10/30/2013 08:11 pm ET Updated Jan 23, 2014

An Economic Policy Agenda for the EU Under the Greek Presidency

In January 2014 Greece will assume the rotating Presidency of the Council of the European Union (EU) for six months, giving it an important opportunity to promote an agenda for growth, jobs, and solidarity for one of the largest economic blocs in the world. In this position, Greece will surely pursue some of the goals agreed upon with its immediate predecessors, namely Ireland and Lithuania. But more generally, and in partnership with the full-time leadership of the European Council and Parliament, it will need to accommodate the concerns of the still vulnerable members of the Union, as well as the interests of the wealthiest countries, regarding the best way forward for Europe. According to recent press reports, Greece will cooperate particularly closely with Italy, which will take over the Presidency of the Union next July, and possibly work toward a common or continuous policy agenda for 2014 with some focus on Mediterranean issues. Yet, even if a promising agenda is adopted, progress toward a more cohesive and prosperous Union will depend critically on the support of the major member states, especially Germany.

In recent years significant actions have been taken to address the European economic and financial crisis. In particular, steps have been taken to improve the EU's economic and fiscal governance framework. Moreover, the pledge of the European Central Bank (ECB) "to do whatever it takes" within its mandate to preserve the euro has helped to stabilize debt markets and increase the effectiveness of monetary policy; and the ECB has been given direct supervisory authority over the operations of the euro zone's biggest banks, an important first step toward the creation of a much-needed banking union. Further, the firewall of the European Stability Mechanism (ESM) has become fully operational; progress has been made under the adjustment and reform programs of several countries (including Greece), which are being supported by the euro area and the IMF; and public debt issues have been addressed, to a degree, by an extension of official loan maturities to some program countries.

Nevertheless, the EU still faces major fiscal and monetary challenges, including financial market fragmentation that hampers access to bank credit in many countries, particularly for small- and medium-sized enterprises. And most worrisome, economic growth has remained elusive and unemployment unacceptably high, especially among young people (under the age of 25), resulting in great human and social costs. Despite some recent signs of recovery, the combined real gross domestic product (GDP) of the 17 euro area countries is projected to contract for a second consecutive year in 2013, while their rate of total unemployment has amounted to 12.0 percent and youth unemployment to 23.7 percent (in August 2013). Also, with some exceptions, the overall situation of the 28 members of the Union has been hardly better. In Greece, after six years of deepening recession, real GDP has shrunk by more than one quarter since 2007, with total unemployment reaching 27.9 percent and as much as 61.5 percent for the country's youth (the highest rates in Europe in June 2013). Youth unemployment has also been exceptionally high in several other EU countries, notably Spain, Croatia, Italy, Cyprus, and Portugal.

Against this background, the EU's policy agenda for 2014 will probably include a host of economic and other issues. But in view of the major challenges still facing the Union, I believe that it would be essential to place particular emphasis on the following priorities:

1. Reviving growth and creating jobs. A top priority of the EU's policy agenda should be to revive and accelerate economic growth and address the burning issue of youth unemployment. Therefore, a readjustment of the current European strategy, which has been tilted rather heavily on fiscal austerity, would be highly desirable, and should comprise at least three basic elements.

a. First, macroeconomic policies of member countries should be rebalanced to facilitate economic revival and growth throughout the Union. In this respect, it would be most helpful if Germany and a few other countries, with a strong external current account position and the necessary fiscal space, adopted a more accommodative domestic demand policy that would boost consumption and investment. Although such an approach will probably be resisted, there is no doubt that, by reinforcing their domestic demand, these countries would improve the prospects for union-wide economic recovery and growth and assist efforts to close competitiveness gaps.

b. Second, structural reforms should be strengthened at all levels, both regional and national, to enhance growth potential by removing labor and product market rigidities, promoting cross-border competition, improving the business environment, and raising productivity.

c. And third, as agreed by the European Council in June 2013, comprehensive and well-targeted measures should be implemented to combat youth unemployment, including speeding up and frontloading the EU's Youth Employment Initiative that is expected to be operational in January 2014. To make a real dent on youth unemployment, this initiative should be significantly expanded, especially in favor of the worst-hit countries like Greece and Spain. At the same time, the European Investment Bank should provide increased support to this effort through its special programs of investment in skills and jobs for young men and women. Also, at the national levels, the authorities should advance reforms to modernize their education and vocational training systems, lower labor and business taxes, and increase public investment in infrastructure, with a view to boosting job creation and competitiveness.

2. Strengthening the EU's architecture. To support growth and job creation on a sustainable basis, the agenda should also focus on strengthening the EU's architecture by deepening fiscal integration, repairing bank balance sheets, and making faster progress on banking union. As well argued in a recent IMF staff paper, in order to deepen fiscal integration and help contain future economic and financial shocks, four elements are essential: establishing a better oversight of national policies and enforcement of rules at the union level or the center; ensuring a minimum of fiscal risk sharing; providing for borrowing by the center; and adopting a fiscal backstop to anchor confidence in the banking system. Although the first three elements will take much effort and time to be realized, the fiscal backstop is urgently needed, and hence will require immediate attention.

Meanwhile, to reduce financial market fragmentation and revive credit growth, it will be important to address the problems posed (in several EU countries) by a sizable corporate and household debt overhang; carry out promptly all the planned bank balance sheet assessments and stress tests in a credible manner; close or restructure ailing banks; and recapitalize frail systemic banks with private capital, public support, and, if needed, the ESM.

These multiple actions would support the establishment of a strong banking union for the euro area, based on three pillars: a Single Supervisory Mechanism (SSM), which is expected to become effective under the leadership of the ECB by November 2014; a Single Resolution Mechanism (SRM); and harmonized Deposit Guarantee Schemes (DGS). Although there are differences of views and legal concerns on some aspects of the banking union, which could prove an obstacle to sufficiently rapid progress, it is to be hoped that the SRM will become operational at the same time as the SSM or soon thereafter, and that progress can also be made on the harmonized DGS. In this way, the banking union would enhance the role of the ECB and the effectiveness of monetary policy in general; but to help boost growth, further ECB support is likely to be required, including cutting interest rates and providing more longer term liquidity to banks.

3. Addressing sovereign debt issues. Although progress has been made in stabilizing debt markets, debt sustainability remains a source of concern for some EU countries, most notably Greece. Therefore, this issue (and the setting of appropriate debt/GDP benchmarks) will require careful consideration. In the case of Greece, the euro area member states have made a commitment to take all necessary measures to reduce the country's public debt burden to substantially below 110 percent of GDP by 2022, on the assumption that the Greek fiscal program remains on track. To ensure Greece's debt sustainability, all options should be seriously examined without delay, including a "haircut" of some official debt obligations; but if such a "haircut" proves unacceptable, as it now seems apparent, there will be need for a substantial extension of official loan maturities coupled with a reduction in interest rates.

Another option, which is relevant not only for Greece but also for a few other countries, is to alleviate official debt burdens through some retroactive transfer to the ESM of public debts incurred for the recapitalization of banks. As this option is not excluded under the ESM's guidelines, it should be favorably considered on a case-by-case basis, though it will probably require augmenting ESM resources allocated for direct bank recapitalization.

4. Developing and diversifying energy resources. For vital economic and environmental reasons, EU member states are continuing to explore and develop their domestic energy potential, as well as to diversify their sources and routes of energy supply. In this regard, a major goal of the EU is to cover by 2020 one-fifth of its energy consumption needs from renewable sources (such as wind, solar, hydro-electric and tidal power), with a view to cutting greenhouse gas emissions and reducing dependence on imported energy. But the rapid growth of renewable energy in some countries has tended to destabilize the grid and undermine established utilities. Hence the EU is making efforts to improve certain aspects of its energy strategy, including revising its problematic emissions-trading system. Going forward, and to the extent feasible, all EU member countries should develop their renewable sources of energy in a more efficient and cost-effective way and without undue reliance on subsidies. At the same time, with EU funding of inter-connecting energy infrastructure, they should foster the full integration of their energy markets in order to promote more secure supplies and cheaper energy.

However, apart from nuclear power, which is a main source of energy in a few cases (notably France), in other countries reliance on coal, oil and gas will remain critically important for the foreseeable future, with gas playing an increasingly significant role. Indeed, in the years ahead EU countries may see large additional amounts of natural gas produced from their own shale deposits, along the lines so successfully developed in the United States. In this connection, it is worth noting that there have been encouraging findings of offshore deposits of gas and oil in Cyprus and neighboring Israel, with possibly considerable benefits to these countries and Europe as a whole. There have also been serious indications of potential hydrocarbon deposits in parts of Greece, which are now being ascertained by detailed and methodical explorations. Therefore, it will be most helpful, under the EU's policy agenda, to encourage further work in developing these deposits, as well as to consider actions (such as a proposed union-wide delineation of the EU's exclusive economic zones) that would enhance the momentum of exploration of other possible fields of hydrocarbons in member states.

As to new sources of imported energy, a most promising recent venture, to be realized in the coming years, is the construction by the Shah Deniz Consortium of the Trans-Adriatic Pipeline (TAP), which is expected to bring initially some 10 billion and eventually up to 20 billion cubic meters of natural gas per year from Azerbaijan across Turkey, Greece and Albania and then under the Adriatic Sea to Italy. TAP's reach to Italy, the third largest gas market in Europe, would provide multiple opportunities for further transport of Azerbaijani natural gas to other European countries, contributing to Europe's overall energy security.

5. Rationalizing immigration policy. In view of the aging of the European population, immigration has been providing an important supplement to the EU's labor force. However, the persistence of poverty and insecurity in many parts of the world has led to a large flow of illegal migrants toward the EU, putting great pressure on the limited resources of some member countries, notably Greece, Italy, Malta and Spain. Although immigration issues have often been addressed and actions taken by European leaders, many difficult problems remain. Thus, under the EU's agenda for 2014, it would be opportune to undertake a broader and longer term review of immigration policy and practices that would reassess labor requirements, continue to ensure an equitable treatment of legal migrants and asylum seekers, and ease the burden of the most affected European countries. This review should also aim not only at strengthening border controls and security as necessary but also at fighting human trafficking, preventing the loss of lives at sea, and improving development aid to poor countries.

6. Promoting the Transatlantic Trade and Investment Partnership (TTIP). Last but not least, the EU's policy agenda should incorporate a renewed commitment to the conclusion of agreement on the so-called TTIP as soon as possible. By reinforcing the trade and investment relationship between the EU and the US, already the biggest in the world, this agreement is expected to boost growth and jobs, and hence provide significant benefits to both parties as well as the global economy. The negotiations, which started in July 2013, envisage the removal of most of the remaining barriers to trade and investment between the EU and US. At the same time, it is understood that each party will retain the consumer, health and environmental standards that it deems necessary.

In the final analysis, the EU's policy agenda under the Greek Presidency in 2014 will be so formulated as to reflect the broadest possible consensus among member countries. Although the agenda may not include all of the above items, in my view, reviving growth and creating jobs should be a key policy priority; and this will require implementation of comprehensive regional and national actions. Otherwise, the EU could well face a long period of recession or sluggish growth with high unemployment, especially among the young, which would tend to fuel social and political tensions and the rise of extremist forces. If the EU can mobilize the necessary political will and solidarity, it certainly has the potential to achieve broad-based and sustainable economic growth with financial stability. Undoubtedly, this would be in the best interests of Europe and the world at large.

*Evangelos A. Calamitsis is an economist and former director at the International Monetary Fund (IMF).