Op-Ed: Europe's (Potentially) Bright Future

January 22, 2013

Jim Yong Kim Wall Street Journal Europe

First published in Wall Street Journal Europe on Tuesday 22 January 2013

A year ago, when German Finance Minister Wolfgang Schauble claimed that within 12 months Europe's leaders "will have banished the dangers of contagion and stabilized the euro zone," he was accused of groundless optimism. But it appears he was right, at least for now. During 2012, the euro zone provided proof of its will to stay together.

In 2013, Europe must demonstrate its resolve to modernize economic structures and restart growth. Otherwise, progress made in 2012 will be jeopardized, not just in Europe but around the world.

As leaders gather to discuss the global economy at the World Economic Forum in Davos in the coming days, I am optimistic that these improvements will be made. This is not because structural reforms are easy. They will be more painful than the changes in regional monetary and financial arrangements.

Rather, my optimism comes from Europe's inspiring history of reform and progress, which includes Spain in the 1980s, Sweden in the '90s and Estonia in the 2000s. These stories are catalogued in "Golden Growth," the World Bank's assessment of the European economic model. It is not difficult to be upbeat in a region where policy reforms have historically led to shared prosperity.

Europe will still have to make many changes in the next 12 months. It needs a region-wide regulator and supervisor of banking activity; this is already under way. It also needs reforms to put public finances in order, make social services and public programs more efficient, and regulate work in ways that encourage effort and enterprise.

But while fixing the faults and failures of their economic model, Europeans must not forget their continent's strengths and successes. Three achievements deserve note.

First, unprecedented integration has enabled more than a dozen countries -- including Ireland in the 1980s, Portugal in the '90s, and Slovenia and the Slovak Republic in the 2000s -- to become advanced economies in a hurry. This did not happen by chance. The European "convergence machine" is the product of vigorous trade and financial flows enabled by the single market and nurtured expertly by the European Commission.

Second, economic integration has helped "Europe" become a global brand. Since the mid-1990s, European enterprises have generated jobs and exports. European goods and services -- German cars and French resorts -- are desired around the world. Again, this is not accidental. These countries have made it easier to do business.

When it comes to improving the investment climate, Central Europe has picked up the pace during the last 10 years. The euro-zone economies that have decelerated their reforms should take note. Tight interlinkages create growing gaps in competitiveness in Europe.

Third, by translating peace and progress into an enviable work-life balance, Europeans enjoy the highest quality of life. But a good thing can be taken too far. As prosperity brought better health and longer lives, Europeans have shortened their work week, taken longer vacations and retired ever earlier. Retirees and jobless workers rely ever more on the state and ever less on the market.

Today, with 10% of the world's population and 30% of its GDP, Europe accounts for 60% of global social-protection spending, i.e. pensions, unemployment benefits and social assistance. Most countries in Europe are finding it difficult to provide generous social protection without sacrificing growth. The results are permanent fiscal deficits and growing public debt.

Fixing this requires changing the core of the European economic model, and it will not be easy. But those who doubt the determination of Europeans should take a look at Latvia.

In 2008, facing crushing external debt and a collapsing economy at home, Latvia had to seek international assistance. In 2009, GDP shrank 17.5% and unemployment rose above 20%. But instead of devaluing the lat, the Latvians accelerated structural reforms -- cutting spending, improving conditions for enterprise and instituting measures to help the poor and jobless. By 2012, the current account was balanced, the economy grew more than 5%, and unemployment came down. By 2014, Latvia expects to repay its loans and adopt the euro.

We are proud of our work to help Latvia ensure that vulnerable people are shielded from the worst effects of the downturn until growth restores employment opportunities. Latvia's impressive story is not novel. When confronted by crises, Sweden and Germany -- Europe's economic leaders today -- also made changes that were painful but effective. In a few years, Ireland and Portugal may provide the inspiration for reformers around the world.

Europe has a rich history of reform and innovation. If Europe's governments institute the policies needed to restart growth -- and if they do it as purposefully as they acted to stabilize the euro -- the years ahead will bring many successes.

Dr. Kim is president of the World Bank Group.