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Challenges Sheets

In the increasingly competitive global economy, technological innovation has become an increasingly important source not just of new products and services for consumers, but of new businesses and industries. New technologies disrupt existing industries and may displace jobs. Ultimately, highly skilled workforces that are given the tools and opportunities to be more productive drive greater wealth, better job opportunities and more competitive economies. Modern infrastructure, strong educational systems and business environments that support investment, research and development can help spur innovation. Demographic trends can have profound implications for an economy. Increasing numbers of retired people put pressure on government services like healthcare and pensions plans. With fewer people of working age to support retirees, policy makers may be forced to cut benefits or raise taxes. Aging populations can also lead to slower growth due to the shrinking labor force. Today in Europealso threaten specific interests and groups. How can euro area countries take advantage of new opportunities while adapting to global competition? Fiscal policy is an important economic tool at the disposal of governments. During recessions, increasing public spending and cutting taxes can provide a powerful boost to the economy. Likewise, if an economy is overheating, cutting spending and raising taxes will depress output. But borrowing to fund spending can be risky. If debts and deficits get too big, they can lead to debt and financial crises. High unemployment rates can arise due to recessions or structural factors like regulations or tax policy. Either way, high unemployment hurts growth and living standards. Unemployment rates in several euro area countries have been slow to recover following the global financial crisis. How did unemployment get so high in these countries in the first place? Why aren’t labor markets improving more rapidly now? What can be done to promote jobgrowth? The euro area is unique in that it is a currency union without a corresponding fiscal union. Sharing a single currency helps the single market by lowering transaction costs and preventing competitive devaluations. But EMU also means that countries cannot always depend on monetary policy to help them adjust to shocks, and the appropriate policy stance for one country might be inappropriate in another. Promoting growth is the main goal of economic policy makers. High growth rates lift the standards of living, help reduce unemployment rates, improve the fiscal situation and create opportunities for future generations. But growth rates across much of the developed world, including Europe, have slowed in recent years. What can policy makers do to increase growth? After World War II, many countries adopted policies that aimed to reduce poverty and inequality by providing universal social welfare benefits like health care, unemployment insurance, and more. For a time, these programssucceeded as many countries enjoyed both rising living standards and a narrowing of inequalities. But in recent years inequality has become an issue in many countries, and many social welfare programs have come to be viewed as unaffordable and in need of reform. What conditions should social welfare systems meet to withstand the challenges of the 21st century global economy?

Country Profiles

  AAustria has a well-developed ‘social market economy’ with a high standard of living and is closely tied to other EU economies, especially Germany’s. But it faces challenges… Belgium’s open economy and financial sector made it especially vulnerable to the economic downturn, and the country faces several structural challenges on the road to recovery. More than a decade of sustained and strong economic expansion in Cyprus came to an end in 2009 as the global economic crisis took its toll. Estonia’s economy was hit hard during the financial crisis, but it is now recovering, thanks to economy’s flexibility and governmental decisions. Finland, a highly open economy, was hard hit by the financial and economic crisis. Structural reforms, especially in the labor market, will help it to re-gain economic momentum. The French economy managed to stave off a more severe recession than other advanced economies, but the recovery is fragile and the economy is in need of growth-enhancing anddeficit-reducing reforms. (Update coming soon!) Germany, Europe’s economic engine, is slowly regaining the ground lost in the crisis, but still faces long-term structural challenges. Greece has to undergo significant fiscal adjustment and implement far-reaching reforms to reduce its high deficit, stabilize its debt level, and emerge from the current crisis. After years of rapid growth, the “Celtic Tiger” was among the European economies hardest hit by the global economic crisis. Recent reforms have put Ireland back on track towards a sustainable economic future, making it a success story in the recovery from the Euro crisis. Following years of slow growth, the economic crisis highlighted Italy’s structural problems, in particular its issues with competitiveness and fiscal discipline. Nonetheless, the country is on a path to recovery. Latvia joined the euro area in 2014. Latvia’s economy has turned around from a deep contraction during the recent global crisis. Lithuania is one of the 3Baltic States, and it became member of the EU in 2004. Lithuanians will start using the euro as of January 2015.     The stability of its banks and the productivity of its manufacturing industry sheltered the wealthiest country in the EU from the worst of the financial and economic turmoil of the global crisis. Malta’s economic growth exceeded the euro area average for several years and was led by robust domestic demand and export expansion. The global financial and economic crisis did not spare Malta, but it was one of the least affected countries in the EU. The global financial and economic crisis had a deep impact on the Dutch economy due to its trade and financial linkages. The financial crisis highlighted Portugal’s issues with low productivity, weak competitiveness and high public debt. A success story of strong growth led by exports and foreign direct investment, the Slovak economy took a strong hit in the recent crisis. Due to its dependence on trade, this role model forsuccessful economic liberalization and European integration was impacted in the recent crisis. After the Spanish economic miracle ended with the burst of the housing bubble in 2007/2008, Spain’s economy now faces severe challenges.