ALPBACH ECONOMIC FORUM - EUROPE NEEDS MORE

UNCLAS SECTION 01 OF 02 VIENNA 003025

SIPDIS

E.O. 12958: N/A

TAGS: PREL ECON EFIN ECIN ELAB AU EUN
SUBJECT: ALPBACH ECONOMIC FORUM - EUROPE NEEDS MORE

REFORMS, LESS ENLARGEMENT, AND A REVITALIZED GERMAN

ECONOMY

Summary

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1. The August 18-September 3 European Forum Alpbach's

Reform Symposium focused on the flagging Lisbon Agenda,

moribund EU growth rates, labor market inflexibility, and

Germany's bleak economic outlook. Politicians,

academics, and subject experts called for more democracy

and closer political and economic policy coordination

within the EU. Many speakers cited the Lisbon Agenda's

failure as an example of the EU's political weakness. ha

There was a strong consensus that, without higher growth

rates and continued structural reforms, the EU would not

be able to maintain its generous social welfare system.

On enlargement, most argued that enlargement beyond

Romania and Bulgaria was not an option. Many

participants touted the "Scandinavian model" as the best

blueprint for enhanced labor market and social reforms

throughout the EU. Germany's economic problems are

likely to continue for several more years, with its

anemic growth prospects affecting the entire Euro area.

There was near-unanimous criticism of the European

Central Bank's tight monetary policy. End Summary.

The EU - Call for Reform, Democracy and Common Policies

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2. A common message was that the EU needs more

democracy, closer political coordination, common fiscal

and economic policies, and renewed "bonding" with its

citizens after the constitution ratification debacle.

Anna Diamantopoulou, Greek MP and former EU Commissioner,

stated that the EU would only have a future if it has a

political future. According to former EU Commissioner

Mario Monti, the EU is severely handicapped, especially

vis--vis the U.S., because it speaks and acts "as one"

only with regard to trade, competition and monetary

policies. Fritz Verzetnitsch, President of the Austrian

Trade Union Federation, supported Monti's view that the

EU should forge a more united position towards the

outside world.

The Lisbon Agenda - Pessimistic Outlook

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3. The overwhelming majority of speakers maintained that

the Lisbon Agenda had failed because of the EU's

political impotence. Most pointed to the October 2005

Lisbon revision and the Austrian Presidency as the last

chances to salvage anything from the process. The Lisbon

Agenda, while elaborating perfectly laudable economic

targets, lacked implementation strategies and interim

goals, but most of all, political commitment. There was

consensus that such ambitious projects need closer

central coordination and would be difficult to carry

through without a political union.

Low Growth Threatens EU Social System

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4. Daniel Thorniley, Senior Vice President of the

Economist Group, presented a gloomy medium-term economic

outlook for the EU-15, with projected average growth of

only 1.5-1.8% over the next five or more years. Without

higher growth rates, there was general agreement that the

EU could not maintain its high environmental and social

standards, nor provide much-needed investment in

education, research, infrastructure, administrative

reform and innovation. Several economists criticized the

lack of EU-wide, growth-oriented economic policies, as

well as inflexible fiscal policies, which in most Member

States just focused on deficit reduction. There was

concern about the EU's lagging productivity growth and

the widening gap compared to the U.S. Noting that

services represent 70% of the EU's total output, Monti

underlined the necessity of establishing a single market

for services. There was near-unanimous criticism of the

European Central Bank's (ECB) tight monetary policy, with

many asserting the ECB missed opportunities to spur

growth in 2001-2004 by not lowering interest rates.

EU Enlargement - Unlimited Enlargement is No Option

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5. There was general agreement that the May 2004 EU

enlargement had been positive and that without it, the EU

would be facing additional economic challenges.

Nevertheless, most analysts cautioned that the EU needed

sufficient time to deal with this enlargement,

economically and politically, before launching a new

enlargement round. The Dutch and French referenda on the

constitution highlighted that Member States must address

enlargement within a domestic policy context. Ewald

Nowotny, economist and Vice-Rector of the University of

Vienna, opined that the EU would have to define its

borders clearly, as unlimited enlargement is not an

option. With the accession of Romania and Bulgaria, the

EU will reach its provisional limit. Nowotny argued that

Croatia and other Balkan states are potential candidates,

but requisite political conditions in the region are

lacking. Nowotny added that the EU should offer "large

and economically underdeveloped countries," such as

Ukraine, Belarus and Turkey, a privileged partnership.

However, Nowotny warned that full membership for these

countries in the near-term would weaken the EU and

ultimately "destroy" it.

EU Labor Market Issues - More Flexibility Needed

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6. Several economists praised the "Scandinavian Model"

as the best approach for Member States to achieve higher

growth rates, budgetary responsibility, more R&D

spending, while maintaining the welfare state. Many

highlighted successful reforms of the labor markets in

Scandinavia, which promoted "flexicurity" (flexibility

for firms, security for employees). However, several

labor representatives criticized "flexicurity" as one of

many subtle methods to restrict labor rights and

benefits. Christoph Leitl, President of the Austrian

Chamber of Commerce called for more development of an EU

social model, which would spur economic growth and fight

unemployment. Globalization, according to Leitl,

required global institutions and social partnerships to

ensure minimum labor standards.

Germany's Economic Situation - Bleak Outlook

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7. There was much discussion and reflection about

Germany's current economic malaise. Most agreed that the

cost of German reunification had severely hampered

growth. Several economists criticized the German

Government for not having raised taxes to finance

reunification, but most agreed the decision had been

political. There was agreement that other factors, e.g.,

unbridled growth in social spending, had aggravated

Germany's current economic problems. Michael Huether,

Director of the German Economic Institute, cautioned that

reforms will be difficult, because Germany is not a true

market economy, rather a social state model. Restoring

confidence and optimism would be key for Germany's

recovery, since recent policies have destroyed trust in

the government's economic policies and institutions.


8. Several speakers warned that eastern Germany could

develop into a "Mezzogiorno" of the north, with per

capita GDP in western Germany roughly equivalent to GDP

in the U.K., Belgium or Austria. However per capita GDP

in eastern Germany lagged behind that of Portugal and

Malta. Most speakers warned that Germany's anemic growth

would continue to hold back growth throughout the EU,

perhaps even pushing many countries into recession.

There was consensus that Germany will remain a special

case for some years - reunification costs and the

structural budget deficit will not fade away any time

soon.

BROWN