Quantifying four scenarios for Europe

This study presents four economic scenarios for Europe until 2040. The scenarios are developed around two key uncertainties: international cooperation and institutional reforms. In the scenarios Strong Europe (SE) and Global Economy (GE), international cooperation is prominent, while the other scenarios, Regional Communities (RC) and Transatlantic Market (TM), feature limited international cooperation. Public institutions are important in Strong Europe and Regional Communities. In Global Economy and Transatlantic Market the role of the public sector is limited. There is more room for private initiatives in these scenarios.To illustrate the scenarios, this document presents quantitative developments described with an applied general equilibrium model developed at CPB: WorldScan. By using this model we are able to derive consistency between developments in the scenarios and to apply common economic mechanisms. The variation in the outcomes for the scenarios is derived by introducing differences in exogenous trends. This document explains and motivates these differences.More regulation and income redistribution in Regional Communities and Strong Europe is accompanied by higher unemployment rates and lower participation, as compared to the scenarios in which private initiatives are given more leeway (i.e. Global Economy and Transatlantic Market). Combined with the ageing of the population, this result implies that employment contracts in Regional Communities, while it grows only moderately in Strong Europe, due to immigration. More incentives for labour supply imply a higher participation rate in Transatlantic Market than in Strong Europe. However, lower population growth in the former scenario has the effect that overall employment growth is equivalent in Strong Europe and Transatlantic Market.The emphasis on an efficient functioning of markets in Global Economy and Transatlantic Market is accompanied by a higher labour productivity growth than in Strong Europe and Regional Communities. Labour productivity growth is weakest in Regional Communities. This weak growth, together with a fall in employment, causes GDP per capita in Regional Communities to grow by only 0.6% per year.Trade liberalisation and economic integration boost trade and growth in Global Economy and Strong Europe. High growth in Asia redirects European trade flows towards that continent, so that the share of intra-EU trade decreases. In Transatlantic Market, the EU cooperates more closely with the United States and Latin America, which boosts EU-US trade. In Regional Communities, growth in world exports is negligible, and the share of intra-EU trade remains relatively high.In Strong Europe and Global Economy, governments stimulate national savings by curbing budgets deficits and stimulating private savings. Although this does not prevent a decline in saving rates because of ageing, it is less dramatic than in Transatlantic Market and Regional Communities, where saving rates decrease by 6%-points between 2000 and 2040. As the demand for capital also falls substantially, real interest rates still decrease in Regional Communities and, to a lesser extent, in Strong Europe. In Global Economy and Transatlantic Market, increasing investment demand causes a higher real interest rate.