Rhein on Energy and Climate

The EU Commission has just published its economic outlook for 2010/2011.It is a sobering document. The economic situation in 2010 is expected to stabilise, after a 4 percent GDP decline in 2009, the deepest Europe has ever experienced since the end of WW II.

Europe, except the new member states, must learn to get used to the status of “mature economies”, enjoying high prosperity but little economic dynamics. Because of a stagnating population and labour force rising productivity will be the only source of economic growth; and there are limits to increasing productivity. Considering the already very high levels of European productivity it would be prudent to assume the average economic growth rate in the EU in the coming 10 years to be closer to one percent rather than two percent.

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Such a perspective would be compatible with the ambitious climate targets – reduction of C02 emissions by up to 30 percent by 2020 – the EU has envisaged and a more harmonious distribution of wealth across the world.

Politicians in member states, especially in France and Germany, do not seem to relish such a prospect. They believe that tax reductions or big public spending programmes should ensure past growth patterns, even if these lead a breach of EU constitutional rules, which strictly prohibit annual deficits >3 percent and public debt >60 percent of GDP, and generate a heavy legacy for the next generation.

The rise of the French public debt over the past 20 years is deeply worrying: in 1980 it amounted to a modest 20 percent of GDP; in 2013 it will reach 90 percent of GDP. The situation in other member states is not much different. And the richer the country the higher the level of public debt! Only the new member states are still able to keep their deficits close to the 60 percent limit. In 2009 Bulgaria will be the only EU country to stick to the rules!

This development rightly causes rising concern to the Commission and the ECB. The Commission bears the responsibility for the respect of the Treaty and the ECB is committed to price stability. Of course, 2008-09 were exceptional years: the dramatic economic situation justified dramatic policy responses and derogations from the rules.

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But now the time for lowering taxes or launching new public “modernisation” programmes at the expense fiscal discipline should come to a gradual end. Member states need to reduce their deficits progressively to less than 3 percent and even envisage budget surpluses in a medium term, say by 2020, however impossible this might sound in the ears of politicians.

Jointly Commission and ECB must slowly but firmly rein in member states` extravagancies in the next decade.

Brussels, 06.11.09 Eberhard Rhein

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