. ”In the report we write that the evaluation published by the European Commission is unconvincing. Another instrument is the “European semester: Implementation of Country-Specific Recommendations” (see figure 4.23 in the report). Though, this is a dialogue and not binding. Here we can see that not very much is implemented.”
The audience at the seminar was most knowledgeable and engaged in the discussion.
At the end of his presentation Professor Fuest gave some recommendations, stating that economic integration does not automatically imply income and policy convergence.
- While output convergence is desirable, input convergence may be counterproductive (level playing field vs comparative advantage and specialization)
- In the current institutional setting, The EU’s policy toolbox cannot foster cohesion: convergence depends mostly on the policies of the member states
Economic integration offers opportunities, but requires policy adjustments. European policy coordination can help by providing information and encouraging dialogue. It should focus on areas where the effects of national policies spill over country boundaries, and involve national institutions.
There was a full house at the seminar in Stockholm where the EEAG-report 2018 was presented.