Download United States - Euro Challenge

Two Economic Challenges
1) Slow GDP Growth
2) Maintaining the Social Welfare System
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 1
What is GDP?
Or, how do we measure the size of an economy?
• Gross domestic product (or GDP) is the
total value of all the goods and services
produced by an economy
• Cars
• Cappuccinos
• iPods
• Insurance policies
• Haircuts
The US is the world’s largest economy. It has the highest GDP
If the euro area is counted as a single economy, it would be second largest
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 2
How can we compare the standard of living?
• GDP per capita – total GDP divided by
the population size, tells you the average
standard of living (how “rich” or “poor”)
US GDP = $13 trillion.
US Population = 300 million
Luxembourg GDP = $25 billion
Luxembourg Population: 0.5 million
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 3
Measuring GDP growth
Our GDP measure can increase because:
a) The economy produces more goods and services
b) The prices of goods and services increase
We are only interested in (a), the real increase!
Nominal GDP growth
Inflation
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Real GDP growth
=
Slide 4
Explaining differences in living standards
Euro Area (15)
(2008)
United States
(2008)
GDP (USD billions)
14 043.78
Population (million)
320.1
305.5
43 873
46 790
GDP per capita (USD)
Employment rate
Hours worked per employed person
Output per hour worked (USA = 100)
14 294.5
54%
62%
1,600
1,781
87
100
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 5
Does GDP per capita measure “quality of life”?
Euro area GDP per capita is only 70% of US level, so the
standard of living is lower in euro area on this measure
But Europe has:
• Much longer holidays!
• Slightly higher life expectancy
• Notably lower infant mortality
• Lower poverty and earnings inequality
• Lower levels of crime and violent crime
• Universal health care
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 6
How do we raise the rate of economic growth?
If the economy is experiencing weak
growth, sometimes the solution is to
change macroeconomic policy and
stimulate the economy.
Imagine you are driving a car.
If you want to go faster, you step on the gas:
• Monetary policy – reduce interest rates
• Fiscal policy – cut taxes, raise government spending
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 7
Macroeconomic policy must avoid generating inflation
But if policy is too loose, this can lead
to higher inflation. This is like driving
too fast and going into a skid.
Avoid a skid (ease off the gas and gently apply the brakes):
• Monetary policy – raise interest rates
• Fiscal policy – raise taxes, cut government spending
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 8
Driving at a safe speed: the potential growth rate
The rate at which an economy can safely grow without
triggering higher inflation is called the potential growth
rate. This rate will differ between economies.
€ area: 2% to 2.2%?
US: 2.5% to 3%?
The potential growth rate depends on the growth of the labor
force as well as productivity growth. Higher employment
rates, longer hours worked and more productive workers all
help to raise the potential growth rate.
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 9
Productivity is a key determinant of long-term growth
• Productivity – a measure of how much
each worker produces
Marie-Claude
Karl-Heinz
• Marie-Claude designed 5 web sites
• Karl-Heinz designed 8 web sites
• Who is more productive?
• Marie-Claude worked 200 hours
• Karl-Heinz worked 400 hours
• Now who is more productive?
• Web sites designed per hour – Marie-Claude: 0.025, Karl Heinz: 0.020
• Marie-Claude has a higher hourly productivity than Karl-Heinz
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 10
Slow growth and high unemployment raise concerns
• In the recent past, Europe has
suffered from slow growth, high
unemployment and low
productivity growth
• Labor and product markets less
flexible than the US, harder to
deal with economic shocks,
globalization, etc
• Low productivity growth seems to
stem from low investment in
information and communications
technology (ICT), less use of ICT
relative to US, low R&D spending
and relatively low workforce skills
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 11
The Lisbon Strategy: Europe gets a tune-up!
*Also called Lisbon Agenda or
Strategy for Growth & Jobs
• The Lisbon Strategy* was adopted in
2000 to create a more dynamic and
knowledge-based EU economy
• Initial results disappointing, Lisbon relaunched in 2005 with clearer focus
• Key objectives: raise R&D spending to
3% of GDP, raise employment rate to
70% by 2010
• Structural reforms now contributing to
better economic performance in
Europe (higher productivity and
employment rates), but more reforms
needed, e.g. to cope with ageing
http://ec.europa.eu/growthandjobs
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 12
Challenge #2: Sustaining the “social welfare system”
- What is a social welfare system?
- Does Europe have one or many?
- What does it mean to have a system that’s
“sustainable”?
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 13
What is a social welfare system?
•
Pensions
•
•
•
Health care
Unemployment benefits
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 14
high
Europe has many types of social welfare system
There are (at least) four different European models
Rhineland: low
employment, low
inequality
unemployment benefits
Scandinavian:
high employment,
low inequality
low
English-speaking: high
employment, high inequality
Mediterranean: low
employment, high inequality
employment protection
weak
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
strong
Slide 15
Why is welfare system “sustainability” at risk?
Europe is Ageing Rapidly!
• The “old-age dependency ratio” will
rise due to fall in birth rate, fall in
death rate and retirement of “baby
boomers”
• 2000: Four people of working age
for every one retired person
• 2050: Only two people of working
age for every retired person
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
16
Slide 16
Economic consequences of changing demographics
What happens to the economy when
the working-age population shrinks?
• EU growth rate will more than halve by
2050 (fewer workers)
• Reduction in potential growth
• Social model under stress (fewer
taxpayers, more social spending, e.g. on
pensions, health care, long-term care)
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 17
Sustaining the Social Welfare System
• Can Europe still afford its Welfare States?
• Does it need to adapt its social model?
Nigel Nagarajan, Counselor, Head of Economic and Financial Affairs Section
Delegation of the European Commission to the United States
Slide 18