72nd International Atlantic Economic Conference

October 20 - 23, 2011 | Washington, USA

Erosion of the European growth potential: Pre- and post-crisis trends

Sunday, 23 October 2011: 11:55 AM
Andrea Elekes, Ph.D , Department of International Economics, Pannon University, Veszprém, Hungary
The world is emerging from one of the greatest economic shocks of modern history. In Europe, the pain has been particularly acute. According to the IMF, the EU overall is expected to grow more slowly than most other advanced economies and all of the major competitors over the next five years. We argue that the erosion of the European growth potential has been a longer latent process. It began well before the outbreak of the crisis.

Objectives

-         As a first step we try to identify the most important features of the European growth potential and create a novel grouping of the EU member states based on their growth characteristics.

-         We analyze in detail the impacts of the latest economic crisis on the member states’ performance.

-         We outline medium and long-term alternative scenarios.

Data, method

-         The study applies supply side approach.

-         The study is based on growth accounting analysis using the European Commission’s AMECO, and the OGVG database. The most important features of the European potential growth are identified by examining the different growth factors’ contribution to the potential growth.

-         Medium and long-term simulations apply production function methods.

 

Results

-         Until the 1990’s the European TFP growth was above the rate of the USA. From the 1990’s the EU lags behind. Labour utilization was the only area, where the European performance was better. We can argue that the erosion of the European growth potential has begun in the 1990’s.

-         Based on their growth (and other economic) characteristics we categorized EU27 into 5 groups: continental countries (BE, DE, FR, LU), reform countries (AT, DK, FI, IE, NL, UK, SE), Mediterranean countries (IT, PT, EL, ES, CY, MT), catch-up countries (CZ, PL, SK, SL) and vulnerable countries (EE, LT, LV, HU, BG, RO).

-         Permanently higher risk premium (due to the crisis) resulted in lower rate of capital accumulation which in turn reduces the investment rate and finally the capital’s contribution to the potential growth. Total factor productivity deteriorated further and with the increasing structural unemployment the only source of potential advantage disappeared too.

-         The symmetric shock resulted in asymmetric consequences. As regards the potential growth and the contribution of the individual factors, the most unfavourable trends were experienced in the case of the Mediterranean and vulnerable countries.

-         According to current trends significant further erosion of the European growth potential is unavoidable, that is, in 2-3 decades the potential growth rate might be cut half. 

-         The ongoing crisis can be considered a growth crisis at the same time, which highly underlines that integrated structural reforms are required. The ongoing global crisis has, however, strengthened extraordinarily the challenges which need to be overcome by the adequate European economic policies contributing to the mitigation of the potential output losses, which are mainly caused by the decrease in total factor productivity.