“Give weight to the EU’s voice”
An interview with Professor Marcel Fratzscher on the EU’s role in the world economy and paths towards increased growth.
Professor Fratzscher, the European Union has just 7% of the world’s population but generates almost a quarter of the world’s gross domestic product and the highest share of world trade. What is the EU’s role in the global economy?
The European Union has by far the largest economy in the world – significantly larger than that of the USA. This makes the EU enormously attractive both as a trading partner and as a destination for investment. It also gives the EU an influential voice in global decisions on economic policy. Unfortunately, however, the EU is not putting its full weight behind its voice. It is too busy with its own affairs, and far too often it doesn’t do justice to its global responsibility. Europe speaks with too many voices, and its member states still primarily pursue their own national objectives. We should understand that only a common, strong European voice can also strengthen national interests globally. Until we take this to heart and strengthen our common European institutions, the EU as a whole and its member states will inevitably lose global influence.
Given the heterogeneity of the EU countries, is it right to talk about an “EU economy” at all? And what role does the German economy play?
There are considerable economic disparities across the regions in the EU. This is not so much a national phenomenon as a regional one. But it is nothing unusual either, because every country has such differences – as does Germany itself.
As the largest and economically most stable economy in the EU, Germany has a special responsibility. Its economic and political stability was and still is an important anchor for the entire EU during the European crisis. It has helped prevent an even deeper crisis and to buy time for the weaker countries to implement necessary reforms. Now, too, during the recovery, the German economy has a major role to play as a locomotive for Europe. It won’t be able to pull Europe out of the crisis alone, but it can make a valuable contribution.
At present, the growth rates in most EU countries are low. What would you do to encourage growth and innovation?
Europe needs a stimulus for growth. This can only be achieved with a balanced reform agenda that both strengthens the supply side by means of structural reforms, and supports the demand side. The problem of weak demand will not be solved by a bigger public sector and more government intervention, but only an increase in private investment in Europe. Investment is so important because in the short term it can boost demand – and thus reduce the level of unemployment, which is still much too high – and, in the longer term, it can strengthen the supply side by improving productivity and competitiveness.
One magic phrase here is free trade. The EU is currently negotiating with the major economic powers USA and Japan. What do you hope the treaties will achieve? What are the advantages and disadvantages?
Macroeconomically, a free-trade agreement with the United States will benefit both the USA and the EU. Germany in particular, with its high level of exports, is more dependent on free trade and global competition than any other country. There are few countries where so many jobs depend on open markets and global trade. However, as with any liberalisation there will be winners and losers within every national economy. In Germany, it will be mainly consumers who will profit from a free-trade area with the USA. In some fields the USA has stricter regulations and standards protecting consumers than the EU. And consumers will be able to benefit from lower prices.
The global financial and economic crisis has also hit the EU and the eurozone hard. Is it now over? Or what adjustments still need to be made to prevent a relapse?
The effects of the global financial crisis of 2008 and 2009 were quickly displaced by the European crisis after 2010. But its causes have only partly been remedied. Many regulatory reforms of the banking and financial system have since been launched, both in Europe and globally. However, up to now implementation has been slow and there has been a lack of global coordination. This is important not only to make the financial system more secure, but also to make fair global competition possible.
The European Central Bank’s interest rates are at an all-time low, yet the economy has still not taken off in EU countries. What financial-policy measures are still available?
Monetary policy is doing everything possible to ensure both price stability and financial stability in the eurozone. However, many monetary-policy measures can only be partially effective if policymakers don’t meet their obligations and implement both decisive structural reforms and a sustainable fiscal policy. Governments should certainly use the limited fiscal leeway they still have. However, the key to an economic recovery lies in structural reforms and in measures to strengthen private investment.
What is your short- to medium-term forecast for the EU economy?
I’m afraid we are falling ever deeper into economic stagnation – with growth rates that are too high for a recession, but too low for a sustainable recovery. Stagnation means that the crisis countries are unable to find jobs for people and the high level of unemployment will continue for a long time. It means that political and social conflicts within countries, but also between member states, will further intensify. And it also means that Europe’s global influence will decline. ▪
Interview: Martin Orth
