European leaders’ search for growth brought them to the farthest reaches of a continent on the brink of another recession this weekend, meeting in a snowbound log cabin in the Arctic Circle to explore ways to boost the economy at a time of austerity.
Finnish Prime Minister Jyrki Katainen hosted a select group of influential people on the edge of Saariselka, a Lapland winter resort and corporate retreat, to work out how to thaw European economies facing unprecedented spending cuts.
In discussions covering trade, jobs, the single market and the world’s shifting power balances, Katainen picked the brains of the head of the World Trade Organisation, a European Central Bank board member, the EU’s economy commissioner and others.
“The theme is more or less the future of Europe,” Katainen said without overstatement, underlining just how much self-examination the continent is undergoing after two years of debt crisis that has called into question its economic viability.
“We need to look at how the European Union should be developed and what we have learned from the crisis,” he said.
The focus was on finding ways to inject life into a moribund economy, especially the 17 countries that share the euro single currency, while not giving ground on the spending cuts and tax increases that leaders have committed to as part of efforts to quell the sovereign debt debacle.
It was, to use Katainen’s slightly awkward phrase, about ‘growsterity’, a concept that may be tough to grasp for a country such as Greece, where the economy has contracted 17 per cent in three years and more spending cuts are demanded.
Prime Minister Valdis Dombrovskis of Latvia, which has gone through one of Europe’s toughest austerity programmes and re-emerged into growth, attended the gathering, as did Spain’s EU minister, Inigo Mendez de Vigo, whose country is perhaps chaffing hardest against EU-demanded budget constraints.
Lost years
With 24 million people unemployed across the 27 countries of the EU, the highest level of unemployment since 1998, and the euro zone economy expected to contract this year, the region faces its most challenging economic outlook in decades, one made more complex by sharply rising global oil prices.
“There’s a risk of losing years,” said Katainen, when asked if some euro zone countries were standing on the brink of a lost decade of growth, like Japan’s experience of the 1990s.
“But if you do change the structures that are not producing growth at the moment, then countries really can change direction,” he said, referring to Greece, Portugal, Spain and Italy, all of which are in a low-growth, high-deficit spiral.
“It’s clear that if you cut expenditures and raise taxes it will hit growth in the short term, but at the same time it will strengthen the credibility of the country, and once you earn back the credibility, the growth will follow.”
The problem for European policy makers is that there are no easy, universal recipes for growth — each economy has to build on its own competitive advantages — and even when sound ideas have been identified, they have not always been implemented.
One of the biggest drivers of expansion, particularly in Europe’s largest economy, Germany, has traditionally been exports, with the United States and China major buyers of German-branded goods, from luxury cars to industrial equipment. But trade disputes between the EU and China are growing and there is a threat of long-term repercussions for many European businesses, particularly from China’s limits on the export of rare earth minerals used in leading high-tech industries.
A long-term refrain in Europe has been the need to make the single market work properly — by ensuring a free-flow of goods, capital and labour throughout the EU and making markets in sectors such as energy and communications fully liberalised.
But the single market is riddled with inefficiency and countries have a vested interest in protecting national champions from outside competition, undoing the benefits that a unified market of 500 million people is supposed to create.
“We have plenty of things to do in the field of energy and electricity liberalisation,” said Olli Rehn, European commissioner for economic and monetary affairs.
Waiting to be created
“The (EU) services directive has not yet been implemented in all the member states, the digital single market is still waiting to be created in a genuine sense of the word, so these things have to be moving forward.”
A Finnish industry delegation, including two-dozen high-tech start-ups, recently visited the United States, and learnt first hand how Europe sometimes puts itself at a disadvantage.
In America, the computer games industry, with a potential market of 300 million consumers, is regulated by one agency. In the EU, there are 27 regulatory bodies.
“This is only one example of what we have to do at the European level,” said Katainen, who as leader of one of the four euro zone countries that still have a triple-A credit rating has seen his influence grow despite Finland’s relatively small size.
In a signal to countries such as Portugal and Spain that are struggling to cut spending even as their economies contract, Finland announced last week that it would cut the budget by nearly euro 3 billion over the next three years, even though it is well within EU budget deficit limits.
And while it increased VAT to 24 per cent, it introduced tax breaks for companies that invest in research and development, hoping to further stimulate a high-tech sector that has grown up around global firms such as Nokia.
