Conference report: The politics of slow growth in Europe

November’s Ditchley Park conference brought together 50 leading economists to consider the politics of slow growth in Europe. While Europe’s economy is finally recovering, the long-term outlook remains weak, thanks to low productivity growth. Changing demographics will place an increasing strain on public services and the welfare state. And the rising influence of populist parties may make pro-growth reforms harder.

Broadly, there were four questions the conference sought to answer about how Europe should deal with a slow growth world.

It may be that governments should throw the kitchen sink at the productivity problem, trying multiple reforms at once, and hope that some of them bear fruit.

The first question was: can governments raise the structural rate of growth in the European economy – and if so, how? The conference agreed that there had been a slowdown in the trend rate of growth since the 1970s, which the Great Recession had made worse. But economists still do not fully know why productivity has been so disappointing since 2008; there were as many explanations for weak productivity growth as there were solutions for it. In order to boost innovation and investment, participants suggested greater use of competition policy in markets with high levels of concentration, deepening the single market in services and capital markets, taxing more innovation-friendly equity on the same basis as debt, stronger labour rights, and more training and education to foster the adoption of new technologies. It may be that governments should throw the kitchen sink at the productivity problem, trying multiple reforms at once, and hope that some of them bear fruit.

Would workers take a larger share of the pie in the future? The conference tended towards pessimism. Some participants thought that the ‘China shock’, which had raised the global supply of labour and curbed workers’ bargaining power in the West, might go into reverse as China was ageing rapidly. Sub-Saharan Africa, the potential ‘new China’, may not be able to integrate into the global economy without better governance. But there were other reasons to think that ‘weak labour’ would continue – trade union membership continued to fall across the developed world, in part because manufacturing’s share of output was declining, and education expansion, an important driver of wage improvements since 1945, would be difficult to repeat. The conference’s proposals included government intervention to strengthen labour’s bargaining power, including higher minimum wages, higher investment in education and skills, and taxing wealth and inheritance more to raise funds for investment. Participants agreed that more redistribution would be hard to achieve politically in a slow-growth world.

Many participants argued that central banks should not ‘normalise’ monetary policy too early; Europe needed to use fiscal policy to help the ECB revive the economy.  

How should macroeconomic policy respond to low growth? There was a fair degree of consensus that productivity growth and macroeconomic policy were linked. Unless policy-makers acted decisively to stabilise the economy, structural unemployment rose, reducing long-run productivity levels, and investment was deterred. Many participants argued that central banks should not ‘normalise’ monetary policy too early; and that European policy-makers needed to use fiscal policy to help the European Central Bank (ECB) revive the economy. Others went further, suggesting that Europe should try to run a ‘high pressure’ economy, with loose monetary and fiscal policy, in an attempt to raise growth. But many participants were sceptical that counter-cyclical fiscal co-ordination between member-states of the eurozone would be politically achievable. Some even questioned whether it was desirable in the context Italy’s debt burden and the risk that posed to the currency union as a whole.

Many participants agreed that politicians had overlooked the risks facing people who were born or stuck in weaker regions.

Finally, how should moderate parties deal with zero-sum politics, with workers, retirees, rich and poor fighting to retain their share of national income? Many participants agreed that politicians had overlooked the risks facing people who were born or stuck in weaker regions. Some argued that finance ministries should put more weight on the political backlash in deindustrialising towns and cities than ‘cost-benefit’ analyses for supporting struggling regions (which usually found that subsidy was too costly). Most agreed that more redistribution would be difficult if growth continued to be very slow, because the strongest pressure to increase public spending would come from older people: health and pension spending was set to rise as Europe’s baby boom generation entered old age. Social democrats were doing badly in Europe because they needed stronger tax receipts to fund their priorities. There were a few radical proposals from conference participants: one suggested that governments borrow on a large scale and use the money to buy equities, with profits distributed to citizens. Others proposed a commitment to universal tertiary education. But the conference was divided on whether moderates needed to be conservative, holding the line against populist damage, or try to persuade the public of the merits of a more productive radicalism than was on offer from the populists. Yet participants agreed that some way had to be found to prioritise investment in the future and find a way to say no to the growing ranks of Europe’s retirees.