Investing out of the crisis

Europe can move towards an inclusive, sustainable and innovation-friendly growth-path as long as it renews its economic policy agenda

The European Union has been harshly hit by the economic and financial crisis of 2008: in some member countries its impact has been much worse than that of the Great Depression.

Overall, the macroeconomic evidence sends two key messages. First, the effects of the Great Recession have been more dramatic in the European Union than in other developed economies which used more active counter-cyclical policies (e.g. the U.S.), leading to increasing unemployment and poverty across the E.U. Second, European internal divergence has skyrocketed since 2008, with Southern countries (i.e. Greece, Italy, Spain, Portugal, but also Finland) drifting away from Germany.

The research carried out in the first eighteen months of the EC-funded ISIGrowth project provides micro and macroeconomic evidence that the current EU policy mix grounded on fiscal austerity and labour market structural reforms has been pain with no gain, increasing vulnerability of citizens without restoring steady growth and creating jobs. Quantitative results are supported by the qualitative study based on interviews with civil society organisations, found in ISIGrowth, published in the working paper 33/2016.

Research findings support an alternative policy agenda:

First, austerity policies and labour market structural reforms should be replaced by a combination of innovation, demand-management and industrial policies. The threefold combination will help deal with complex issues such as: inequalities within and between countries; divergence and de-industrialisation; technological transition and labour impact of innovation; and environmental challenges.

Second, European public policies should move from (just) “fixing” market failures to actively “creating” markets, by means of mission-oriented policies able to create systemic effects through long-term investments which favour the transition towards high-value, innovative and environmentally-friendly production, distribution and consumption.

Such an ambitious policy program can be realised as long as President Jean-Claude Juncker’s “Investment Plan for Europe” is strongly reinforced, empowering and reshaping the European Fund for Strategic Investments at the European Investment Bank.

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