12 September 2013

Buti/Padoan: How to make Europe's incipient recovery durable - End policy uncertainty

The eurozone is recovering but the revival is fragile, ringed by downside risks. This column argues that three steps are essential: reducing policy uncertainty, repairing the financial system, and creating new investment opportunities.

Authors Marco Buti/DG ECFIN & Pier Carlo Padoan/OECD

What has to be done to unlock investment in the eurozone? The authors list three conditions they believe are necessary in order for investment to pick up:

1. Reducing policy uncertainty.
2. Repairing the financial system.
3. Creating new investment opportunities.

These conditions, if fulfilled, will be self-reinforcing and will enhance medium-term growth potential.

For these conditions to be fulfilled, action is needed at both the European and the national level, both on the demand side, by boosting investment demand, and on the supply side, by accelerating a much-needed structural change in the economy…

Implementing the measures the authors discuss in this paper rapidly and credibly would boost confidence and reduce uncertainty while paving the way for more robust medium-term growth. Higher confidence, lower uncertainty, and better access to credit would support firms' investment and short-term economic growth, but would also make ambitious structural reforms easier to implement politically and allow economic agents to reap their full benefits. This is why there is no room for complacency. The cost of procrastination or dithering would be high, involving a double penalty on the economy as growth losses due to lack of reforms would be compounded by growth losses due to persistently high uncertainty and subdued confidence.

Procrastination is not inevitable, however, and policy action should be encouraged by the expected growth benefits. Such benefits and the strategy that will make them materialise should be well-communicated so as to enhance consensus. It is essential that the vicious circles that have marred the Eurozone economy in the past are turned into a powerful virtuous circle where growth feeds confidence and confidence further reinforces activity.

Full article

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