CHALLENGES FOR THE EU IN COMPETING AGAINST CHINA, THE USA AND THE WORLD A. Illarionov Institute of Economic Analysis 3 rd European Resource Bank Meeting Vienna, June 30, © Institute of Economic Analysis

© ИЭА Economic growth rates in the original EU-6 are gradually falling…

© ИЭА …while world economic growth is picking up.

© ИЭА Deviation in economic growth rates in the original EU-6 from the world economic growth rates, p.p.

© ИЭА As a ratio to the EU-25 GDP per capita in China rose from 4% in 1976 to 25% in 2006.

© ИЭА As a ratio to the USA GDP per capita in the EU-25 fell from 72% in 1982 to 66% in 2006.

© ИЭА As a ratio to the World GDP per capita in the EU-25 fell from 306% in 2001 to 293% in 2006.

© ИЭА As a ratio to the World GDP in the EU-25 fell from 30,7% in 1963 to 20,3% in 2006.

© ИЭА Observation: European Union is visibly lagging behind its own historical records as well as behind China, USA, World. Why? Hypothesis 1: Because of inclusion into the EU of new less developed, slower growing economies?

© ИЭА As a ratio to the USA GDP per capita in the EU-25 in fell from 72% to 66% and in the EU-15 – from 79% to 73%.

© ИЭА In GDP per capita as a ratio to the USA in the EU-15 fell from 78 to 73%, but in EU-10 it rose from 30 to 37%.

© ИЭА Hypothesis 1 – because of inclusion into the EU of underdeveloped, slow growing economies – must be rejected.

© ИЭА Hypothesis 2: Because of policies pursued in the EU countries? The key ingredient of policies pursued is size of government.

© ИЭА Size of Government in the EU-15, the USA and China, 1991−2005

© ИЭА Economic Growth in the EU-15, the USA and China, 1991−2005.

© ИЭА On average in , size of government in the EU-10 was 17 p.p. smaller than in the EU-15.

© ИЭА In economic growth in the EU-10 was almost twice faster than in the EU-15.

© ИЭА Negative correlation between size of government and economic growth is well known. Size of government and economic growth in the EU-25,

© ИЭА Deviation in actual size of government from predicted one and economic growth in the EU-17, 1982−2005, %

© ИЭА Deviation in actual size of government from predicted one and economic growth in 3 groups of the EU countries – the EU-3, the EU-6 and the EU-8, 1982−2005

© ИЭА In GDP pc as % of the EU-17 has changed: in the EU-3 it rose by 52 p.p. – from 79% to 131%, in the EU-6 remained at the same level – 83%, in the EU-8 it fell by 19 p.p. – from 120% to 101%.

© ИЭА Since 1982 GDP pc as % of the USA level has changed: in the EU-3 it rose by 35 p.p. – from 63 to 98%, in the EU-6 it rose by 2 p.p. – from 59 to 61%, in the EU-8 it fell by 8 p.p. – from 84 to 76%.

© ИЭА Hypothesis 2 – because of policies pursued in the EU countries (size of government) – is overwhelmingly supported.

© ИЭА After some decline from 50% of GDP in 1985 to 43,7% in 2000 size of government in the EU-25 is again rising – up to 45,3% in 2005.

© ИЭА Inversed correlation between size of government and economic growth for the EU economies is once again confirmed. Economic decline is the price that European countries are paying for the excessive size of their governments. Continuing increase in size of government presents the most serious challenge to economic positions of Europe in the world.