The situation is currently better in the euro area, so now is time to shake it up.
The long period of lackluster growth since 2011 led to a drop in potential growth. High unemployment and lack of investment dented the mainsprings of European growth. The euro area no longer has the same facility it had before the 2008 crisis to grow at an average pace of 2%. In the current circumstances, 2% looks close to the economic cycle peak, and the situation is even more stark in France, where growth stood at around 2% on average before the financial crisis, while the 2017 figure is poised to come to 1.8% at best. These figures along with statistics for 2018 are close to the cycle peak and we should expect growth to take a downturn from 2019 onwards. The role of economic policy should be to promote an improvement in potential growth to keep the economy on a stronger growth path over the long term.
Key areas for consideration.
The first dimension is improving economies’ ability to adapt to a more complex environment. Today’s context is contrasting and lacks uniformity, primarily because competition is no longer comparable or uniform. Companies that operate on a worldwide market are not subject to the same restrictions and conditions as those that operate locally. This is not new, but the trend is now more pronounced. Meanwhile, the economy and companies displayed diminishing returns in the past: after reaching a certain size, any additional production was increasingly expensive to generate, and this was a source of inflationary pressure. There was therefore a degree of uniformity across companies as they were all subject to the same law of diminishing returns, but this is no longer systematically the case. Network economics have completely and spectacularly revolutionized the production landscape. The majority of companies still obey the law of diminishing returns but now there are also companies that boast increasing returns: they are network-based and marginal production costs no extra, making any increase in business systematically profitable. This can be seen across all large companies in the so-called network economy.
This situation makes competition between the two different types of companies very unequal, so businesses need to be able to adapt to this very mixed environment. It is not right to see these two groups of companies exist side by side – on the one hand those whose staff enjoy very high salaries as the company can generate high productivity gains, and on the other companies with low-paid staff and little scope to generate this surplus.
If we do not create this ability to adjust, then it is tantamount to accepting the status quo of unbalanced momentum and two-speed growth.
There is a twofold solution to this problem. Firstly, training is a key factor in enhancing human capital. It is vital to enable each member of the working population to access effective and ongoing training, as this is the only way for workers to keep up to date and maintain control over their own careers and lives. In France, but also in a number of countries in the euro area, this key issue must be developed in the months and years ahead in order to improve potential growth. It is crucial to be adaptable and responsive to the ever-changing global context. If this aspect is not tackled effectively then the labor market will become even more unequal, which is not a desirable outcome.
The other aspect is a necessary upturn in public investment in order to create the right circumstances for companies with low productivity gains to be able to invest effectively. Public investment must be a driving force and a way to allow all companies to recover some leeway in managing their business.
In other words, investment must act as a driver and a way to reduce uncertainty in the long term, providing the means for all companies to regain more profitable momentum. This option should not be reserved exclusively for network companies.
The last area for reform has a Europe-wide dimension. There are a number of questions that are raised on a much wider scale than a national one. The climate, terrorism and governance for the euro area, as well as a raft of other issues need to be addressed Europe-wide as the answers to these questions cannot be found on a local scale. It is precisely during this phase of renewed growth that these institutional reforms must be made if we are to reduce uncertainty on the future of European integration. Talks between France and Germany will be vital in determining the right path to take.
Growth prospects are looking more upbeat, employment is recovering across all countries in the euro area, and the ECB does not seem to want to restrict the economy in the area in the very near future. Now is the time to implement the reforms needed to boost growth potential for Member States in the euro area. The initial reforms on the French labor market are a step in the right direction, but they need to be rounded out with training and public investment to foster momentum that is truly specific to the euro area. Meanwhile, institutions must adjust to this new path in order to adapt to this more self-sustaining momentum, and thereby set growth and employment on a resolutely long-term trend.