A rosy European outlook

Turkey lags behind its peers in terms of the number of think-tanks, but the few ones out there are doing a great job. I spent the better part of last week attending conferences about Europe’s fate organized by local policy institutes.

At an Economic Research Forum seminar on Tuesday, Martin Raiser, the World Bank’s Turkey Country Director, unveiled “Golden Growth: Restoring the Luster of the European Economic Model,” a new report that he has co-authored.

Raiser argued that the European growth model has been very successful when viewed over the last few decades, rather than the last few years. For one thing, the European Union has been “taking in poor countries and helping them to become high-income economies,” which has led to an unparalleled convergence in living standards across the old continent.



Trade and financial linkages, which are also noted as the main strengths of the European model, were given as the main drivers of this “convergence machine.” However, Koç University’s Sumru Altuğ, in her discussion of the report, attributed it to institutions as well. Even Serbia and Albania, who are in the early stages of the EU accession, have seen a sharp increase in their World Bank governance indicators.

Some participants at Friday’s roundtable discussion, “Restructuring the Economic and Monetary Union,” organized by the Economic Development Foundation, would also debate the nature of this convergence. As Murat Üçer of Turkey Data Monitor succinctly summarized, “Greece has obviously lived beyond its means.”

On a more general note, the World Bank report shows that financial flows have resulted mainly in debt in Southern Europe. Altuğ’s institutions may have attracted the money, but without attractive opportunities and a good business environment, the euros were used for real estate or consumption booms rather than investment and production.



The contradictions between Northern and Southern European economies seem to lend support to this story. Labor productivity, innovation and business climate are on par with the United States in the North, whereas the South has clearly lagged behind.



It could even be that this easy money during the “convergence” created disincentives for the South to reform. You may argue that the crisis will solve that, but I am not sure. Raiser noted that it is simply not possible anymore for Europeans to work fewer hours per week and less weeks in a year, while at the same time retiring earlier, than others. But there have been huge protests in many European countries for increasing the retirement age by a couple of years.

There is important food for thought for Turkey in all this. For one thing, you often see government officials dismissing the EU accession process, implicitly hinting that Turkey does not want or need to be in the EU anymore. But adopting core EU institutions may nevertheless bring Turkey enormous benefits, provided the country does not fall into the “complacency trap” like Southern Europe.



More importantly, Turkey looks even worse than Southern Europe in some indicators such as the prevalence of small firms, innovation, higher education and business climate. That’s not good news at all.