Europe’s elusive growth consensus

PARIS – In most European countries, GDP per capita is currently lower than it was six years ago. In some cases, like Greece, Italy, and Ireland, it is more than 10% lower. Even in Germany, where it is higher, average growth over the last six years has been anemic.It is hard to overestimate the adverse consequences of this state of affairs. The European Union has lost six million jobs since 2008. Many younger people who have entered the labor force in recent years have been unable to find a job corresponding to their skills and are bound to pay a price for it throughout their careers. Governments have been struggling with the impossible task of balancing their books despite dwindling revenues. And, worst of all, companies have begun discounting Europe in their investment plans, paving the way for a permanent loss of aggregate momentum.In such a situation, growth ought to be at the top of the policy agenda. But, while the EU and national governments pay lip service to it, they have not devised an effective economic-revitalization strategy.In the eurozone, the hope is that calmer sovereign-debt markets, slower fiscal adjustment, and supportive monetary policy by the European Central Bank will help trigger a sustained recovery. This may be the case, but the recovery that is now expected will not suffice to offset the adverse consequences of the last six years. The productivity gains that failed to materialize during this period are lost forever: many people who have experienced long-term unemployment or have left the labor force are unlikely to return to work, and Europe will be lucky if productivity growth accelerates somewhat and approaches pre-crisis trends – better than nothing, but hardly satisfactory.Things are completely different in the United States, where growth is on everyone’s agenda: the Federal Reserve is targeting an unemployment rate below 6.5%, and companies have used the recession as an opportunity to reorganize and become more efficient. The lasting adverse effects of the 2008 shock are likely to be much smaller there than in Europe.So, why is Europe not doing more to return to growth? European leaders would probably say, first, that they have been forced to address more urgent matters since the Greek crisis erupted in 2010. But, while it is true that much policy attention has been devoted to fighting financial fires, this is not a sufficient answer: since the summer of 2012, when ECB President Mario Draghi convinced markets that the eurozone would not break up, Europe has had enough breathing space to address the growth imperative, but has barely done so.The second explanation is that there is agreement on the goal but not on the means. Again, there is some truth to this. Keynesians argue that Europe would grow if only policy were focused on generating aggregate demand; they blame precipitous fiscal consolidation and insufficiently aggressive monetary easing for the loss of momentum. Their opponents, by contrast, see structural weaknesses and internal imbalances as the major impediment to growth; for supply-siders, it is the slow pace of economic and social reforms that is to blame.This lack of consensus on the nature of the problem arguably hinders agreement on a solution. But, again, this is not an entirely convincing explanation. Disagreements such as this have arisen before – and not only in Europe. Given sufficient will, there could be ample room for compromise. As the Nobel laureate economist Paul Samuelson famously said, the reason we have two eyes is to keep one on supply and the other on demand.A deeper, more worrying explanation is that Europe does not have a strong desire for growth. In fact, some have become convinced that, given the environmental consequences, economic growth does more harm than good and that the crisis should be regarded as an opportunity to shift to a more frugal economy. The growth agenda, according to this view, is a Trojan horse for ecological neglect – for example, through more business-friendly environmental regulation or shale-gas exploration.Others perceive calls for growth as a pretext to weaken employment protection or accept greater income inequality. They fear that, rather than delivering the promised benefits, painful reforms would tilt the distribution of power and income in favor of employers.Environmentalists and labor advocates have a point when they insist that growth should not be the ultimate goal of economic policy. They are right to point out that its quality – in terms of preservation of the environment, work conditions, or income distribution – matters, too. They are even right to be suspicious that an overriding emphasis on growth could be used as an excuse for questionable social choices. But they are wrong to conclude that their own interests would be better served by neglecting growth. Stagnation is not a solution to any problem; on the contrary, it entails serious risks.What steady-state advocates forget is that stagnating or declining incomes would heighten resistance to higher taxes on fossil fuels and delay investment in green technologies (and thus the transition to new industries and the creation of better jobs). To end the current stalemate and unlock its economic potential, Europe needs a new “compact” (to use the current jargon) that addresses simultaneously the demand shortfall, impediments to productivity gains, and the quality of growth. Designing and implementing such a package is far from impossible – several elements are already available. What is lacking is a political platform on which Europe’s necessary growth conversation could take shape. It is urgently needed.Jean Pisani-Ferry teaches at the Hertie School of Governance in Berlin and serves as the French government’s Commissioner General for Policy Planning.