Europe: stagnation or integration?
The Eurozone’s longest recession is finally over, but there is still plenty to do, especially to get unemployment levels back under control. Minouche Shafik, Deputy Managing Director of the International Monetary Fund (IMF), says deeper integration holds the key to prosperous development.
“Europe now faces a very stark choice — a choice of stagnation or a much more ambitious integration agenda.”
— Minouche Shafik, Deputy Managing Director of the IMF
GDP growth of 0.3% in Q2 2013 has ended the Eurozone contraction.
However, in the 18 months prior to Q2, GDP in the currency zone fell 1.5% to stand 3.5% below the pre-financial crisis peak in 2008, while unemployment has climbed to over 12%. Unemployment in Greece and Spain has surged to 27% and 26% respectively.
Europe at a crossroads
Nemat Shafik, universally known by her nickname “Minouche,” says the road to sustainable recovery will be long and difficult, with many challenges for policy-makers to negotiate.
“Europe now faces a very stark choice — a choice of stagnation or a choice of a much higher growth rate that would require much deeper levels of integration,” says the former Permanent Secretary of the UK’s Department for International Development.
Despite the recent positive economic data, she fears the stagnation scenario remains plausible.
“You can imagine a scenario where households, firms and governments under huge debt burdens would reduce demand and not contribute to any recovery, and you can imagine a situation where structural reforms stagnate.”
But is it likely? Shafik suspects not, in principle, because it is not politically or socially viable. Neither policy-makers nor European citizens themselves would allow it to happen.
Divergence within the Eurozone has become more marked than it has been since the early 2000s. This means, in her view, taking steps such as:
- Completing the banking union
- Setting out compelling balance sheets that convince the markets that Europe’s banks are sound
- Having a paced approach to fiscal consolidation
Getting labor working
As the Eurozone enters a period of relative calm, new approaches can be applied to address the high unemployment rates. The IMF, whose tasks include promoting high employment, has an important role to play.
“One of the things that strikes you when you look at the differences across Europe is that the countries that have reformed their labor market policies are the ones that have seen gains,” says Shafik. “Another thing is that many countries are reforming their pensions systems, so we have seen a significant increase in labor force participation for those aged between 55 and 62.”
For Shafik, the key point is that whatever a country’s development level, the countries that have suffered the most in terms of high and rising unemployment are those that have also suffered the severest drops in economic growth. “Job one for solving the unemployment crisis in Europe is to provide growth.”
“Many countries in Europe have an incredibly low female participation rate in their labor force, especially when contrasted to the Nordic countries,” she adds.
Despite the challenges, Shafik remains optimistic about the region’s future. If they continue their journey toward deeper integration, sustainable growth and much-needed higher employment will surely follow.