The past decade has been rough for the European Union. EU’s big two, France and Germany, now have an opportunity to strengthen the region. Allianz Research offers 10 ideas...
After the recent political developments, there is momentum on both sides of the Rhine to strengthen Europe. It’s no secret that the EU has had it rough for a while, lurching from one crisis to another since the 2008 global meltdown.
Allianz Research provides 10 ideas that could help France and Germany put the region back on track:
The sovereign debt crisis highlighted how the whole Eurozone could suffer in the absence of an efficient stabilization mechanism.
Against this backdrop, the European Commission’s (EC’s) idea of creating a European Monetary Fund along the lines of the International Monetary Fund is worth considering. If a country faces a liquidity problem, it could get funds in exchange for implementing certain structural reforms. In the case of a solvency crisis, the focus could be on debt restructuring.
France and Germany could also work on promoting a macro-stabilization tool or fund for EU economies that are more vulnerable to shocks. Countries could set aside money for the rainy day fund when the going is good.
The risk of large imbalances within the EU jumps if there are no means of helping countries in temporary distress. A system of grants and loans could address short-term difficulties of a single member sooner.
The cost of financing for businesses varies across Europe. A Capital Markets Union could unlock EU’s rich savings pool and allow better capital allocation. Reforms proposed by France and Germany could remove regulatory and legal barriers, creating truly integrated financial markets.
Strengthening existing regulators and eventually creating a capital markets supervisor to implement and enforce financial sector rules commonly across Europe could be steps in the right direction. This will decrease the cost of financial transactions and the opportunity for regulatory arbitrage as well as enable more private risk-sharing across borders.
New types of pan-European financial products could help too. Deeper integration and cross-border flows are key to positioning Europe as a financial services hub.
France and Germany could lead a ‘private investment booster’ to expand the Juncker Plan, an infrastructure investment program by EC President Jean-Claude Juncker. This could help stimulate investment in the eurozone and make financing conditions more uniform, especially for small and medium-sized enterprises (SMEs).
Currently, the European Fund for Strategic Investments offers guarantees to raise funds for the most viable projects in infrastructure, education, renewable energy and SME funding. Unfortunately, its approved financing since inception is below 1.7 percent of total European investment in 2016. Plus, the guarantees given are highly concentrated. For example, a large chunk of the 1.8 billion euros Portugal received went to a single biomass factory.
Trade and innovation are two pillars of an industrial policy. In trade, European nations suffer from a lack of coordination in supporting exporters and ensuring legitimacy of trade deals negotiated by the EC; in innovation, a coordinated effort to meet international competition is missing.
France and Germany should encourage a more proactive policy for the EU – one that collectively promotes European exports and levels the playing field for domestic producers.
Europe needs a single digital market and innovative ecosystems to compete with China and the U.S. in fields such as artificial intelligence, Big Data and biomedicine, where future jobs will be. According to the EC, a single digital market could contribute 415 billion euros more by 2020. To participate in the digital revolution, European players need a common regulatory framework for issues such as data security, consumer protection, digital transaction taxation, etc.
Innovation also requires patient, long-term finance. Venture capital funding in Europe is highly fragmented and short-term oriented – desired exit is within three-five years but an innovation cycle can easily take up to two decades.
A European agency modeled on the U.S. Defense Advanced Research Projects Agency could allow investments in breakthrough technologies, which could later be incubated in the European market.
France and Germany are still seeking the right mix of social protection, work incentives and competitiveness to promote inclusive growth. The two countries must work together to strike a balance between progressive taxation and social security contributions on labor income.
A recent study showed that social security contributions in France are 106 billion euros higher than in Germany after adjusting for output. Conversely, at nearly 50 percent, the German tax wedge is among the world’s highest, disproportionately impacting low-wage earners. Both countries struggle to keep the burden of tax and social security contribution light on low-wage earners, maintain a level of benefits that doesn’t cause poverty at retirement and retain incentives for low-paid jobs.
Lower and less progressive social security contributions on the so-called mini- and midi-jobs in Germany should therefore be considered. Likewise, reducing the cost of social security for both employers and employees is important. The reduction of levies on salaries in France will make work more attractive, supporting growth.
To enhance labor mobility, a ‘borderless space’ could be created to allow qualifications, benefits and grants to be ‘transported’.
On paper, labor mobility is a core freedom in the EU, but it’s been hard to implement. Pension rights are especially challenging. Many European expats end up collecting bits of pension from different employers in different places.
Also, a lack of a harmonized framework means pension can be taxed twice: once on the way in (example, Germany) and once on the way out (example, the UK). A Pan-European Pension Product could be the answer. Such a product could reduce the pension gap and unlock an additional 700 billion euros in savings by 2030, according to the EC. It will also encourage workers to move freely, helping dampen the impact of asymmetric shocks.
In 2016, a big percentage of 15- to 24-year-olds in Greece, Spain and Italy were identified as not in education, employment or training. High youth unemployment has steep societal costs in terms of foregone earnings, higher taxpayer burden and lower economic growth.
Accelerating technological changes mean that only those with the right skills and the ability to adapt will thrive in an increasingly digital economy. So it’s imperative for France and Germany to tackle the gap between the skills of young job seekers and those required by the real economy.
In France, employability of young people after their first qualification is rather low. In Germany, a record high 43,500 apprenticeship positions stayed vacant in 2016 while over 20,000 applicants failed to find spots. To match supply to demand, France and Germany should establish the basis for EU-wide standards for apprenticeship.
France and Germany should develop best practices in Europe for providing lifelong learning and actively retraining their populations as technology shortens the lifecycle of job skills across professions.
The Digital Economy and Society Index shows that in terms of human capital, there are considerable differences within Europe. Finland and Luxembourg, for example, are twice as ‘skilled’ as Bulgaria and Romania. Europe must bring its human capital up to speed with the intellectual property it is producing. The ability to retrain and requalify its population will shape Europe's transition into the digital age.
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