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WTO chief Pascal Lamy: Competitiveness must drive European growth

Europe is struggling to find its place in the new global economy because of 'domestic' issues, not external factors (like a rising China or trade disadvantages). On the contrary, the external climate favors European growth – if Europe can improve competitiveness and find its niche.

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Where potential for growth is concerned, the crisis has highlighted difficulties incurred through the problem of excessive debt. The only way to keep the social security system going without significant demographic growth is by increasing the economic growth rate. Yet it is difficult to impart a fresh boost to the growth of an economy whose potential for such growth has been damaged by the crisis and which is having to cope with the burden of deleveraging.

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Yet therein lies the whole issue: It is a matter of boosting potential for growth by 1 or 1.5 percentage points in order to be able to continue funding the European welfare system and to pay down the debt that has built up to date.

The reforms required to achieve this goal and to make the best of Europe’s comparative advantages are long-term reforms primarily regarding its education, training, and innovation system. It is in that sphere that the difference between countries and continents is going to be seen.

A population’s level of education is the single variable that has best evinced differences in economic growth and success worldwide over the past 40 or 50 years. But public education and innovation policies can have an impact only in the medium and longer terms. So in view of that, how can we stimulate growth in the short term? It is a matter of devising measures whose impact can be felt at once.

We may find an answer to that question on the labor market, yet we have to combine fiscal and budgetary measures in order not to reduce productive public expenditure, which has a driving effect on the economy, and to avoid any rise in manufacturing costs so that we can protect our price competitiveness.

Finally, monetary policy can also serve as a short-term lever for action. According to the Bruegel think tank, there is a way of managing the inflation differential within Europe intelligently so as to restore part of the competitiveness that is missing in the south. Inflation at 2.5 percent to 3 percent in northern Europe, coupled with lower inflation – at, say, 1 percent – in southern Europe would gradually allow countries that cannot devalue their currency to recover, to some extent at least, the price competitiveness they lack.

In sum, Europe’s dearth of price competitiveness and of “non-price competitiveness” must be the target of future public policies, which will give Europe the means to benefit from the comparative advantages that it should have. Education, training, and innovation policies, the meticulous management of intra-community inflation, and greater fluidity in the labor market are the pillars of a courageous reform equal to Europe’s legitimate ambitions in an increasingly competitive world.

Pascal Lamy is the director general of the World Trade Organization.

© 2012 Global Viewpoint Network/Tribune Media Services. Hosted online by The Christian Science Monitor.


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