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19 May 2008

Let’s Stop Being Gloomy About Europe

Paul De Grauwe

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Pessimism has been rampant in many EU-countries over the last decade, largely fed by lagging productivity growth in the EU since the late 1990s and a perception that the US has a superior economic model. This perception has led to the view that the only way to restore higher levels of productivity growth is by introducing deep structural reforms in the EU, making goods and labour markets more flexible. This paper presents the argument that such pessimism is excessive: a significant part of the productivity growth differential between the US and the EU is cyclical, and is already turning around. In addition, there are areas in which the EU is structurally better prepared than the US to face the challenges of globalisation.
The forthcoming mid-term review of the budget should be used to achieve political agreement on breaking the status quo bias by introducing ‘sunset’ clauses, which stipulate that major spending programmes will be discontinued after a certain period of time unless their usefulness can be ascertained and a new agreement reached allowing their continuation. Movement in the right direction can thus start immediately, even within the present legal framework, especially if Parliament uses its influence to push for a better allocation of expenditure.