OPINION:WHAT IS needed to restore growth to Europe's economy? This is a critical question for Ireland.
The financial viability of any country with substantial debts depends on three inter-related factors:
* Interest rates that are low and affordable;
* Growth rates in the economy that are sufficiently high to generate tax revenues to pay off debts over time;
* Whether the government is running a primary surplus (that means that its revenue is higher than its spending if one leaves out of account the spending that goes in interest on debts).
It looks as if the European Central Bank and the US Federal Reserve are going to keep interest rates low for a long time to come and there is little risk of inflation in the short term. So condition number one for a return to financial viability is being met. This is the big difference between now and the 1980s, when international interest rates were kept cripplingly high.
The third condition has yet to be met. While the Government is meeting its immediate EU-IMF targets, Government spending still exceeds revenue by an amount greater than the amount being spent on paying interest on existing debt. That is why cutting spending and increasing revenue are still such a priority.
But what about the second condition, growth? OECD studies suggest the medium-term growth potential for the Irish economy, that is between 2016 and 2025, is better than that for most EU countries because we have a younger population, a higher birth rate, a more modern industrial base and a generally more flexible workforce than most EU countries have.
In contrast, in the short term, because of declining international trade on which we heavily depend, our growth prospects have had to be revised downwards, and this is affecting revenue and our debt position.
International trade prospects are made more uncertain by the threat of an Israeli attack on Iran, which would hit energy importers such as Europe especially hard.
So, in the absence of a boost from international trade, we depend on the production of credible policies to boost Europe’s own domestic growth, independently of what is happening in the rest of the world. In the late 1930s the Great Depression in Europe was ended by a surge in investment – in armaments. Not a cure we need to use now! But perhaps there is another form of security-related investment that would make sense for Europe today – investment in climate security.
Climate change is happening, and it is a threat to the lives of millions of people, especially in drought-ridden parts of the world. Our long-term ability to feed ourselves is being put under threat. The depletion of phosphate and potash resources means soil conservation, and the avoidance of soil loss through climate change, should be a top priority if we want to be able to feed the nine billion people we will soon have living on our planet.
In the 1990s, the EU set itself a goal of reducing CO2 emissions by 2020 to 20 per cent below their 1990 levels. Due to the recession, that goal will now be easily achieved in most countries.
The German ministry of the environment commissioned a report in 2011, A New Growth Path for Europe, which suggested the EU should scrap the old 20 per cent target as too unambitious, and set itself a new target, to reduce CO2 emissions to 30 per cent below the 1990 level by 2020, and that it should accompany that new target with an EU-wide investment programme in co-generation of heat and power, insulating all older buildings, enhancing the power grid and building new wind turbines. The report suggests this investment would increase the growth rate of the overall EU economy from a potential 2.2 per cent to 2.8 per cent. It could, the report claims, create an extra six million jobs in Europe.
In Germany’s case, it suggests the unemployment rate could, as a result of the additional investment, be 2.9 percentage points lower than it would otherwise be, and in Ireland’s case, unemployment could be 3.3 percentage points lower. Detailed estimates are produced for most EU countries.
The biggest potential increase in employment identified in the report is in the construction sector, in which Ireland has substantial under-used resources.
The detailed measures proposed in the 2011 report undoubtedly need further work and updating, but they provide a basis for injecting some hope into the debate about Europe’s future and a sense that we are taking charge of events again.
It would be a good idea for this German paper of 2011 to be put on the agenda for the EU summit of December 2012.
John Bruton is a former taoiseach and former EU ambassador to the United States