Meeting Global Economic Challenge (Part-II)

"A report last year by the European Commission forecast that without revenue or expenditure measures public debt would hit 200 percent of GDP by 2050."

Article by Dr. Zia-Ur-Rehman zia177@yahoo.com

The European economies are currently in a strong position. One welcome feature of global economic growth of 2006 was that it became better balanced regionally. In the recent past, growth has largely been driven by demand in the United States. But now, China and India have become important engines of growth for the world economy, and we are also seeing a long-awaited pickup in investment and in employment in Europe. The Fund estimates that growth in the euro area in 2006 was just above 2½ percent, and that it will be slightly over 2 percent annually in both of 2007 and 2008.

Of course, there are risks to this benign outlook. One that is particularly troubling is a possible resurgence of protectionism. One of the greatest sources of global growth in recent years has been increased freedom of trade, achieved in particular through multilateral trade reform. For this reason, governments and citizens all around the world, including in Europe, should be very concerned about the negotiations in the Doha Round. There is a shared responsibility among all countries, but particularly the larger economies—both advanced and emerging market countries—to bring the Doha Round to a successful conclusion. I have made the point that Europe is growing, but it starts from a position in which per capita output has remained stubbornly lower than that of the United States—per capita GDP has been about two-thirds of the U.S. level for the last thirty years. Meanwhile, unemployment remains stubbornly higher. Unemployment in the euro area fell to about 7½ percent in November, but again this contrasts with an unemployment rate of about 4½ percent in the United States. I am therefore pleased that Germany, which assumed the revolving presidency of the EU this month, has proposed as a priority setting the future path of Europe, including the most appropriate socio-economic model to promote jobs and growth. In the spirit of contributing to this debate, I would single out two areas where I think European countries could most usefully concentrate their efforts: consolidation in fiscal policy, and structural reforms. High structural fiscal deficits and government debt are still problems in many countries, including in Europe. It is both easier and more economically sensible to reduce these deficits when the economy is strong than when it is weak. It is important to distinguish here between headline and structural deficits. In many European countries, more ambitious action is needed to tackle structural deficits. The Fund has recommended that those countries which have not yet achieved their medium-term objectives for their budgets aim at an improvement in the fiscal position of half a percent of GDP in each year. But some governments have not been so ambitious, and in those countries that have set more ambitious fiscal targets, the policies to achieve the adjustment planned have mostly not been specified yet. A look at the public debt dynamics reinforces the importance of such adjustment. A report last year by the European Commission forecast that without revenue or expenditure measures public debt would hit 200 percent of GDP by 2050. However, if countries meet their medium-term objectives by 2010, debt would be only 80 percent of GDP. So a little more adjustment now can head off serious long-term problems. The issue is also urgent because populations are aging in most advanced countries and the demands on governments are likely to increase over time. The old-age dependency ratio in the euro area is projected to double over the next forty years. Our most recent estimates are that population aging will add about 3¾ percent of GDP to public expenditure through 2025, and the effects could be higher than this. Governments would do well to prepare for this now, when times are good, rather than waiting until the pressures from aging populations are already impacting budgets and raising social tensions.