A New Strategy for Europe - New York...

0 08.04.2016

Karl Aiginger

H:\user\aig\vortrag\21stAustria_NY_130416.pptx

A New Strategy for EuropeReaping the benefits of change

4th Austrian Investor and Business Conference

New York City, April 13th, 2016

1 08.04.2016

Outline

Europe: Status 2016

The new strategy: benchmark, 3 principles, 7 drivers

Developed by 34 teams, at request of EU-Commission

Kenneth Arrow, Barry Eichengreen, Jeff Sachs on board

The hidden potential of Europe

Lessons for and learning from Austria

Summary

Annex: data, graphs, documents, figures.

2 08.04.2016

Europe:

A success model in a difficult stage

Indicators of the long run success

From 6 to 28 (+), largest economic area

From trade agreement to common market and currency

Peace, soft power, spreading "rule of law" ( Jeffrey Sachs)

Strengths of Europe:

Rising median incomes, high life expectancy

Rather stable world market share, export surplus

Manufacturing, energy efficiency, renewables

Integration machine (w.r.t. Eastern Europe: World Bank).

3 08.04.2016

Challenges and weaknesses call

for a new strategy

Challenges

Globalization, ageing, heterogeneity, new technologies

Climate change, political instability, refugees, polarization

Weakness signs

Lost decade, unemployment, R&D gap, poverty

Governance, Euro crisis, imbalances, exit parties, BREXIT

“not in a good state" (Junker, 2015); “broken system”

New long run strategy commissioned to 33 teams

Karl Aiginger: NEW DYNAMICS FOR EUROPE: REAPING THE BENEFITS OF SOCIO-ECOLOGICAL TRANSITION (http://Synthesis-Summary.foreurope.eu).

http://synthesis-summary.foreurope.eu/

4 08.04.2016

Outline

Europe: Status 2016






Summary


5 08.04.2016

Europe as role model for successful regions 2050:

Stronger dynamics based on innovation and human capital

Less differences in incomes, higher employment

World leader in environmental technology, energy efficiency

Heterogeneous preferences, pluralistic policy approach

Open area, enjoying globalization; inviting neighbours

A genuine European model of wellbeing

Deepening existing strengths

Not copying US or Asian models.

The WWWforEurope vision in a nutshell

6 08.04.2016

High and rising wellbeing

This benchmark substitutes GDP and GDP growth

Theoretical underpinning: Beyond GDP concept

Stiglitz – Sen – Fitoussi Commission 2009

Operationalisation

Three strategic goals

With several objectives within each goal

Measurable by Better life indicators OECD, EU.

A new benchmark of performance

7 08.04.2016

The three strategic goals for wellbeing

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Simultaneity between goals and instruments Instead of silo strategies

The latter are expensive and inefficient

High-Road-Strategy Forfeiting low costs and standards (“low.cost competitiveness”)

Based on capabilities, ambitions (USP of excellent firms)

Two-stage strategyFirst stage: Consolidation and reprogramming

Second stage: Socio-ecological transition: given low growth

First stage not business as usual but

investment in change: decarbonisation, skill upgrade.

Guiding principles

9 08.04.2016

Innovation: boosting and redirecting

Dynamics: reducing inequality, investment in change

Welfare: from protection to social investment

Employment: symmetric flexibility + upgrading skills

Energy: decoupling and decarbonisation

Public sector: halving taxes on labour

Finance: recommitting to real economy & societal needs.

Seven drivers of change

10 08.04.2016

Why it should work this time:

Going for compromises, not corner solutions

Bundling reforms, partial compensation, fairness

Taking business, social partners, NGO’s on board

Inviting youth, migrants, new actors

Monitoring progress by indicators (“nowcasting” GDP)

Necessity of change is understood

Potential for excellence exists.

Facilitators for change

11 08.04.2016

Outline

Europe: Status 2016






Summary


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Share of Europe in World GDP 2015*

*) GDP based on purchasing-power-parity (PPP), share of world total; IMF (http://www.imf.org).

Core Europe: Germany, France, Netherlands, Belgium, Austria, Finland.

EU plus neighbors: Albania, Bosnia and Herzegovina, Kosovo, Croatia, Macedonia, Montenegro, Serbia, Armenia, Azerbaijan, Georgia, Moldova, Ukraine, Turkey, Switzerland, Norway. EU plus wider neighbors: Russia, Belarus, Israel, North Africa (Algeria, Egypt, Libya, Morocco, Sudan, Tunisia).

7.6

12.2

17.3

20.6

22.7

17.2

15.9

19.3

-5.0

5.0

15.0

25.0

Core Europe Euro area EU28 EU plus

direct

neighbours

Eu plus

wider

neighbours

China USA USA +

Canada +

Mexico

USA 15,9

http://www.imf.org/

13 08.04.2016

The share of manufacturing in GDP:

larger in Europe than in US (at current prices)

10

12

14

16

18

20

22

24

26

28

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

EU-15

USA

EU-15 USA

1960 21.3% 25.2%

2000 16.4% 14.3%

2014 13.6% 11.9%

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Europe: Rather stable world market sharesShare of exports (in % of world exports)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

EU-15

Germany

USA

China EU-15 USA

1995 15.4% 11.5%

2014 13.7% 8.8%

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Share of GDP 2010/2050

1) OECD members.

2) Albania, Bosnia/Herzegovina,Kosovo, Croatia, Macedonia, Montenegro, Serbia; Armenia, Azerbajan, Georgia,

Moldova, Ukraine, Turkey; Switzerland, Norway.

S: OECD Economic Outlook No 93 - June 2013 - Long-term baseline projections.

2010 2050 2010/2050

% p.a.

Euro area 17.9 8.7 1.5

EU-27 24.2 12.4 1.7

EU plus wider neighbours 2)30.0 28.0 2.5

France 3.5 1.9 1.8

Germany 4.8 1.8 0.9

Austria 0.5 0.3 1.6

USA 22.8 13.3 2.0

China 15.9 23.9 4.5

India 6.3 15.6 5.8

Share in GDP in %1)

16 08.04.2016

Refugee crisis opens potential for new dynamics

Argument of ageing and decreasing labor supply is trash

Need for common European solutions became evident

Brexit danger leads to rethinking which issues are regulated

Hidden assets of Europe

EU not based on low, stagnant wages and dirty energy

Higher importance of energy efficiency, renewables

Work life cycle, lower working hours, more leisure

Incomes of “low 90%” are rising

EU outperforming the US (© Wharton 2015)?

Current problems can be turned

into part of the solution

17 08.04.2016

Danger of disintegration (failed “Euro”)

Political polarization within Europe and some members

Political instability in neighborhood, return to cold war

Muddling through with alternating crises and green spots

Reaping the chances

Decarbonization

Lower income spread

Experience of heterogeneity

Learning from each other and best practice

Which scenario is most probable?

Europe 2050: three scenarios

18 08.04.2016

20%: Danger of disintegration (failed “Euro”)

Political polarization within Europe and some members

Political instability in neighborhood, return to cold war *

30%: Muddling through with alternating crises and green spots*

50%: Reaping the chances

Decarbonization

Lower income spread

Experience of heterogeneity

Learning from each other and best practice

The 21st century can still become Europe’s century.

The profitability of the three

scenarios

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Outline

Europe: Status 2016






Summary


20 08.04.2016

Austria’s position as of 2016

Wealthy, diversified, large external surplus (3 bn € vs. US)

High performance (growth bonus 2000/12), low volatility,

Large manufacturing, tourism, high road: 4th in R&D

4th in per capita GDP, 20% above EU, higher than D, F, UK

Low unemployment, income spread, stabilizing institutions

Top position in environmental technology, renewables

Risks, but even more chances from neighborhood

CEE, Black Sea, Middle East, North Africa.

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Austria’s position

S: Eurostat (AMECO); WIFO.

100

105

110

115

120

125

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Austria

Germany

EU28

2000/2015 2016

EU-28 +20.3% +1.6%Germany +18.0% +1.3%

Austria +22.2% +1.6%

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Equal distance to fast growing

neighbors and Western Europe

Distance from Vienna:

Lisbon 2,900 km

Tripoli 2,400 km

Ankara 2,100 km

Kiev 1,300 km

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Challenges and hangover 2013/15

Challenges

Pressure from emerging countries

Deepening specialization, frontier strategy needed

Hangover/low growth 2013-15

Loss of market shares after 12 years of higher growth

Crises in “new neighbor countries”: Ukraine, Russia, N-Africa

Neglected low third and migrants in education

Leniency in frontier strategy due to budget consolidation

Too much money spent for past priorities rel. to the future.

24 08.04.2016

Wrong myths about Austria

Ageing society leads to labor shortage; definitely wrong

Inflexibility of labor, burden by social standards

High exposure of banks, risky geographical position

Public sector risks (see maturity, interest, structure of finance)

Chances dominate (if some homework is done)

Vivid neighborhood (incl. CEE), plus diversification (China, US)

Fiscal and financial reforms progress, education deficits addressed

Adequate “model” for more inclusive and decarbonized future

Austria grows faster than Germany and EU since 2000

It will match probable top W-Europe in the next decade.

25 08.04.2016

Outline

Europe: Status 2016






Summary


26 08.04.2016

A new strategy for EuropeBased on strength and preferences

No: continuation of political inertia and pessimism

No: sorry, we have low growth and a lost decade

No: sorry, we have rising emissions and higher poverty

Strategy has to turn problems into growth dynamos

Decarbonisation, empowering the low third (unskilled)

Investing and stabilizing neighborhood

Refugees end labor shortage and inflexibilities

Brexit threat lead to reconsider overregulation

EU has the potential for the best model of the 21st century

Less income divergences, plurality, lead in sustainability.

27 08.04.2016

Austria will overcome hangover

and – to some extent – lead to new strategy

High-road strategy, dynamic, open

Manufacturing base, high R&D, surplus, diversification

Threat of low growth due to ageing no longer founded

Investing into vivid neighborhood

Dynamics by low income spread and decarbonisation

Chances from neighborhood outweigh risks

Given - homework is done and - strategy is implemented.

28 08.04.2016

Karl Aiginger

H:\user\aig\vortrag\21stAustria_NY_130416.pptx 4.4.2016, 9:20

A New Strategy for EuropeReaping the benefits of change

4th Austrian Investor and Business Conference

New York City, April 13th, 2016

29 08.04.2016

Austria´s “ability to deliver goals”

Beyond GDP goals Rank Strength Lead country

Austria

Income pillar 2 Household income Luxembourg

Social pillar 4 Youth unemployment Netherlands

Ecological pillar 7 Share of renewables Italy

Overall wellbeing 2 Income Sweden

Karl Aiginger: A New Strategy for Europe, Vienna-Brussels, 2016 (http://Synthesis-Summary.foreurope.eu).

http://synthesis-summary.foreurope.eu/

30 08.04.2016

Low growth in core Europe: vivid

neighborhood

2000/2015 2000/2020 2010/2015 2015/2020

Germany 1.1 1.2 1.6 1.4

France 1.1 1.2 0.8 1.7

Core Europe1) 1.1 1.2 1.1 1.5

Euro area 1.0 1.2 0.6 1.6

EU28 1.4 1.5 1.0 1.9

EU plus direct neighbours2) 1.6 1.7 1.2 2.1

EU plus wider neighbours3) 1.9 1.9 1.2 2.0

EU-CEE4) 3.2 3.2 2.3 3.1

North Africa5) 4.1 4.3 3.1 4.6

USA 1.8 2.0 2.1 2.5

China 9.6 8.7 7.8 6.2

1) Germany, France, Netherlands, Belgium, Austria, Finland.2) Albania, Bosnia and Herzegovina, Kosovo, Croatia, Macedonia, Montenegro, Serbia, Armenia, Azerbaijan, Georgia, Moldava, Ukraine, Turkey, Switzerland, Norway.3) Russia, Belarus, Israel, North Africa5).4) Bulgaria, Croatia, Czech Republic, Estonia, Hungaria, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia.5) Algeria, Egypt, Libya, Morocco, Sudan, Tunisia.

Source: World Economic Outlook, October 2015, International Monetary Fund. http://www.imf.org

http://www.imf.org/

31 08.04.2016

Productivity more important than costs

Competitive advantage:

Quality, sophisticated products, technology

Growth drivers:

Innovation, education, universities

Ambitions/Institutions:

Social empowerment, ecological excellence, trust

Objectives: Three strategic goals

Europe has to go for a high-road strategy.

It has to be a high-road strategy

32 08.04.2016

In the very long run (rich countries) will have lower growth

Supported by decreasing marginal utility of income

Increasing non material values with rising income

Burn outs are neither warranted nor necessary

But over the next 10 years we have to have decent growth

For returning to full employment, paying back public debt

Favouring redistribution

Jobs for migrants and refugees

Driven by investment in decarbonisation and social innovations

Tripling GDP up to 2100 (1.5% p.a.) neitherfeasible nor warranted.

It has to be a two-stage strategy

33 08.04.2016

New infrastructure much less dependent on fossils

Social innovations prepare for second stage

Changing institutions, behaviour, awareness

Redefine competitiveness towards beyond-GDP goals

Reduce dominance of GDP, address goals directly

Start double decoupling (emission and labour)

Support industry moving towards 4.0 (lower material/ energy)

Energy Roadmap 2050

Zero Net Emission Goal (OECD, COP 21 Paris 2015).

Even the first stage cannot be business

as usual but investment in change

34 08.04.2016

Low growth in core Europe: vivid

neighborhood (2000-2015)

*) Gross domestic product based on purchasing-power-parity (PPP), share of world total.

Core Europe: Germany, France, Netherlands, Belgium, Austria, Finland.

EU plus neighbours: Albania, Bosnia and Herzegovina, Kosovo, Croatia, Macedonia, Montenegro, Serbia, Armenia, Azerbaijan, Georgia, Moldava, Ukraine, Turkey, Switzerland, Norway.

EU plus wider neighbours: Russia, Belarus, Israel, North Africa (Algeria, Egypt, Libya, Morocco, Sudan, Tunisia).

Source: World Economic Outlook, October 2015, International Monetary Fund. http://www.imf.org

1.01.1

1.4

1.6

1.9

0.0

0.5

1.0

1.5

2.0

Core Europe Euro area EU28 EU plus direct

neighbors

Eu plus wider

neighbors

USA 1,8

http://www.imf.org/

35 08.04.2016

Defining Europe

Core Europe: Germany, France, Netherlands, Belgium,

Austria, Finland.

Direct neighbors: Albania, Bosnia and Herzegovina,

Kosovo, Croatia, Macedonia, Montenegro, Serbia,

Armenia, Azerbaijan, Georgia, Moldava, Ukraine, Turkey,

Switzerland, Norway.

Wider neighbors: Russia, Belarus, Israel, North Africa.

Source: World Economic Outlook, October 2015, International Monetary

Fund. http://www.imf.org

http://www.imf.org/

36 08.04.2016

Equalizing US position in technology

driven industries in exports

30.0

35.0

40.0

45.0

50.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Deutschland USA EU15 EU28

1996 2014

EU 15 33.1% 36.8%

EU 28 33.3% 38.1%

USA 44.0% 34.9%

37 08.04.2016

EU: 'not in a good state': economically, public opinion

Pessimism will phase out if there is a forward-looking strategy

dynamics, employment, lead in decarbonisation

Europe will become a success model again

investment into change

exchange with neighbours (Fulbright, ERP)

Europe will become the best model for dynamic high-income regions.

A new strategy is necessary and

feasible

38 08.04.2016

Challenges for Austria

Pressure from catching up economies

Dependent on external demand as small country

Upgrading skills of lower third neglected

Integrating migrants (2nd gen) into school and training

Needed: Adapting vocational training

Frontier strategy for universities and innovation

Deepening specialization and smart diversification

Loss of market shares by political instability and investment trough

Mobilizing structures and redirecting public sector.

39 08.04.2016

Debt, public sector, uncovered risks

Public debt is medium, private debt is low

Financial risks low (interest, maturity, structure, rating)

Structural deficits are decreasing, Heta risk exists but "priced in"

Share of public sector large, inefficiencies abundant

Public sector pays for pensions for those not needing support

Governance reforms could reveal big chances

For cutting expenditures, taxes

Boosting investment in skill

Innovation, ecology

Labor highly taxed; energy, tobacco, alcohol, transport not.

40 08.04.2016

Risk in the financial sector

Exposure to Central, Eastern and SE-Economies (CESEE)

60% (gross) and 40% (net) of GDP, but rather diversified

Restructuring has taken place, Banking supervision

Restructuring and resolution Act 2015

Strong institutions, sometimes reluctant to change

Pro-European opinions dominate, critical to EU governance

Refugee crisis favors right wing tendencies incl. admiration for authority.

41 08.04.2016

Risks are more than

compensated for Austria

Potential: rising population & vivid neighborhood

Successful diversification (China, US)

External surplus, low private debt, public deficits declining

Need for continuous reforms & technological excellence is on rise

In Austria critical about public sector and institutions (bureaucracy) in all rating reports strong institutional effectiveness!!!

42 08.04.2016

Cross roads for Austria & Europe

Frontier or backlash innovation system

Upgrading skills or polarization

Political integration vs. extreme parties

Deploring the past or investing in future

Low trend in labor productivity, higher in resources

Inside orientation (fences) or enjoying diversity, heterogeneity.

43 08.04.2016

Prospects for Austria

Lower growth based on ageing/ declining work force

Is now definitely wrong; increasing supply up to 2030

And even later if migration trends continue

Headline fiscal deficit declines (disguised by HETA resolution)

Recovering CEE, peace in neighborhood vs. refugees

Persistent large current account surplus

Positive net investment position

Great challenges Austria, larger chances.

44 08.04.2016

Austria’s growth since 2000 –

higher than in Germany

100

105

110

115

120

125

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Austria Germany

Euro area EU28

2000/2015 2016

EU-28 +20.2% +1.6%

Euro area +15.6% +1.4%

Germany +18.0% +1.3%Austria +22.2% +1.6%

S: Eurostat (AMECO); WIFO.

45 08.04.2016

Europe: A new strategy is needed

Based on strengths and preferences

“Europe is not in a good state”, economically, public opinion

Pessimism and ad hoc solutions are overcome by a new strategy

Dynamics, employment, lead in decarbonization

Problems can be turned into solutions

Refugees and labor shortage and inflexibility

Increase awareness of common solution needed

Brexit referendum helps to rethink what has to be regulated

Europe has the potential for best model for rich regions

Less income divergence, plurality, lead in sustainability.

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