Rhein on Energy and Climate

The retiring President of the German Central Bank, Axel Weber, has most recently warned German citizens that the recent and still ongoing German “boom” will be followed by meagre years with the Gross National Product growing by a mere one percent annually, leaving very little room for wage increases.

His words echo a similar call by and his colleague from the Belgian Central Bank and the ECB President not to exaggerate wage demands.

Indeed, the prospects for economic growth in the EU look very dim for the indefinite future.

This is due to three basic structural factors.

First, the active population will stagnate and even decline.

More citizens will retire than enter enter the labour market, a logical consequence of the ageing European society.

Second, Europe will find it increasingly difficult to raise labour productivity by two percent annually, the standard rate of the past.

Three quarter of the labour force, will be employed in services – trade, education, health, old age care, repair and maintenance, transport, public administration – where the scope for technological progress and productivity increases will progressively shrink. Manufacturing and agriculture, the two sectors where labour productivity may continue to rise , will not be able to compensate for the stagnant productivity in the service industries.

Third, emerging countries, above all China, will make increasing inroads in the manufacturing sector, wiping out entire swathes of industries and jobs.

This competition is one of the the reasons for the rising share of structural unemployment in many low-tech industries directly exposed to international competition.

Policy makers should adapt to these fundamental changes and focus their attention on six crucial aspects.

  • Adapt the retirement age to rising life expectation.

    The official retirement age in most European countries has not changed during the past 100 years – 65 years for men and 60 years for women – while the life expectancy has risen by more than 10 years. Europe needs to review its pension systems and adapt them to further rising life expectancy. It needs an EU-wide debate and appropriate changes in all member states.

  • Induce and even oblige everybody between 18 to 67 years, who is physically and mentally fit, to work.

    Youth unemployment of 20 percent and employment ratios of less than 50 percent for those between 55 and 64 years are socially and economically unacceptable. Governments have to put an end to early retirement schemes. Above all they must fight more effectively against unemployment, in particular of young people, by providing re-training schemes, more flexible working time for women and old employees and imposing, if necessary, tougher standards for unemployment benefits,. Such measures make a huge difference in terms of labour market participation, as the comparison between Nordic and Southern countries shows.

  • Give a boost to more investment in research and innovation.

    The EU has failed to implement its self-imposed target of investing at least 3 percent of GDP in R&D by 2010. It cannot afford once again to miss the target for 2020, set out in the “EU 2020 strategy”. The main hope for raising productivity by close to two percent annually is by turning out many more engineers and scientists than in the past.

  • Put a premium on first-class education throughout life, starting at an early age and continuing up to 65 years.

    It is absurd for companies to stop training and qualification programmes for employees beyond 40 years. Education and training must get priority attention over old age care, however brutal that me appear.

  • Give an impetus to energy and material efficiency.

    As a crucial complement to labour productivity Europe must step up its efforts to get more out of its raw material and energy resources. Its past record in this field has been below expectations. Hopefully, the forthcoming Commission proposals on energy efficiency will help repair the poor record of the past.

  • Keep a lid on budget deficits.

    The EU 3 percent rule is no longer appropriate when economic growth remains substantially below three percent. It entails progressively rising public debt levels, one of the reasons of the present financial crisis in the EU. A downward revision of authorised budget deficits to 1-2 percent of GDP will therefore be overdue after 2015.

Europe does no longer need fast economic growth. It has reached unprecedented levels of well-being. Its primary attention should be to defend its high living standard and spread it more widely regionally and socially.

Moreover, low economic growth will facilitate the indispensable transition towards a low-carbon society.

It is on these vitally important issues for Europe’s s long-term future that the European Council should focus at one of its next meetings.

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Comments

  1. dear Eberhard,

    most of your suggestions seem not only necessary but also feasible, given that European heads of state were to coordinate better among one another (as you indicated in your more recent post), given that they took a more far-sighted approach to policies and that they communicated their ideas to the public without allowing room for populists. Ambitious – but not completely impossible.

    What appears hard to realize to me is how to force people to work from the age of 18 without creating problems for education. Should those in higher education work as well, compromising the advance in R&D that we dearly need? If exceptions are made for higher education, what about vocational education? How to handle grant schemes for students without stirring up envy?

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