Why Europe Needs to Put Privatization Back on the Agenda

For Europe, the most urgent task is to bring back economic growth. Only growth can deliver jobs to Southern Europe’s young people. Only growth can keep the demographic burden bearable. Only growth can safeguard the cohesion of our societies. And equally important, only growth can restore our belief in our common destiny as Europeans.

Yet, our policy options are extremely limited. After the bailouts of the financial crisis, public debt is far too high to allow for major spending programs. With interest rates close to zero, monetary policy has also largely exhausted its possibilities to boost the economy.

Privatization as an economic tool

One of the most important tools that governments can use to improve the structure of their economies is privatization.

Selling off stakes in publicly held companies actually delivers a double benefit. First, it makes those companies more productive. Second, it brings in additional revenues which can be used to pay back a part of the debt and boost investment in areas that are critical to future growth.

In short, we need a second wave of privatization. In the 1990s, Europe went through a first big wave of privatization. The EU’s single market legislation put pressure on national governments to open up markets, cap subsidies, dissolve monopolies and privatize state-owned companies.

Yet, with the beginning of the financial crisis in 2008, the move toward more privatization slowed considerably.

Despite all the good economic policy, far too few publicly held assets were actually sold. In Greece, the government in 2011 announced a comprehensive privatization program to raise an additional 50 billion euros in state revenues by 2015.

This turned out to be completely unrealistic. Until the end of 2013, Greek privatization revenue only reached 5% of the target – a grand total of 2.6 billion euros.

Public opinion as a barrier

Governance problems in Greece aside, public opinion throughout Europe is highly skeptical of privatization. In the political environment of the aftermath of the financial crisis, people instinctively put far more trust into state intervention and management than into markets.

As a result, few politicians today dare to speak up about the benefits of privatization.

What about the facts? A recent study by the Economica Institute in Vienna covered 14 EU countries – the ten biggest Eurozone countries by GDP, as well as Britain, Poland, Romania and the Czech Republic.

Economica identified a total of 263 companies each with a turnover of more than 100 million euros that could be privatized. That number excludes sovereign mandates, the health and education sectors as well as real estate directly held by public authorities.

Even under these restricted circumstances, the 263 publicly held companies represent a total of 4.6 million employees and an annual turnover of 1.5 trillion euros.

National, regional and local governments could raise up to 511 billion euros in additional revenues by selling company stakes. If they wanted to retain a 25% share in all of these companies, potential revenues would still amount to 272 billion euros.

This is a lot of money – but in comparison to the towering public debt that EU countries have built up, it’s actually not very much at all.

The potential revenues would amount to only 4.4% of the total debt of EU member states. Clearly, debt reduction has to be done by restructuring the budget rather than via privatization.

Reasoning behind privatization must be clear

Just as clearly, any state will have to be very careful how privatization funds are spent. It would be simply unacceptable for any government to sell its assets in order to fill holes in the budget.

This is money that should be invested in areas of particular importance for future growth – for instance, in the broadband infrastructure or R & D.

The most important benefit of privatization concerns neither the amount of money that can be raised nor the purposes that such money can be spent on. Privatization makes companies more productive which, in turn, improves competitiveness and creates growth.

Why is this so? Private owners are quite simply more single-minded about competitiveness. Plus, while they cannot count on state money to help them out in a bad year, they also do not need to bow to political objectives.

They thus neither need to accommodate politicians’ wishes for patronage nor do they face the public sector’s pressure to maintain unproductive jobs and factories. Their main objective is to satisfy their customers and shareholders.

According to estimates, companies’ productivity improves by an average 20% once privatized. In the short term, some of this may translate into job losses when public companies are privatized.

But in a longer-term perspective, the fact that private companies have to be more competitive and innovative is what safeguards jobs.

Productivity gains are central if we want Europe to continue as one of the world’s most prosperous regions. Over the last decade, we Europeans have fallen behind dramatically.

Between 2002 and 2013, labor productivity in the United States grew by 19%. In Europe, productivity only grew by 11%. This is not a trend we can afford for very long.

Changing public opinion

How can the public gain the confidence that privatization will actually help create jobs and prosperity? For starters, we must make sure that every sale of public assets that takes place is entirely transparent, in order to rule out any whiff of corruption.

Just as important is the regulatory framework. Privatization will not be useful to a country’s economy if it replaces public with private monopolies.

At the European level, a privatization monitor could help create cross-border transparency, while a best practices handbook could assist national governments in making the right choices. Both could do much to ensure that a country’s assets aren’t being traded away cheaply.

Of course, privatization won’t solve every problem we have in Europe. Citizens are right to ask hard questions about a policy that is difficult and costly to reverse.

But if we want to transform Europe and the Euro back into an engine for growth, we simply cannot afford to ignore the enormous benefits that privatization presents.