Academic journal article National Institute Economic Review

An Analysis of EU Growth Trends, with a Particular Focus on Germany, France, Italy and the UK

Academic journal article National Institute Economic Review

An Analysis of EU Growth Trends, with a Particular Focus on Germany, France, Italy and the UK

Article excerpt

Since the mid-1990s the growth performance of the Euro Area as a whole, despite some good individual country performances, has failed to keep pace with developments elsewhere in the EU (including the UK) and also in the US. This is especially the case for a number of the larger Euro Area economies. Despite an encouraging performance in terms of its labour input trends, there has been a significant, offsetting, deterioration in the Euro Area's underlying productivity performance. This is driven in large part, worryingly, by a marked downward shift in the growth rate of total factor productivity. Looking to the future, no significant recovery is predicted in the Euro Area's underlying economic performance over the period 2007-11. While the policy challenge is a serious one, the Euro Area as a whole can take comfort from the fact that the gains from a successful refocusing of its overall reform agenda could be considerable. For example, the progressive introduction of the five key measures linked to the Lisbon strategy (i.e. the services directive; reduction of the administrative burden; improving human capital; 3 per cent R&D target; and increases in the employment rate) could boost the Euro Area's economic and employment growth rates by more than 1/2 a percentage point annually for more than a decade. Such an outturn would give the Euro Area a potential growth rate of around 2 1/2 per cent, a rate of growth which in per capita terms would be broadly comparable to that of the US over the 2007-15 time period and, on the basis of current trends and policies, slightly better than that of the UK.

Keywords: GDP growth; Productivity; Employment; Structural reform

JEL Classifications: D24; J11; J21; 047

I. Introduction

Despite the encouraging growth performances of a number of individual EU countries, including the EU's new Member States, Europe's overall growth performance since the mid-1990s has been relatively disappointing. While many countries managed to improve their labour market positions, this unfortunately was not matched on the productivity side, with a significant number of Member States continuing on a downward sloping labour productivity growth path. This experience was in sharp contrast to many developed economies around the world, in particular the US. For the US, the secular downward movement in productivity growth rates experienced since the 1970s was spectacularly reversed around the mid-1990s, aided by a strong performance in both the production and diffusion of information and communications technologies (ICT).

These growing divergences in the growth performance of many developed world economies, and especially the size of the divergences presently being experienced between some of the EU's Member States, has provoked an ongoing debate in the EU regarding the implications of recent trends for future economic prospects:

* The 'pessimistic view', largely supported by the Sapir report (1)/van Ark analyses, (2) suggests that a significant number of Member States have as yet failed to recognise the extent of the reforms which need to be introduced, given the challenges posed by an acceleration in the pace of technological progress, by globalisation and by the effects of ageing populations. This view suggests that the EU might be unable to achieve a shift in its resources to sectors with high productivity growth prospects and will continue with production in areas where it has traditionally held a global advantage, namely medium-technology manufacturing industries. This overall strategy appears increasingly threatened with the emergence of a number of strong competitors around the world in these more traditional industries, most notably China and India.

* The 'more optimistic view', as enunciated by Blanchard amongst others, (3) is that part of the explanation for Europe's poor performance could be measurement problems/adjustment lags, with perhaps the basis for future growth already firmly established due to the labour, capital and product market reforms which have already been introduced. …

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