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Economic growth challenges and responses

Economic growth challenges and responses

Context

The global economy continues to recover from the pandemic, Russia’s invasion of Ukraine and the cost-of-living crisis. Despite war-disrupted energy and food markets and monetary tightening to combat decades-high inflation, economic activity has slowed but not stalled. Even so, growth remains slow and uneven, with widening divergences and inflation, which was already an issue before the war in Ukraine, remains a central concern in OECD countries.

This succession of crises hit the European Union harder than its competitors. Since 2020, existing economic and fiscal heterogeneities across EU Member States have been exacerbated and the debt burden in some Member States, which was already concerning before the Covid crisis, is increasing.

Europe has entered a period of persistent inflation with slow growth although unemployment remains relatively low. Inflation has started to decline but is too high, above the 2% target. Labour productivity is stagnating, or even declining in the main countries of the euro zone notably due to the cyclical downturn, lack of productive investment and insufficient innovation. Growth prospects in Europe for 2023 and 2024 are weak.

Consequently, the EU and the eurozone have to embark on the right course: fighting inflation, having more fiscal responsibility, more equity financing and more supply reforms geared to increase productivity, as well as taking steps to complete the Banking Union and implement the Capital Market Union. But this move can only be contemplated if sufficient discipline starts reversing the trend of ever-growing economic heterogeneities across Member States.

Ultimately, the paradox of the Euro is that a single currency and national economic policies coexist without a strong cement of coordination. Ultra-accommodating and asymmetric monetary policy have been used to overcome the contradictions of this paradox, but the price of this permanent rescue is costly. It is essential to ensure convergence of fiscal and structural policies.

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