The EU is going through a difficult period. Deep and prolonged recessions in the wake of the global financial crisis and the subsequent slow recovery of jobs have eroded the trust of many EU citizens in the ability of established national and EU-wide institutions to provide stability, protection and opportunities.
Brexit added to the erosion of confidence. The short-term economic impact of Brexit was contained, but Brexit adds to its ongoing political and economic challenges. The large inflows of both economic migrants and forcibly displaced persons in 2015 seem to have further entrenched anxiety. Traditional economic indicators, such as unemployment or wages, have become a weak predictor of policy perceptions, making it more difficult to anticipate the political consequences of reforms and adding to a reluctance to change.
According to the latest Eurobarometer survey, many Europeans (especially in the crisis-hit southern countries) believe that the “worst is still to come” in terms of the impact of the economic crisis on jobs, despite a recent recovery in EU labor markets. Growing discontent with established political institutions; entrenched vested interests; and an ageing population could strengthen the opposition to growth-enhancing reforms.
EU growth is projected to remain low and, with aging populations and sluggish investment, to become increasingly dependent on productivity growth. Despite a slow-down in global growth, which reduced the demand for EU products abroad, EU growth was 1.9 percent in the first half of 2016, below the 2.1 percent of the second half of 2015, but above growth in the US. Growth returned to all EU countries, except Greece, as a labor market rebound fueled consumption; this compensated for historically low levels of investment and a decline in exports. Economic growth in the EU is expected to moderate to 1.8 percent in 2016 and 1.4 percent in 2017.
There is limited scope for quick policy fixes that can boost growth. Monetary policy has so far been accommodating; it has reduced interest rates to record low and revived credit growth in some EU countries. Expansionary fiscal policy could, in principle, help boost EU growth. However, those EU-member countries with the largest need for fiscal stimulus also have high public debt, which continues to increase despite fiscal consolidation efforts and historically low interest rates.
Against this background, services can come to the rescue: service sector reforms can increase EU productivity by an average of 5 percent, provide more and better jobs, stimulate investment and further deeper integration. Empirical estimates presented in this publication show that Central and Southern EU member states in particular stand to gain from service sector reform, although the impact of such reforms goes beyond productivity.
There is strong scope for improving regulation as many EU member states have high regulatory restrictions; and parallel efforts in several EU member states could create large synergies. Deepening EU integration in services could encourage innovation, stimulate much-need investment and reinvigorate convergence. Deeper integration could also offer qualified workers additional opportunities and better protection, strengthening the EU’s role as a bulwark against economic shocks.
Service sector reforms can boost EU growth. As low investment and a shrinking working-age population undermine EU growth potential, productivity growth becomes increasingly important for sustaining growth. In this context, reforms to the service sector are likely to strongly impact productivity in a relatively short period of time. Such reforms can make a substantial difference in terms of regaining growth, jobs, and confidence across the EU.
Download full report.