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November 17, 2019

The EU recovers from the financial crisis at a particularly slow pace

The EUThe recovery of the EU has continued at a particularly slow pace compared to other major economies. This is one of the conclusions of the European Business Confederation BusinessEurope regular report “Barometer of Reforms”. The report assesses the current state of the EU and makes recommendations for structural reforms and priorities. The document is based on reports from members of the BusinessEurope organization.

In 2017, the EU production is only 9% higher than in the pre-crisis years, while the US it is 15% up and Canada is 18% higher.

The recovery of the EU is supported by a number of temporary factors, including the quantitative easing program of the European Central Bank.

“If the relevant reforms are not taken, the EU’s main long-term growth capacity is only 1.3%, well below the cyclical growth of around 2%”, warned the analysts.

BusinessEurope recommends follow-up reforms to ensure enhanced and sustainable economic growth in the EU:
– Urgent policy actions to avoid labor market disparities, which increasingly act as a brake on economic growth;
– Education and training systems should be better adapted to labor market needs, focusing on the training of digital and STEM staff (science, technology, engineering and mathematics);
– The labor market regulatory framework should be clear, simple and flexible in the context of the increasingly rapid development of the digital economy;
– Tax systems be simpler, more transparent and user-friendly
– Making public finances more efficient and reducing tax-hindering growth;
– Achieving a truly integrated single market, particularly in the areas of the digital economy, telecommunications, energy and services;
– Ensuring that regulation at EU and national level is well-developed and properly enforced, with a minimum of administrative burdens;
– Energy prices to enable EU businesses to compete internationally;
– Enhance trans-European (and national) infrastructure.

The global financial crisis has forced economies around the world to lose growth, investment rates have fallen, many companies have ceased to exist, industrial changes have occurred. In addition, there are a number of challenges in the long run, such as the aging population in Europe and the need to tackle the global carbon problem.

The last year was strong for the European economy. It was one of the three consecutive years in which EU growth was higher than the United States. But while the US economy is now growing at 15% compared to 2007, the EU has a 9% growth. Europe must ensure that it uses the current period of strong growth, which is still partly driven by temporary factors.

There is still a lack of speed in most Member States to implement the growth-promoting reforms recommended by the EU. Only 22% of the reforms were satisfactory in the period 2006-2017.

While the EU has many world-class companies, innovators and skilled workers, much more can be done to help raise growth and living standards. The recent US corporate tax reform will significantly improve the attractiveness of the US for investors, so the EU must use all possible leverage to improve its competitiveness.

In addition to less burdensome administrative requirements, the EU can also take further steps towards completing the single market by helping Member States to increase R&D spending, reduce labor taxes and increase investment in key growth projects, including infrastructure projects. The most urgent is the need to tackle the rapid expansion of skill shortages that, despite the relatively rapid recovery from the crisis, are already at their lowest level in 20 years, and this represents a real risk to the labor market. The main aim should be to improve training for all age groups.

While unemployment is still high in several Member States, the businesses are increasingly experience difficulties to hire skilled workers. There are indications of a structural mismatch in labor markets in the EU. The average tax burden in Europe is 42% – almost one-third higher than Japan and the US (both are about 32%), with almost no structural change compared to 10 years ago.

According to the PISA survey, the EU has made little progress in reducing the gap in educational outcomes against Japan, Canada and South Korea.

Despite the latest progress, the non-performing loans in 2016 were 4.4%, well above the observed levels in the US and Japan (1.3-1.4%).

The enterprises in the Eurozone are financed more by bank loans than the US, where companies rely more on capital markets. The market capitalization (as a share of GDP) in the Eurozone is less than half of the US and almost two-fifths below that in Japan.

While venture capital investments doubled in absolute terms in the EU since 2010, investment in the US has increased almost 2.7 times, which means that the gap between the EU and the US has increased even more.

The organization recommends strengthening and implementing the Union’s capital markets proposals to ensure that the EU creates a true single market for financial services and develops additional sources of financing for bank lending to improve access to credit.

While the EU Member States have made further progress in reducing the government deficit, much remains to be done to reduce the level of government debt of the EU, which is still 84% of GDP – significantly above the levels of 58% in 2007 and 60% of the Maastricht limit.

Despite the recent focus on consolidation by cutting costs, the public spending as a share of GDP (46%) remains well above those in Japan (37%) and the US (36%).

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