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European Long-Term Growth
and the Euro Crisis
Uri Dadush
New York University, Stern School of Business
October 8, 2010
1
Main Points
• Aborted Long-Term Catch-Up
• Big Hit From the Great Recession
• Euro Crisis Far From Over
• Potential Growth Drivers Remain
2
Europe Compared
2009 Per Capita GDP
PPP, 2005 dollars
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
United
States
EU12*
Average
Japan
Russia
Brazil
China
India
* EU12 (excludes Luxembourg): Belgium, Denmark, France, Germany, Greece, Ireland, Italy,
Netherlands, Portugal, Spain, United Kingdom.
Source: World Bank.
3
Aborted Catch-Up
Per Capita GDP
1990 GK dollars, logarithmic scale
100000
Europe*
United States
10000
1000
100
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
* Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden,
Switzerland, United Kingdom.
Sources: Maddison (2006), World Bank.
4
…Japan, too…
Per Capita GDP
1990 GK dollars, logarithmic scale
100000
Europe*
United States
Japan
10000
1000
100
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
* Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden,
Switzerland, United Kingdom.
Sources: Maddison (2006), World Bank.
5
Long Term U.S. Growth
GDP Per Capita Growth
Thin horizontal red line represents 2 percent growth
20
Annual Growth Rate
25-Year Average Annual Growth Rate
15
10
5
0
-5
-10
-15
1820
1850
1880
1910
1940
1970
2000
6
Source: Measuring Wealth.
The Income Gap
Ratio of Europe* to the United States
1
Output per Capita
0.8
0.6
0.4
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
* Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden,
Switzerland, United Kingdom.
Sources: Maddison (2006), OECD, World Bank.
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The Productivity Gap
Ratio of Europe* to the United States
1
Output per Capita
Output per Hour Worked
0.8
0.6
0.4
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
* Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden,
Switzerland, United Kingdom.
Sources: Maddison (2006), OECD, World Bank.
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The Lisbon Agenda
Enacted in 2000 to transform Europe into “the most
dynamic and competitive knowledge-based economy in
the world” by 2010.
• Objectives:
• 70 percent of the working-age population employed
• 3 percent of GDP spent on R&D
• Environmental and social objectives
• Outcomes:
• In 2009, 69.1 percent of the working-age population employed (71.3
percent in United States)
• In 2008, 1.9 percent of GDP spend on R&D (2.8 percent in United
States)
• Many environmental and social targets dropped in 2004
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Big Hit From The Great Recession
Percent Change in GDP since 2008
Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10
1
0
-1
-2
-3
-4
Euro area
United States
-5
-6
Sources: Eurostat, BEA.
10
Interest Rate Convergence
Annual Inflation Rates and Long-Term Government Bond Yields
Average aggregate rate, percent
25
Bond Yield:
Inflation:
GIIPS
Core*
GIIPS
Core*
20
15
10
5
0
1980
1985
1990
* Austria, Belgium, France, Germany, Netherlands.
Sources: IMF.
1995
2000
2005
11
Competitiveness
Change in Real Effective Exchange Rates, 2000-2008
Based on unit labor cost, relative to the EU and other major industrialized economies
40
30
20
10
0
-10
-20
-30
Ireland
Italy
Spain
Sources: European Commission.
Greece
Portugal
Germany
UK
United
States
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..Not Just The Euro Area…
Change in Unit Labor Cost
In euros, 2004-2008
100%
80%
Peggers
Floaters
60%
40%
20%
0%
Latvia
Romania
Estonia
Lithuania
Bulgaria
Poland
Czech
Republic
Hungary
Germany
-20%
* Austria, Belgium, France, Germany, Netherlands.
Sources: IMF.
13
Governments Grew
Average Annual Growth of Government Expenditure
Percent, 1997-2007
12
10
8
6
4
2
Source: Eurostat.
Ge
rm
an
y
Au
str
ia
Ita
ly
Be
lgi
um
Fr
an
ce
Ne
th
er
la
nd
s
Po
rtu
ga
l
Gr
ee
ce
Sp
ain
Ire
lan
d
0
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Tough Deficit Targets
Government Deficit Projections
Percent of GDP
2009
Greece
2010
Spain
2014 - Official forecast
Italy
Ireland
0
-5
-10
-15
Note: Projections for Spain are for 2013; projections for Italy are for 2012.
Sources: 2010 IMF Stand-by Arrangement Review (Greece), 2010 IMF Article IV Consultation (Spain, Italy,
Ireland).
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Unrealistic?
Government Deficit Projections
Percent of GDP
Greece
2009
2010
2014 - IMF forecast
2014 - Official forecast
Spain
Italy
Ireland
0
-5
-10
-15
Note: IMF and official forecasts for 2010 are nearly identical. Greece, which accepted IMF support in May,
does not provide official forecasts independent of the IMF. Projections for Spain are for 2013; projections for
Italy are for 2012.
Sources: 2010 IMF Stand-by Arrangement Review (Greece), 2010 IMF Article IV Consultation (Spain, Italy,
Ireland).
16
Two-Speed Europe
Percent Change in GDP since 2003
12
Core
10
GIIPS
8
6
4
2
0
03
0
2
04
0
2
Source: Eurostat.
05
0
2
06
0
2
07
0
2
08
0
2
09
0
2
10
0
2
17
Adjustment Thus Far
Core Prices
Percentage points above Germany since 2001
25
Greece
Spain
20
Italy
Portugal
15
Ireland
10
5
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Eurostat.
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The Euro Crisis: Far From Over
10-Year Government Bond Spreads Relative to German Bund
Basis points
1000
800
Spain
Portugal
Ireland
Greece
Italy
600
400
200
20
10
20
09
20
08
20
07
0
Source: IMF, Bloomberg.
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Debt Levels: U.S. is Worse
Debt as a Percent of GDP
2007
2009
2015
62.1
83.2
109.7
187.7
217.7
250
65
72.5
81.5
France
63.8
77.4
94.8
United Kingdom
44.1
68.2
90.6
Greece
95.6
114.7
158.6
Ireland
24.9
64.5
94
103.4
115.8
124.7
Portugal
63.6
77.1
68.4
Spain
36.1
55.2
94.4
United States
Japan
Germany
Italy
Source: IMF
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Europe’s Shrinking Labor Force
Working age population
Index, 2010 = 100
110
105
100
95
90
France
Italy
Europe
85
Germany
United Kingdom
United States
80
2010
2015
2020
2025
2030
21
Source: U.S. Census Bureau.
Convergence Conditions in Place
Index of Technological Catch-Up Conditions
0 denotes slowest convergence to the United States, 10 denotes fastest convergence
10
9
8
7
6
5
4
3
2
1
Nigeria
Ethiopia
Kenya
India
Indonesia
Ghana
Brazil
Argentina
Russia
China
Turkey
Mexico
South Africa
Saudi Arabia
Italy
Korea
France
Japan
Australia
Germany
Canada
United Kingdom
0
Note: The index above is an aggregate of indices that measure the following factors: educational attainment,
communication and transportation infrastructure, governance, and business and investment environment. The United
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States has been omitted; the U.S. index score is 10.
Source: World Bank World Development Indicators (2009), authors' calculation.
Incomes Rising Gradually
Annual GDP Per Capita Growth, 2010 – 2030
PPP, percent change
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
United Kingdom
France
Source: “The World Order in 2050”.
United States
Italy
Germany
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Potential Growth Drivers
• ICT
• United States spent an average of 67 percent more per capita on ICT from
2003 to 2009.
• Emerging Markets
• European merchandise exports to emerging markets average 5.3 percent of
GDP, compared to 2.5 percent in the United States.
• Further Integration
• Average PPP per capita GDP in richest three EU economies is over three
times that of poorest three EU economies.
• Labor Market Reforms
• On average, EU countries rank 40th out of 183 countries in ease of doing
business, but 104th in hiring employees.
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