Union could outperform US, says economist

Date: 02/10/03

By Peter Chapman

THE European Union still has a chance of meeting its goal of topping the world's economic premier league by the end of the decade, according to a report by one of the continent's leading economists.

Rosemary Radcliffe, chief economist of accountancy giant PricewaterhouseCoopers, said Europe might clinch top spot even if America manages to escape with a 'soft landing' from spiralling deficits on its trade accounts and budget triggered by an unsustainable boom in consumer spending.

But she said the US would stay top if Europe fails to push through vital reforms, primarily to make its labour markets more flexible. These should get more people into jobs and boost their productivity.

“If the exam question is can Europe catch up, the answer is that the scope is there,” Radcliffe told European Voice.

“That is partly because there may be problems facing the US and partly if Europe chooses to put together a set of market reforming policies,” she said.

Radcliffe claims this does not mean that the EU would then have to ditch its traditionally higher levels of social protection. Tougher state-aid rules to stop French- style bailouts to struggling companies are also not a priority, she added.

However she warned that the EU only has a “short window of opportunity” to take the necessary steps to boost labour markets before its ageing population “kicks-in in a big way between 2010 and 2015 and after”.

Without reforms, member states and their shrinking workforces will struggle to keep up with the bill for a generation of new pensioners.

The PwC economist was speaking ahead of the launch of a study today (2 October) which gauges the prospects for the EU economy in the short- and medium-term.

She said the most likely scenario would be a “prosperous partners” situation where the US manages a soft landing and the EU makes significant progress in pressing through reforms.

That could lead to growth in national income per head in the EU of around 3%, compared to 2.25-3% in the US.

Other possibilities include an “America First” scenario popular with European critics, whereby the US races ahead, with the EU languishing.

But Radcliffe said this ignores the “real risks” currently facing the American economy. “You can't have consumer spending growing more than anything else forever,” she added.

The “least likely” scenarios are a gloom-laden 'double deflation' hitting both the EU and US, and a 'reborn Europe' with the US in the doldrums. Neither are probable, she predicts, but “they are not impossible by any means”.

In the double deflation world, the EU and US would both face a Japanese-style period of economic stagnation together with falling prices.

In the “Europe Reborn” scenario, the EU would make huge reforms to its markets while the US was forced to raise taxes and cut public spending to reduce a budget deficit running out of control.

Meanwhile the report's short-term forecasts are in tune with estimates elsewhere. The eurozone is expected to record 0.5% growth in 2003, rising to 1.75% in 2004. Top performing country is expected to be Spain, with 2.25% growth this year and 3% next year.

According to a report by Rosemary Radcliffe, Chief Economist of PricewaterhouseCoopers, Europe might reach the top of the world's economic premier league by the end of the decade, but only if vital reforms were implemented, such as making the European labour market more flexible.