Thank you, Karel, for the introduction and CEPS for hosting this event. I would also like to extend a warm thank you to Cinzia and Maarten for taking time out of your busy schedules, and to all of you for joining us today.
Europe has achieved much over the last 75 years.
The “economic miracle” of the post-WWII period brought the rapid recovery in income levels. The “Great Moderation” (1980s-2000) following the oil crises in the 1970s offered stable growth at declining inflation rates. And advances in regional integration—for example through the Single European Act in 1986—and global trade helped lift productivity and income levels in Europe. The result was income per capita in advanced European countries growing by two and a half times between 1960 and the end of the century, on par with the US.
Europe has shown grit when it mattered. Resolute policymaking helped overcome the double blow of the Global Financial Crisis and the European debt crisis. And Europe stepped up again during the Covid-19 pandemic and the energy crisis following Russia’s invasion of Ukraine.
But more work needs to be done.
The world is changing fast. Today, we are confronted with a more shock-prone, uncertain, and fragmented world. This adds to a series of domestic challenges in Europe. Some are longstanding: The great European project remains unfinished, the population is aging, climate change requires attention, and there is a worrying productivity gap with the most dynamic economies. Other challenges have become prominent only more recently, such as the need to bolster national and energy security. And, in many countries, there is limited fiscal space to meet these growing challenges.
Europe must once again step up if it wants to preserve its prosperity. Kicking the can down the road will soon make it impossible to fulfill commitments to social welfare, climate action, and national defense. Delivering on these fronts is existential—Europe’s economic and social model is at stake.
The deteriorating external environment weighs on Europe’s economic outlook.
In our latest World Economic Outlook, we project global growth to reach only 2.8 percent this year, in part due to ongoing trade and policy uncertainty. In the United States, growth is expected to slow to 1.8 percent from heightened tariffs, economic uncertainty, and softer demand while China's growth forecast is lowered to 4 percent. These numbers do not reflect recent developments which could mean lower tariffs than assumed in April. But uncertainty remains extraordinarily high and holds back consumption and investment.
And trade and policy uncertainty also led us to downgrade growth in Europe despite some offsetting factors: Germany plans to ramp-up infrastructure spending and European defense spending is projected to increase significantly.
Inflation is decelerating approaching targets driven by lower energy prices tepid demand.
There are notable risks around baseline:
First escalation trade tensions would further weaken external demand increase uncertainty.
Second reconfiguration supply chains could impact activity inflation view trade diversion Europe countries affected US tariffs small risk aggregate lead losses export shares specific sectors especially CESEE countries persistent real wage growth
Third risk delay necessary fiscal consolidation reignite concerns repayment capacity
How can Europe rise challenges secure prosperity?
Europe needs ambitious concerted push advance long-stalled reforms boost growth economic resilience
Action carried both EU level deepen single market domestically make product labor markets more growth friendly forthcoming EU budget support incentivize reform push meet growing need European public goods
Reform effort anchored steady macro-policy response open trade policies
Let look details:
Starting macroeconomic policy central banks continue normalize monetary policy remaining focused durably reaching price stability targets ECB lower policy rate summer maintain barring major shocks CESEE countries inflation still higher persistent central banks ease cautiously Fiscal policymakers find ways accommodate rising spending needs sustainable way countries public debt already high consolidation warranted reprioritization necessary accommodate new spending needs
Regarding trade policy Europe indeed everyone needs more trade global trade regime shifted some reallocation resources reconfiguration value chains appear inevitable important not over-react For example US-China tariffs may divert some trade estimate even April's high tariff rates aggregate effects small order EU GDP extra-EU imports Although effects pronounced certain industries far clear whether safeguard measures required Where measures deployed align WTO principles time-limited clearly communicated
Europe should avoid tariff escalation protect people not stand way structural change
Structural policies boost growth resilience focus EU domestic reforms highest urgency potential emphasize complementarity pursue comprehensive reform packages enhance political support highlight key role next EU budget play supporting reform effort ultimately secure Europe's prosperity First high time reboot EU single market come long way but EU single market remains far complete instance take months worker relocates country legally employed Large differences across bankruptcy procedures discourage cross-border investment having national stock markets introduces inefficiencies allocation capital continent fragmentation increases costs hurts business dynamism growth Full integration single market yield tremendous benefits modeling work shows reduction barriers intra-EU goods multinational production lift GDP priority areas Presenting reforms package increase buy-in member states see benefits areas realistic feasibility find package selected actionable measures raise GDP significant downpayment full potential gains completing single market Second advancing domestic policy actions together magnify growth impact Another paper published highlight significant potential gains domestic reforms package reform priorities addressing gaps labor markets business regulation credit capital markets boost output approximately advanced economies medium term Coordinated reform effort both likely yield benefits exceed cumulative returns isolated actions areas For example advancing capital markets union boost effect initiatives support innovative startups improving skill levels amplify R&D efforts Across think smart big Structuring reforms packages everyone direct benefits enhance domestic political support facilitate successful implementation Third potential powerful lever advancing priorities Multiannual Financial Framework MFF tackle shared promoting convergence cohesion strengthening resilience NextGenerationEU existing emerging revamped key lines Fourth integrated resilient spike volatility energy prices Russia's invasion along blackouts Spain Portugal underscore urgency coordinated establishing integrated infrastructure financial side advancing channel savings productive facilitate portfolio diversification improve sharing Fiscal particularly play supporting integration sharing conclude stressing stands critical junction demonstrate ability deliver Strengthening prosperity requires decisive concerted push enhances maintaining openness act now act together