By CPB Netherlands Bureau for Economic Policy Analysis, 2003
This study presents four economic scenarios for Europe until 2040. The scenarios are developed around two key uncertainties: international cooperation and institutional reforms.
- Strong Europe. European countries maintain social cohesion through public institutions. As a result, society accepts that the more equitable distribution of welfare limits the possibilities to improve economic efficiency. Yet, governments respond to the growing pressure on the public sector by undertaking selective reforms in the labour market, in social security, and in public production. Combined with early measures to accommodate the effects of ageing, these policies help to maintain a stable and growing economy. In the European Union, member states learn from each other’s experience, which creates a process of convergence of institutions within Europe. Reform of the process of EU decision-making lays the foundation for a successful, strong European Union. The enlargement is a success, and integration advances— geographically, economically and politically. European leadership is important for achieving broad international cooperation, not only in the area of trade but also in other areas like climate change.
- Regional Communities. European countries rely on collective arrangements to maintain an equal distribution of welfare. At the same time, governments are unsuccessful at modernising welfare-state arrangements. A strong lobby of vested interests blocks reforms in various areas. Together with an expanding public sector, this situation puts a severe strain on European economies. The European Union cannot adequately cope with the Eastern enlargement and fails to reform its institutions. As an alternative, a core of rich European countries emerges. Cooperation in this sub-group of relatively homogeneous member states gains a more permanent character. The world is fragmented into a number of trade blocks, and multilateral cooperation is modest.
- Global Economy. European countries find a new balance between private and public responsibilities. Increasing preferences of people for flexibility and diversity, and growing pressure on public sectors, give rise to reforms. New institutions are based on private initiatives and market-based solutions. European governments concentrate on their core tasks, such as the provision of pure public goods and the protection of property rights. They engage less in income redistribution and public insurance, so that income inequality grows. International developments also reflect increasing preferences for diversity and efficiency. Political integration is not feasible, as governments assign a high value to their national sovereignty in many areas. Moreover, policy competition becomes standard in many policy areas. Economic integration, however, becomes broader (not always deeper), as countries find it in their mutual interest to remove barriers to trade, investment and migration. With a limited amount of competences and a focus on the functioning of the internal market, the European Union finds it relatively easy to enlarge further eastwards. Similarly, negotiations in the WTO are successfully completed. Regional and global integration puts poor countries on a path of catching-up and high growth. As international cooperation in non-trade issues fails, the problem of climate change intensifies, while European taxes on capital income gradually decline under tax competition.
- Transatlantic Market. European countries limit the role of the state and rely more on market exchange. This boosts technology-driven growth and increases inequality. The inheritance of a large public sector in EU countries is not easily dissolved. New markets—e.g. for education and social insurances— lack transparency and competition, which brings about new social and economic problems. The interests of the elderly dominate policy decisions, which make it difficult to dismantle the pay as-you-go pension systems in continental Europe. Government failures thus compound to market failures. EU member states focus primarily on national interests. EU decision-making is not reformed, which complicates further integration in the European Union. The EU redirects its attention to the United States, and agrees upon transatlantic economic integration. This intensifies trade in services, which yields welfare gains on both sides of the Atlantic. The prosperity of the club of rich countries is in sharp contrast with the poverty in Eastern Europe and in developing countries.
