A WINDOW OF OPPORTUNITY FOR EUROPE

Source: McKinsey Global Institute

Europe's growth since the start of the financial crisis has been sluggish, and the continent faces some difficult long-term challenges on demographics and debt levels. But new McKinsey Global Institute research finds that thanks to a convergence of low oil prices, a favourable exchange rate and quantitative easing (QE), Europe has a window of opportunity to undertake ambitious reforms, stimulating job creation and investment, and unlock new economic dynamism.

The continent has a foundation of strength on which to take action. It remains a world leader on key economic indicators of social and economic progress.

Growth Drivers for Boosting Markets and Productivity

1. Public sector productivity
2. Competitive and integrated markets in services and digital
3. Further openness to trade.

Growth Drivers for Mobilising the workforce

1. Pro-growth immigration
2. Grey and female labour-force
3. Enhanced labour-market flexibility

Growth Drivers for Investing for the Future

1. Nurturing ecosystm for innovation
2. Effective education to employment
3. Productive infrastructure investement
4. Reduced energy burden
5. Supporting urban development

• Three areas of reform with 11 growth drivers- many of which policy-makers already implement in some form- can help deliver on European aspirations. They entail investing for the future (for example nurturing innovation and reducing the energy burden), boosting productivity (for example, competitive and integrated markets in services and digital and more openness to trade), and mobilising the workforce, for example increasing grey and female labour-force participation and enhancing labour-market flexibility.
• Three quarters of the impact of growth drivers can be obtained at the national level. Best practice on every key dimension of the economy can be found somewhere in Europe. The challenge is to emulate that best practice and adopt it more widely.
• Scope for structural reforms is limited while investment and job creation are weak. Corporations are piling up cash despite low interest rates, households have cut investment since the bubble, and governments have adopted austerity policies. While evety sector is acting nationally, collectively they are causing weak demand that means that output is still 15 percent below pre-crisis trends.
• Europe has several options to reigniting investment and job creation despite its complex institutional setup. Measures to unlock financing and quantitative easing can help but are insufficient on their own. Fiscal stimulus is not esay to implement at scale in Europe. New ideas need to be explored, including accounting for public investment as assets depreciate rather than during capital formation, and carefully adjusting taxation and wage structures.
• By scaling up and speeding up reform mostly at the national level and stimulating investment and job creation at the European level in lockstep. Europe could clsoe its output gap, return to a sustained growth rate of 2 to 3 percent over the next ten years, unleash investment of € 250 billion to € 550 billion a year and create more than 20 million new jobs. This requires trust and the right governance structures that avoid moral hazard, bundle tight package deals, or lift investment programmes to the European level.

Recapitulation

• € 2.2 trillion a year is needed to meet European aspirations by 2025. Europeans are seen willing to make trade-offs e.g. more working hours and/or less social protection- for higher incomes and better education, health care, security and living environment.
• For increasing competitiveness, 75 % can be achieved by national governments.
• For reigniting investment and job creation: 1. At within current governance structure where possible (e.g. QE) 2. Test potential for a post-Maastricht governance system to enable bolder action 3. Look at new solutions like balance sheet accounting and unleashing household spending.
• Growth Potential: If Europe underakes reform on the supply side AND boost investment and job creation- moving beyond crisis management and establishing the vision, trust, and governance to act at speed and scale- 2-3% sustained GDP growth is possible.