Hannes Swoboda argues that ”Europe Can Spend Its Way to Growth” (op-ed, May 22), but in fact Europe’s present growth crisis was caused by a debt crisis. A debt crisis cannot be solved by more of the same.
If public spending were the solution to the crisis, then many debt-heavy European countries would be growing swiftly by now. In France, Italy, Spain and the U.K., total government expenditures were larger in 2011 than in 2008—and all four economies are stagnant. Meanwhile, countries that cut spending and limited the rise in debt – like Germany, Sweden and the Baltic States — are doing quite well.
Restrained deficits are fundamental prerequisites for growth. As the American economists Carmen Reinhart and Kenneth Rogoff have shown, economic growth is seriously hampered when government debts start exceeding 90% of GDP. According to Eurostat, average government debt in the euro zone was 87.2% in 2011. The IMF expects euro-zone governments’ debt to reach 90% this year. For Europe to try to spend its way out of the crisis would be like adding fuel to the fire.
There is a better strategy. Alongside thorough consolidation measures, Europe needs free-market reforms. Most of these structural changes need to be implemented at a national level, by abolishing monopolies, cutting red tape, liberating labor markets and cutting taxes to foster entrepreneurship.
But much can also be done at the European level. We need to implement the internal market for services. Europe’s is increasingly becoming a knowledge-based services economy, but the lion’s share of the services sector is still excluded from the internal market. We also need to re-allocate spending from subsidies to research and development, and to further open our economy to the rest of the world.
The European Union is the world’s largest economy but not its largest market. To remain the former, we need to become the latter.
Gunnar Hökmark
European parliamentarian from Sweden and vice president of the European People’s Party group