Making Europe Work

Another proposal is a central-budget subsidy to reduce employment taxes in the EU’s most economically challenged countries. The logic is that a country like Greece needs devaluation to enhance its competitiveness, but that leaving the euro would pose major problems. The alternative would be to cut nominal wages (internal devaluation), which is hard to do (though it has been achieved in Latvia and Ireland).

Reducing taxes on labor, perhaps for a defined period, would have a similar effect. That would be costly for governments in the short term, though an increase in output and employment might well justify the tax expenditure involved; here, too, an EU subsidy might be a worthwhile investment.

If Europe wants to revive sustainable growth and high employment, it must replicate what has worked in those countries that have performed successfully. Doing so will cost money. Governments must be prepared to persuade their electorates that it would be money well spent.

Howard Davies is a former director of the London School of Economics and chairman of the UK’s Financial Services Authority. He currently teaches at Sciences-Po in Paris.

Copyright: Project Syndicate/Europe’s World, 2012.

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