ZEW Paper on the 2014 European Elections – Identifying and Exploiting Europe's Potential

The 2014 elections to the European Parliament take place at a time when Europe is facing considerable economic challenges. Doubts have been voiced about Europe's capability to cope with these challenges. Against this backdrop, the president of the Centre for European Economic Research (ZEW), Prof. Clemens Fuest, urges to identify and exploit the potential for growth that European integration offers. At the presentation of a ZEW paper in Brussels that identifies key policy areas for the EU in the coming years, Fuest said: "Europe urgently needs to achieve a sustainable economic recovery as well as a stringent concept for the future distribution of tasks between the European and national level."

The ZEW paper analyses a number of key policy areas and discusses the options that European policy-makers have to create incentives:

• Europe should fully tap its growth potentials: Further deepening the single market would abolish the still existing discriminating regulations in the service sector and in national tax laws that impede cross-border investments. It is equally important to prevent the creation of new barriers within the single market. Recent discussions in some EU Member States about the restriction of the free movement of labour involve the danger of new obstacles. Furthermore, it is important to increase the openness of Europe’s single market to the global economy.  Driving forward the project of a Trans-Atlantic Free Trade Area would be a significant step in this direction.
• The stony path towards fiscal consolidation should be continued because solid public finances are a precondition for a sustainable upswing. Returning to the policy of extreme private and public debt that was the driving force behind the boom preceding the crisis would, at best, have short-term effects.
• Less money from the EU budget should be spent on national projects that only have visible effects in individual EU Member States. This approach is an obstacle to expenditures that serve truly European public goods. Extended cooperation in foreign and security policy, for example by joint diplomatic offices abroad, would generate significant cost savings. The same applies for integrated European armed forces for operations abroad.
• The eurozone needs to maintain incentives for sound fiscal policies such as the commitment to containing debt levels. The ESM grants eurozone member states financial aid in the event of temporary financial problems. However, a gap is still remaining: The eurozone is in need of a well-defined and credible sovereign insolvency procedure. In the absence of such a procedure, the capital markets lack disciplining effects. ZEW gives an example of how such an insolvency procedure could look like: the ESM should only grant time-limited loans to indebted countries if financial recovery seems possible without a debt cut. After a period of three years, further  financial support would only be provided if combined with a debt cut.
• The European banking union is of key importance for stability within the euro zone. It is essential for the banking union project, however, that all banks dispose of sufficient liable capital in order to ensure a better protection of tax-payers in future banking crises. It is a matter of controversy that investments in sovereign debt continue to be classified as being risk-free.
• Any plans to introduce a financial transaction tax (FTT) in eleven EU Member States should be abandoned. The financial sector is already providing for the costs of future banking crises through bank levies. The best way to guarantee financial-sector stability is to establish higher capital requirements. The FTT is not suitable for neutralising the VAT exemption for financial services. It would be more suitable to introduce a financial activity tax as proposed by the IMF.
• EU policies that battle youth unemployment should focus on encouraging mobility. Doubts remain as to the added value of EU policies in this area that go beyond supporting EU-wide mobility for employment and training.
• It is necessary to develop a stringent European energy and climate policy. National measures such as the promotion of renewable energies have to be coordinated with EU policies. The  European targets for the reduction of greenhouse gas emissions should be defined with a view on other important emitters like the US and China. Reducing fragmentation of European energy markets should be another objective of European climate and energy policy. European power grids should be expanded across national borders. The investments entailed would stimulate growth in all Europe.

For further information please contact

Prof. Dr. Clemens Fuest, Phone +49 621/1235-100, Fax -222, E-mail fuest@zew.de