Hamish McRae: What Europe really needs is speedier growth

Sometimes it is easier to see what will happen in three or four years’ time than in three or four days. So it is with Greece. One of the things that many of us will have found distressing, alongside the hardships heaped on the Greek people, has been the tone of the debate between the country and the European Union’s dominant economy, Germany: fury on the one hand, and something close to contempt on the other.

This is not the ever-closer union envisaged by the founders of the EU and enshrined in the Treaty of Rome. Ironically the euro, the key device designed to pull Europe even closer together, is driving it apart. But an ever-closer union was at some stage always going to be transformed into some sort of multi-speed Europe, with the members wanting to integrate further doing so while those that didn’t staying put — or even retreating a bit.

That is where Britain is now. But it is not just us who want a looser relationship with the EU: the elections in Denmark last week point in the same direction. The governments of Finland and Sweden also face pushback from their electorates although there is no question of Finland dropping the euro.

It is a harsh truth — harsh for its supporters — that the EU members of the eurozone have grown substantially more slowly since its inception than the EU countries outside it. That is not straightforward cause and effect as other reasons including demography help to explain this. But the euro has imposed a rigidity when what is needed is flexibility. Greece might appear an extreme case, for after surging in the mid-2000s its real GDP is back to the level of 2002. But it is not alone. Italy is back to the GDP of around 2002 too. For much of the eurozone, it has been a lost decade — or worse.

Whatever Greece does about its membership of the eurozone, or indeed Britain does about its membership of the EU, we will in three or four years’ time be clear. But while it is easy to see a looser Europe in political terms, the bigger challenge will be whether we will see a more successful Europe in economic terms.

There is a temptation in the UK to write off the European economy, Germany apart, as a failure. I think that is because we are so aware of the floods of young Europeans coming here for jobs. Eurozone unemployment is 11.1% and would be even higher were it not pulled down by Germany’s 6.4%. We are at 5.5%. There are now almost two million non-UK nationals from the EU working here, against 600,000 10 years ago. In one sense, this is wonderful, notwithstanding the social pressures it puts on us. But it does raise questions about the rest of Europe’s ability to grow faster and create jobs.

Some argue that for the EU to survive, it must have more political union. I would argue that it must have more economic success. A new paper from the McKinsey Global Institute, A Window of Opportunity for Europe, makes some suggestions as to how the EU could lift its game. Without reform, it calculates that the European economy will grow at 0%-1% a year through to 2025. That is a pretty dismal prospect. For if some countries grow faster than that, it suggests other will not grow at all, or worse. It would be another lost decade. Yet the convergence of low oil prices, a competitive exchange rate for the euro, and the continuing impact of quantitative easing ought to create an environment where Europe could do better.

McKinsey suggests there are three areas of reform that could lift the overall growth rate to 2%-3%: mobilizing the workforce, boosting productivity and investing for the future.

Much of this is common sense. Some EU countries, ourselves included, have managed to get a high proportion of people into the workforce. Our employment rate, of 73.5% of people of working age in jobs, is the highest since the series began in 1971. We also have a million people of more than the official working age in jobs, and that is likely to go on climbing. Since we still have a youth unemployment problem, it should be possible to push participation up yet further. The task is for the laggard countries to push through the reforms done by the frontier ones.

If that requires political drive, boosting productivity, the second plank, is more a task for the private sector. We know we have a problem in the UK, but actually there is a problem across much of Europe. Even Germany has stagnant productivity. To some extent, high employment and lower productivity go together because the higher the employment, the more the marginal workers (the old, the low-skilled and so on) are sucked into jobs. But Europe could surely do better than it does and the interesting question here is whether, as the labour market tightens, our productivity will recover.