Guriev suggested a recipe for the survival of the European Union

Sergei Guriev

Photo: Anton novoderezhkin / TASS

The European Union is experiencing an existential crisis and needs reform, said the chief economist of the EBRD, Sergei Guriev. In this work, the unit can adopt the experience of post-Soviet countries, he said

The EU should adopt the experience of reform in post-Soviet countries, says Guriev published March 1 article, “the Political economy of reform: Lessons for the EU from the post-Communist transition to a market economy”.

The EU is the only major supranational entity in the history of mankind, says the Russian economist, which brought peace and prosperity to the continent for millennia been the scene of wars. Moreover, European countries voluntarily gave the unit a significant part of its sovereignty. “The European project” until recently, remained successful — that’s why many neighbors of the block aspire to join it, and migrants and refugees are flocking to the EU from around the world, the article notes. But today the European Union is experiencing an existential crisis and needs reform in two key areas, says Guriev.

First, the unit needs to improve its homogeneity, especially in the Eurozone. To this end, many countries should carry out reforms of the labor market, fiscal, pension sector, business regulation and other areas. Second, member countries should establish a banking Union, a system of insurance against unemployment, the single market of capital, the integration system of refugees and other structures to complete the institutionalization of the Association.

The need for these reforms is obvious, but inhibits the legacy of the global economic crisis of 2008, says the economist. “Previous stages of European integration occurred in a rapid, sustainable and overall inclusive economic growth. Today conditions are different. Countries and households burdened with debt, growth has slowed in some countries there is high unemployment, and in some it is long-term. Against the background of financial constraints and slow growth is very difficult to carry out reforms that would compensate for the detriment of those who from them lost, and to preserve the social cohesion of the society”, — said Guriev.

The experience of the former Soviet Union

In this work, the EU could adopt the experience of reforms in post-Soviet countries in the 1990-ies, which generally have been successful, indicates the chief economist of the EBRD (the Bank was created to assist the transitional economies of Eastern Europe). Most transition economies managed to reduce the gap with Western Europe in part GDP per capita. In addition, they caught up with her on such indicators as subjective well-being. However, Guriev admits that in some transition economies, where reform wore painful and public benefit was not available to the General population, came to power, populist politicians have given reforms reversed, and built a corrupt capitalist society. Some of them managed to eliminate the system of democratic checks and balances and make it difficult for the opposition to let the government, despite the fact that they have not fulfilled their promises to ensure inclusive growth.

European reformers can learn from this experience important lessons, says Guriev. Reform on the model of shock therapy (“short-term damage kompensiruet long-term gains”) are significant risks. If reforms a lose and do not receive adequate compensation even in the short term, can come to power, populists and reform to reduce to nothing or even give them reverse, admits the economist. It is crucial initially to ensure inclusiveness of the reforms and to provide compensation to those who can directly from them to lose, in particular, lost their jobs. Reformers should develop support measures for those who hit the reforms, taking into account not only passive, but an active policy on the labour market. The labour market reforms and deregulation to create jobs should be a priority in some member countries and the European Union as a whole, the article notes.

Unemployment is not confined to lower income — may lead to dramatic social and political consequences. Guriev indicates that the analysis of the correlations between unemployment and support for Brexit, based on data from 379 electoral districts in the UK suggests that in those districts where the level of unemployment due to the financial crisis by 1 percentage points above average, the number of votes in the Brexit was 5 PP more. To EU reforms were successful, they must be inclusive from the beginning, warns Guriev. This should include not only the redistribution of wealth, but also the creation of jobs and active policy on the labour market. Even getting unemployment benefits, the unemployed complain of low life satisfaction, which increases the chances that they will vote for populist parties and reforms will be reversed.

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