Editor Pick – The EEAG 2007 Report on the European Economy
by the European Economic Advisory Group (EEAG) at CESifo:
Lars Calmfors, Seppo Honkapohja, Giancarlo Corsetti, Michael P. Devereux, Gilles Saint-Paul, Hans-Werner Sinn, Jan-Egbert Sturm, Xavier Vives
From the press release:
“Published now for the sixth year, the EEAG Report on the European Economy consists of two parts: one dealing with short-term macroeconomic issues and the other with the choice of a long-term economic model for Europe.
The main conclusions regarding the short-term issues are:
• There will only be a mild slowdown in the world economy. In Europe there will be a slower – but continued – recovery.
• With low forecasted and expected inflation, it is hard to justify further interest rate rises on the part of the ECB.
• The current upswing in Europe should be used for stronger fiscal consolidation than is now planned. Government expenditures should be restructured in favour of investment, R&D and education.
• The common monetary policy in the euro area has exposed individual countries to severe macroeconomic stress, which has not fallen over time. Problems have been particularly difficult in Ireland and Italy. To solve the Italian adjustment problem, there should be fundamental deregulation reform to boost productivity growth.
• The ten countries that entered the EU in 2004 are growing fast. If they fulfil the other criteria for entry into the EMU, they should be given a rebate with respect to the inflation criteria, so that they can adopt the euro as soon as possible.
As to the issue of what economic model Europe should opt for, the main conclusions are:
• Although not as successful as often perceived, recent macroeconomic performance in the Scandinavian countries is good. The lesson for Europe is not that one can do without market-liberal reforms, as is often claimed. It is instead that such measured reforms in both product and labour markets can produce very substantial results.
• Tax competition from the new member states has brought down corporation taxes in the EU. This raises equity concerns. To tax capital in an efficient way, the report proposes a simultaneous increase in the VAT and a reduction in labour taxes.
• Economic nationalism in the form of opposition to cross-border mergers, promotion of national champions and bailing out of domestic firms is a serious danger for economic efficiency. A key factor behind economic nationalism is public ownership, which should be severely restricted. The report proposes an EU rule to this effect.”
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