European Long-Term Growth and the Euro Crisis Uri Dadush New York University, Stern School of Business October 8,

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 * 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 * 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 * 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 Source: Measuring Wealth. 6

The Income Gap Ratio of Europe* to the United States * Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, United Kingdom. Sources: Maddison (2006), OECD, World Bank. 7

The Productivity Gap Ratio of Europe* to the United States * Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, United Kingdom. Sources: Maddison (2006), OECD, World Bank. 8

The Lisbon Agenda Enacted in 2000 to transform Europe into “the most dynamic and competitive knowledge-based economy in the world” by 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

Big Hit From The Great Recession Percent Change in GDP since 2008 Sources: Eurostat, BEA. 10

Interest Rate Convergence Annual Inflation Rates and Long-Term Government Bond Yields Average aggregate rate, percent * Austria, Belgium, France, Germany, Netherlands. Sources: IMF. 11

Competitiveness Change in Real Effective Exchange Rates, Based on unit labor cost, relative to the EU and other major industrialized economies Sources: European Commission. 12

..Not Just The Euro Area… Change in Unit Labor Cost In euros, * Austria, Belgium, France, Germany, Netherlands. Sources: IMF. 13

Governments Grew Average Annual Growth of Government Expenditure Percent, Source: Eurostat. 14

Tough Deficit Targets Government Deficit Projections Percent of GDP Note: Projections for Spain are for 2013; projections for Italy are for Sources: 2010 IMF Stand-by Arrangement Review (Greece), 2010 IMF Article IV Consultation (Spain, Italy, Ireland). 15

Unrealistic? Government Deficit Projections Percent of GDP 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 Sources: 2010 IMF Stand-by Arrangement Review (Greece), 2010 IMF Article IV Consultation (Spain, Italy, Ireland). 16

Two-Speed Europe Source: Eurostat. Percent Change in GDP since

Adjustment Thus Far Core Prices Percentage points above Germany since 2001 Source: Eurostat. 18

The Euro Crisis: Far From Over 10-Year Government Bond Spreads Relative to German Bund Basis points Source: IMF, Bloomberg. 19

Debt Levels: U.S. is Worse Debt as a Percent of GDP United States Japan Germany France United Kingdom Greece Ireland Italy Portugal Spain Source: IMF 20

Europe’s Shrinking Labor Force Working age population Index, 2010 = 100 Source: U.S. Census Bureau. 21

Convergence Conditions in Place Index of Technological Catch-Up Conditions 0 denotes slowest convergence to the United States, 10 denotes fastest convergence 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 States has been omitted; the U.S. index score is 10. Source: World Bank World Development Indicators (2009), authors' calculation. 22

Incomes Rising Gradually Annual GDP Per Capita Growth, 2010 – 2030 PPP, percent change Source: “The World Order in 2050”. 23

Potential Growth Drivers ICT United States spent an average of 67 percent more per capita on ICT from 2003 to 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 40 th out of 183 countries in ease of doing business, but 104 th in hiring employees. 24