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pc_2011_13_growth_01

pc_2011_13_growth_01

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Published by: Bruegel on Oct 24, 2011
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ISSUE 2011/13OCTOBER 2011
EUROPE'S GROWTHEMERGENCY
ZSOLT DARVAS AND JEAN PISANI-FERRY
Highlights
The European Union growth agenda has become even more pressing because growthis needed to support public and private sector deleveraging, reduce the fragility of thebanking sector, counter the falling behind of southern European countries and provethat Europe is still a worthwhile place to invest.The crisis has had a similar impact on most European countries and the US: a persis-tent drop in output level and a growth slowdown. This contrasts sharply with theexperience of the emerging countries of Asia and Latin America.Productivity improvement was immediate in the US, but Europe hoarded labour andproductivity improvements were in general delayed. Southern European countrieshave hardly adjusted so far.There is a negative feedback loop between the crisis and growth, and without effec-tive solutions to deal with the crisis, growth is unlikely to resume. National and EU-level policies should aim to foster reforms and adjustment and should not riskmedium-term objectives under the pressure of events. A more hands-on approach,including industrial policies, should be considered.Earlier versions of this Policy Contribution were presented at the Bruegel-PIIE conferenceon
Transatlantic economic challenges in an era of growing multipolarity
, Berlin, 27September 2011, and at the BEPA-Polish Presidency conference on
Sources of growth inEurope
, Brussels, 6 October 2011. We are grateful to Dana Andreicut and Silvia Merler forexcellent research assistance, and to several colleagues for useful comments andsuggestions. Zsolt Darvas (zsolt.darvas@bruegel.org) is a Research Fellow at Bruegel.Jean Pisani-Ferry (jean.pisani-ferry@bruegel.org) is Director of Bruegel.
Telephone
+32 2 227 4210info@bruegel.org
www.bruegel.org
BRUEGEL
POLICY
CONTRIBUTION
 
EUROPE’S GROWTH EMERGENCY
ZSOLT DARVAS AND JEAN PISANI-FERRY,OCTOBER 2011
02
BRUEGEL
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CONTRIBUTION
1 INTRODUCTION
In the twentieth century it was common to jokethat ‘Brazil is a country of the future, and alwayswill be’. In the same way it is tempting to say thatgrowth is Europe’s agenda for the future, andalways will be. This goal has been emphasised asa priority at least since the 1980s, and it seemsthat each decade makes it even more elusive.It was therefore bold for the Polish presidency of the EU Council to put economic growth at the coreof its agenda (Polish Presidency, 2011), and itwas brave for the World Bank to undertake an in-depth examination of the 'lustre' of Europeangrowth (Gill and Raiser, 2011). Both should becongratulated on their initiatives, because growthin Europe is both more important and more diffi-cult to achieve than at any point in recentdecades.The reasons why restoring growth has becomeparamount are not hard to grasp. Until the globalcrisis, Europe’s disappointing growth performancecould be seen as a merely relative concern vis-à-vis more successful countries. It meant that thecontinent would not reach the US level of GDP percapita, but it enjoyed already high living stan-dards, and benefited from longer holidays and ear-lier retirement. As Olivier Blanchard (2004) put itin a (controversial) paper, Europe’s lower incomeper head was perhaps the result of a social choice.Furthermore, as pointed out in the World Bankreport, Europe was successful in fostering thecatching up of its least developed areas, wherethere was the most pressing need for growth.The global crisis has however altered this benign
‘Without growth, Europe is at risk of struggling permanently with debt sustainability and it is atthe mercy of stagnation and a debt overhang. Without growth the sustainability of the (already precarious) European social model would be further brought into question.’ 
landscape in three fundamental ways:First, growth is of utmost importance for bothpublic and private deleveraging and for reduc-ing the fragility of the banking sector. Historyshows that in addition to growth and fiscal con-solidation, previous rounds of financial repres-sion, inflation, and occasional default helpedachieve the deleveraging of the public sector.Europe does not want to have to fall back on thelatter three. Without growth, Europe is at risk of struggling permanently with debt sustainabil-ity and it is at the mercy of stagnation and adebt overhang. Without growth the sustainabil-ity of the (already precarious) European socialmodel would be further brought into question.Second, the convergence machine has brutallystopped in the southern part of the EU – andhas moved into reverse in Greece, Portugal andSpain, with little chance of short-term improve-ment. Italy, meanwhile, has been falling behindsince the early 1990s.Third, the euro-area sovereign debt crisis mayput Europe at risk of being seen by investors asa place where there are very few reasons toinvest. This may trigger an accelerated weak-ening of its economic performance.It is of the highest importance to assess theseriousness of these threats and the possiblepolicy responses. With this goal in mind and witha focus on the medium term, this paper isorganised as follows: in section 2, we explain whywe think growth should now be given higherpriority; in section 3 we investigate if the seeds of future growth have been sown during therecession; in section 4 we discuss the policyresponses. Section 5 concludes.
EUROPE'S GROWTH EMERGENCY
Zsolt Darvas and Jean Pisani-Ferry
 
To simplify matters, we use throughout this paperfive country groups as the basis for discussion of the diverse challenges. The Appendix presents theclassification.
2 WHY GROWTH IS EVEN MORE IMPORTANT2.1 Overall performance
After the second world war, European countriesembarked on a rapid convergence with the US interms of GDP per capita (Figure 1). This was inpart based on the rebuilding of the capital stocklost during the war, in part on technological catch-ing-up and in part on economic integration efforts.By the late 1970s, however, convergence with theUS has stopped in most countries of 'older' Europe– though with significant exceptions, such as Ire-land. Countries in the North (Denmark, Finland,Sweden, Ireland, United Kingdom; see Appendix)and South (Greece, Italy, Portugal, Spain) groupsin particular had apparently settled for levels cor-responding to 80 percent and 60 percent of USGDP per capita. The central and eastern countriesby contrast were catching up from the mid-1990s,though from a much lower base.Figure 1 also shows IMF projections up to 2016suggesting that the positions of the West andNorth country groups relative to the US shouldremain broadly stable, while southern Europe isexpected to fall behind and the convergence of theCentral and East groups is projected to continue
1. By 2016, the relativeposition of the East group isforecast to reach only pre-transition level. Note thatdata for the late 1980s andearly 1990s should beinterpreted with cautiongiven the differences instatistical methodology,changes in relative prices,and measurement errors.
03
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0%10%20%30%60%70%80%90%
    1    9    5    0    1    9    5    5    1    9    6    0    1    9    6    5    1    9    7    0    1    9    7    5    1    9    8    0    1    9    8    5    1    9    9    0    1    9    9    5    2    0    0    0    2    0    0    5    2    0    1    0    2    0    1    5
WestNorthSouthCentralEastAsia & Latam 14China
40%50%
Figure 1: GDP per capita at PPP (US = 100),1950-2016
Source: Bruegel using data from the IMF’s World EconomicOutlook September 2011, PENN World Tables and EBRD.Note: median values are shown.
(after the major shock of recent years in the lattercase)
1
.Judging from Figure 1 it seems that the potentialfor natural catching-up with the US has beenexhausted in three of the five groups, and the gapremains noteworthy. Only significant economicreforms and/or a change in social preferenceswould lead to a change in this diagnosis.Europe should not only look at the US but also thenew emerging powers. Figure 1 also underlinesthe extremely rapid development of China, andshows that smaller countries in Asia and LatinAmerica are also converging.But there is also some good news. As Figure 2shows, western European countries are closer tothe US in terms of GDP per hour worked, with Bel-gium and the Netherlands even at US level. Fromthe North group, Ireland is only three percent below.Therefore, these European countries were able tocatch-up with the US in terms of productivity; lowerper capita output is in part a reflection of socialpreferences (more leisure), and in some caseshigher unemployment. The four South group coun-tries have mixed records in this respect: Spain andItaly are closer to the US than Greece and Portugal.
2.2 Deleveraging
The period in the run-up to the crisis wascharacterised by a rapid increase in private debt inseveral countries, such as the Baltic countries,Ireland, the Netherlands, Spain and the UK, while
West North South Central East
0102030405060708090100GDP per capitaGDP per hour worked
Figure 2: GDP per hour worked and per capita atPPP (US = 100), 2010
Source: Bruegel using data from the OECD (all but GDP perhour for four Eastern countries apart from Estonia) andEurostat (GDP per hour for four Eastern countries).
Zsolt Darvas and Jean Pisani-Ferry
EUROPE'S GROWTH EMERGENCY

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