5

A Growth Strategy for Europe

FRANKFURT – With the third Greek loan program almost in place, it is time for European leaders to start focusing on the future. That does not mean concentrating on Greece’s debt-service schedule over the next few months. Rather, it means embarking on a broad economic-reform program that combines growth-enhancing supply-side reforms and demand-side efforts to support investment and job creation.

Low oil prices, a more competitive euro exchange rate, and the European Central Bank’s judicious use of its full suite of monetary-stabilization policies – not to mention the fact that the threat of Grexit has been averted, at least for now – provide a favorable backdrop for such ambitious reforms. Even the political environment may not be as inauspicious as is often believed: Despite the worrying rise of anti-European sentiment in many countries – especially those hit hardest by the crisis – there is a palpable yearning among Europeans to break out of the continent’s debilitating economic (and political) rut.

Indeed, a recent McKinsey survey revealed not only that Europeans aspire to a more vibrant economy, higher incomes, and better public services (especially health care and education), but also that they are prepared to accept tradeoffs, including longer hours and reduced social protection, to achieve them. A whopping 91% of the 16,000 respondents said that they would favor changes to the status quo, even if it required some sacrifice.

And the status quo is in urgent need of change. As it stands, European economic output per capita remains well below 2008 levels. In most European countries, gross sovereign debt exceeds the threshold (60% of GDP) established by the Stability and Growth Pact. Immovable adjustment constraints have caused eight countries to experience nominal wage deflation in at least two years since 2008. And unemployment remains stubbornly high.