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.
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
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)
.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.
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