Prospects for Growth in the Euro Area

Mcquinn, Kieran and Whelan, Karl (2006): Prospects for Growth in the Euro Area. Unpublished.

Abstract

We review the recent performance of the Euro area economy, focusing in detail on the separate roles played by labour input, capital input, and total factor productivity (TFP). After a long period of catching up with US levels of labour productivity, Euro area productivity growth has, since the mid-1990s, fallen significantly behind. We show that this recent divergence has accelerated since 2000, and that this is mainly due to the poor rate of Euro area TFP growth. Based on prevailing trends, we estimate that potential output growth in the Euro area currently may be running as low as 1.5 percent per year. In addition, if TFP growth stays at recent levels, the output growth rate will decline further due to weaker capital deepening. To consider future Euro area prospects for growth, we examine a set of alternative scenarios, each of which posits a potential increase in a determinant of output growth. One of these scenarios focuses on the potential effects of greater labour market deregulation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Growth, Euro Area, TFP
• Subjects: O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output (Income) Convergence; O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O52 - Europe

References

[1] Alesina, Alberto, Edward Glaeser and Bruce Sacerdote (2005). “Work and Leisure in the US and Europe? Why So Different?” NBER Macroeconomics Annual. [2] Blanchard, Olivier (2004). “The Economic Future of Europe,” Journal of Economic Perspectives, 18, Issue 4, 3-26. [3] DeLong, J. Bradford (2003). Macroeconomics, McGraw-Hill. [4] Dew-Becker, Ian and Robert J. Gordon (2006). “The Slowdown in European Productivity Growth: A Tale of Tigers, Tortoises and Textbook Labor Economics,” working paper, NBER and Northwestern University. [5] Fagan, Gabriel, Jerome Henry and Ricardo Mestre (2001). An Area-Wide Model (AWM) for the Euro Area, ECB Working Paper No. 42. [6] Hall, Robert and Charles I. Jones (1997). Why Do Some Countries Produce So Much More per Worker than Others?, Quarterly Journal of Economics, 114, 83-116. [7] Lawless, Martina (2006). “Measurement Issues and International Comparisons of Output and Productivity Growth,” Central Bank of Ireland Quarterly Bulletin, Spring. [8] Maddaloni, Angela, Alberto Musso, Philipp Rother, Melanie Ward-Warmedinger, and Thomas Westermann (2006). Macroeconomic Implications of Demographic Developments in the Euro Area, ECB Occasional Paper No. 51. [9] McQuinn, Kieran and KarlWhelan (2006). Conditional Convergence Revisited: Taking Solow Very Seriously, working paper, Central Bank and Financial Services Authority of Ireland. [10] Musso, Alberto and Thomas Westermann (2005). Assessing Potential Output Growth in the Euro Area: A Growth Accounting Perspective, ECB Occasional Paper No. 22. [11] Prescott, Edward (2003). “Why Do Americans Work So Much More Than Europeans?” Federal Reserve Bank of Minneapolis Quarterly Review, 28, Issue 1, 2-13. [12] Sakellaris, Plutarchos and Focco Vijselaar (2005). “Capital Quality Improvement and Euroland Growth,” Economic Policy, April, 269-284. [13] Sapir, Andre et al (2004). An Agenda for a Growing Europe: The Sapir Report, Oxford University Press. [14] Schwerdt, Guido and Jarkko Turunen (2006). Growth in Euro Area Labour Quality, ECB Working Paper No. 575. [15] Solow, Robert (1956). “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, 70, 65-94. [16] Whelan, Karl (2002). “A Guide to US Chain-Aggregated NIPA Data,” Review of Income and Wealth, 48, 217-233.