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The 2009 Euro Challenge | Ten Economic Challenges
Ten Economic Challenges
Concepts and Key Issues
Presentation by Amy Medearis
Faculty Orientation for the 2009 Euro Challenge
New York, November 25th 2008
The 2009 Euro Challenge
The Competition Task
2. Select one economic-related challenge confronting the euro
area as a whole (from the list provided), and pick one of the
16 member countries of the euro area to illustrate that
challenge.
Pick a different challenge and country from last year!
Use the Interactive Exercise on the Website!
3. Recommend a policy or policies for addressing the
challenge you identified in the country you selected. Be sure
to include in your recommendation a discussion of how
having a single currency may or may not affect the policy
choices for addressing the challenge.
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The 2009 Euro Challenge
1. Slow Growth
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The 2009 Euro Challenge
Slow Economic Growth:
Key Concepts
• Gross Domestic Product (GDP): growth (%), not level
• GDP per capita (to compare across countries)
• Is the slowdown in growth the consequence of normal business cycle ups
and downs, or of “fundamentals” (structural issues)?
• Potential growth. Why is it important for a country’s GDP to grow at a solid
and sustainable rate? What can’t countries afford with low growth?
• How can a country or region promote faster growth? Short-to medium-term
policies (e.g., government spending, interest rate cuts) versus longer-term
policies (e.g., investment in education, technology, infrastructure)
• Lisbon Strategy designed to increase growth and jobs
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The 2009 Euro Challenge
2. High Unemployment
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The 2009 Euro Challenge
High Unemployment:
Key Concepts
• What can cause unemployment to rise or fall?
• What is the difference between employment and
unemployment?
• Is the unemployment rate higher for certain groups (e.g.,
youth, women, older workers)?
• Benefits to the unemployed and incentives to work: welfare
state/taxes/unemployment benefits/”non-wage labor costs”
• Demand and supply of labor and jobs: do workforce skills and
education fit businesses’ skills demands?
• What can be done to reduce unemployment?
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The 2009 Euro Challenge
3. Inflation
Basket of goods
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The 2009 Euro Challenge
Inflation:
Key Concepts
• Why is inflation a bad thing? Why is deflation a bad thing?
(watch the ECB Price Stability video!)
• How do we measure inflation?
• What is the job of a central bank? (what is the mandate of the
ECB?)
• Commodity prices: Importance of energy, food and other
commodity prices
• Inflation expectations: self-fulfilling? Higher prices → higher
wages → still higher prices
• What policies can or can’t countries pursue to tackle high
inflation if they are a member of the euro area?
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The 2009 Euro Challenge
4. Adapting to technological change
(including raising productivity)
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The 2009 Euro Challenge
Adapting to technological change (raising productivity)
Key Concepts
• Use of new technology in the economy (high-tech, ITC)
• Productivity and economic growth
• The US has enjoyed stronger productivity growth in recent
years than the euro area: what role has adaptation to
technological change played in that gap?
• Adapting to change: Entrepreneurship, R&D spending,
innovation
• Education and skills training: quality of vocational / higher
(tertiary) education, brain drain/gain
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The 2009 Euro Challenge
Productivity – a measure of how much each worker produces
Marie-Claude
• Marie-Claude designed 5 web sites
Karl-Heinz
• 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
Level of Productivity versus Productivity Growth
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The 2009 Euro Challenge
5. Globalization (including immigration)
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The 2009 Euro Challenge
Globalization (including immigration)
Key Concepts
• Globalization: Trade, communication, transport, global integration
• Benefits of globalization (larger market for export, cheaper goods to
import; cultural diversity) versus costs (greater competition from
abroad, loss of jobs in industries that can’t compete globally;
potential backlash against cultural diversity and outsourcing)
• Global competitiveness (role of domestic wage and price inflation)
• Immigration: low- versus high-skill immigrants and how immigrants
fit into the labor market; integration of immigrants into the host
economy and society
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The 2009 Euro Challenge
6. Aging (including health care)
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The 2009 Euro Challenge
Aging (including health care)
Key Concepts
•
•
•
•
•
Old-Age Dependency Ratio (ratio of number of retirees to number of
working age people)
The OADR in Europe is about 1:4 currently; by 2050, it will be 1:2.
What impact will that have (on people, on the economy)?
Health care: what does a country spend on health care (as a % of
GDP), and how do its health outcomes (life expectancy, infant
mortality, etc.) compare with other countries?
Tax burden to fund pensions and health care systems, and its
impact on the employment and income of working people
Inability to finance pensions and government-provided health care
as demand for these increases due to demographic shift
Unemployment of older people and early retirement
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The 2009 Euro Challenge
7. Living with a single monetary policy
“One size fits all”
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The 2009 Euro Challenge
Living with a single monetary policy
Key Concepts
• “One size fits all”: monetary policy is set for the euro area average
• What policy tools do countries give up when they join a monetary
union? What benefits do they gain?
• Consequences of having higher inflation or slower GDP growth than
the euro area average
• What policy tools can a country use to tackle these problems?
• “Convergence”
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The 2009 Euro Challenge
8. Sustaining the social system
(welfare state)
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The 2009 Euro Challenge
Sustaining the social system (welfare state)
Key Concepts
• Elements of the social welfare system: unemployment benefits;
pensions (social security); health care
• Not one but many “social models” in Europe
• “Sustainability” of the welfare system – how to be able to keep paying
for these social programs in the future, when their cost is growing.
• How to find a politically viable way of trimming social benefits that is
fair to all generations? How can Europe adapt its social models?
• Social systems and the concept of distributing wealth (pros and cons)
• Can social programs be a disincentive to economic activity (tax
burden on companies and households, disincentives to hire workers
or to find work)
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The 2009 Euro Challenge
Europe has (at least) four different social “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
strong
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The 2009 Euro Challenge
9. Coping with a housing market slowdown
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The 2009 Euro Challenge
Coping with a housing market slowdown
Key Concepts
• What is a “bubble”? What happens when a housing bubble bursts
or deflates?
• Some Euro Area countries (e.g., Ireland, Spain) are experiencing
housing market downturns now. In what ways are they similar to or
different from the US housing bubble burst?
• Impact on economic activity (GDP growth) through construction
industry, but also effect on consumer spending through housingrelated purchases and “wealth effect” of house prices.
• What policies can a country undertake to help overcome a housing
market downturn?
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The 2009 Euro Challenge
10. High government deficits and debt
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The 2009 Euro Challenge
High government deficits and debt
Key Concepts
• What’s the difference between a government deficit and debt? Hint: the
bathtub analogy
• What is “long-term sustainability”?
• Stability and Growth Pact: fiscal rules to keep national governments in
Europe from pursuing irresponsible fiscal policies
• What happens when governments borrow too much? (generally, interest
rates rise, currencies depreciate, and inflation expectations rise – not
good for the economy!)
• Different generations value government spending differently (bridges
versus parties)
• Fiscal stimulus: e.g. deficit spending or tax cuts to stimulate domestic
consumption. When does it make sense? When does it not make
sense? (tradeoffs, short-term benefit versus long-term cost)
• Fiscal contraction: e.g. raising taxes or cutting spending to reduce the
deficit/debt
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FOR MORE INFO . . .
For additional resources to
prepare for the Euro Challenge:
www.euro-challenge.org
For more information on the
European Union in the US, please
visit: www.eurunion.org
To access EUROPA, the EU’s
official web portal, please visit:
http://ec.europa.eu/
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