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In 2020 Europe will be a smaller region in the world economy. Its challenge is to increase productivity and employment growth with appropriate recovery and long-run growth strategies.
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Europe in the World Economy: Economic Recovery and Europe 2020
Rafael Doménech Economic recovery and Europe 2020: Towards smart, sustainable and inclusive growth Wilton Park, October 24, 2012
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Main messages
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2
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In 2020 Europe will be a smaller region in the world economy due to (1) lower population growth and (2) lower GDP per capita growth than emerging economies. The challenge is to increase productivity and employment growth. Needed: a recovery strategy and a long-run strategy: convergence with the US. Recovery strategy: (1) a road map to a genuine EMU (four pillars), (2) correction of internal imbalances, and (3) a balance between growth and austerity. Long-run strategy: (1) economic integration to ensure internal convergence (at national and European levels), (2) improve institutional quality, human capital, R&D and infrastructures.
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Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
In 2020 Europe (EU15) will be a smaller region in the world economy due to:
Demographics are difficult to change, but GDP per capita is more sensitive to policy changes
(1) lower population growth and (2) lower GDP per capita growth than emerging economies
Loosing weight in the world
economy
22.414.8
23.5
17.9
7.7
4.8
6.1 5.3
4.64.4
2.11.6
53.7
37.5
12.8
11.4
2000 2017 2000 2020
Share in w orld in economy in PPP Share w orld population
UE-15 USA Japan
Relative position of Europe in the world economy
Shares in world GDP and in world populationSource: BBVA Research
22.4 14.8
23.5
17.9
7.7
4.8
6.1 5.3
4.6 4.4
2.1
1.6
53.7
37.5
12.8
11.4
0
10
20
30
40
50
60
2000 2017 2000 2020
Share in world in economy in PPP Share world population
0
2
4
6
8
10
12
14
UE-15 USA Japan
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Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
employment growth bonus + working-age population growth
As stated before, working-age population growth in the next 10 years will be low
This requires first to close the cyclical gap and, second, to increase potential growth, closing the
gap with the USA
The challenge is to increase (1) productivity growth and (2) employment growth above working-age
population growth
The European growth challenge
A useful decomposition
GDP growth = productivity growth +
Page 4
GDP = GDP
L15-64 L15–64 =
L15-64 L15-64
Ld
Ld GDP
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
EU15 cyclical gap with the 1970-2012 trend: around 5%
Needed: (1) a recovery strategy in the short run, and (2) a long-run growth strategy: convergence with the
USA
EU15 trend gap with the USA: around 25%
The European growth challenge
GDP per working-age population Source: BBVA Research
10.4
10.5
10.6
10.7
10.8
10.9
11
1994 1998 2002 2006 2010
EU15
USA
Averagegrowth=1.83
Averagegrowth=2.01
Cyclical gap
GDP per WAP gap
Trend components estimated from 1970 to 2012
1 0 . 4
1 0 . 5
1 0 . 6
1 0 . 7
1 0 . 8
1 0 . 9
1 1
1 9 9 4 1 9 9 8 2 0 0 2 2 0 0 6 2 0 1 0
Average growth = 2.01
EU = 15
USA
Average growth = 1.83
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Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
A recovery strategy
1. A road map to a genuine EMU
2. Correction of imbalances in a very heterogeneous Europe
Short-term objective: to avoid the risk of an austerity-recession vicious circle and the doubts regarding sovereign debt
solvency
3. Balance between growth and austerity: Focus on structural deficits as the Stability Treaty proposes
Page 6
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
A recovery strategy (1): a road map to a genuine EMU
J. Andrés and R. Doménech (2012):”The solution to the Euro crisis: Back From the Future”. Vox EU.
Page 7
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
A recovery strategy (2): internal imbalances in EMU
Debt and deficits in the EMU, USA and the UK (% of GDP)Source: AMECO, Haver, IMF, national sources and BBVA Research
Page 8
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Page 9
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
General Government Debt(%GDP)
Private sector debt Debt(% of GDP)
% change on credit to theprivate sector (% of GDP)
Housing marketdevelopments
Unemployment rate
Current Account (% ofGDP)
Net International DebtorPosition (% of GDP)
REER growth
Export Market share loss
Unit Labor costs growth
General GovernmentDeficit (% of GDP)
DEU FRA ITA ESP GRC PRT eurozone average
Macroeconomic imbalances in the European periphery (six pack) Index. Units of standard deviations with respect to the average in the Eurozone (Euro zone average= 0) Source: BBVA Research, Eurostat and Haver
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
General Government Debt(%GDP)
Private sector debt Debt(% of GDP)
% change on credit to theprivate sector (% of GDP)
Housing marketdevelopments
Unemployment rate
Current Account (% ofGDP)
Net International DebtorPosition (% of GDP)
REER growth
Export Market share loss
Unit Labor costs growth
General GovernmentDeficit (% of GDP)
DEU FRA ITA ESP GRC PRT eurozone average
A recovery strategy (2): internal imbalances in EMU
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
A recovery strategy (2): internal imbalances in EMU
Short-term goal: prevent further job losses → adjust working hours + wage flexibility and effective
organisation
Eliminate internal growth barriers through a more favourable regulatory environment
Reallocation of productive factors to more dynamic firms and sectors (external competitiveness)
The challenge: from adjustment to growth
Unemployment rates Source: BBVA Research, Haver
Page 10
0
5
10
15
20
25
30
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Ireland Portugal Spain Greece
France Germany Italy
0
5
10
15
20
25
30
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Ireland Portugal Spain Greece
France Germany Italy
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
A recovery strategy (2): internal imbalances in EMU
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
160,0
180,0
20003 20014 20031 20042 20053 20064 20081 20092 20103 20114
USA EA-17 Japan UE-15
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
20003 20014 20031 20042 20053 20064 20081 20092 20103 20114
USA EA-17 Japan UE-15
Page 11
Household debt Source: Haver and BBVA Research
0
20
40
60
80
100
120
140
160
180
20003 20014 20031 20042 20053 20064 20081 20092 20103 20114
USA EA-17 Japan UE-15
Denmark
Austria Italy
Non-financial corporations de Source: Haver and BBVA Research
0
50
100
150
200
250
300
350
20003 20014 20031 20042 20053 20064 20081 20092 20103 20114
USA EA-17 Japan UE-15
Ireland
Greece/ Germany
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
0.0
50.0
100.0
150.0
200.0
250.0
20003 20014 20031 20042 20053 20064 20081 20092
USA EA-17 Japan UE-15 (Excl. Sweden)
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
20004 20021 20032 20043 20054 20071 20082 20093 20104
USA UE-15 Japan EA-17 UK
Domestic credit (% of GDP) Source: Haver and BBVA Research
0
50
100
150
200
250
20003 20014 20031 20042 20053 20064 20081 20092
USA EA-17 Japan UE-15 (Excl. Sweden)
Ireland
Belgium
Current account deficits Source: Eurostat, National Sources, IMF BOP and BBVA Research
-20
-15
-10
-5
0
5
10
15
20
20004 20021 20032 20043 20054 20071 20082 20093 20104
USA UE-15 Japan EA-17 UK
Page 12
A recovery strategy (2): internal imbalances in EMU
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
A recovery strategy (2): internal imbalances in EMU
Public debt is increasing due to fiscal deficits and bank recapitalizations
Evaluate fiscal consolidation in structural terms
Weak fiscal position of some countries that need a deep and low restructuring of public administrations
A slow but steady fiscal consolidation
0.0
50.0
100.0
150.0
200.0
250.0
20003 20014 20031 20042 20053 20064 20081 20092 20103 20114
USA EA-17 Japan UE-15
General government debt Source: Eurostat and BBVA Research
0
50
100
150
200
250
20003 20014 20031 20042 20053 20064 20081 20092 20103 20114
USA EA-17 Japan UE-15
Page 13
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Interest rate and TARGET2 Source: ECB and BBVA Research
Target 2 (in GDP%)
10
-Y b
onds
inte
rest
rate
-80% -60% -40% -20% 0% 20% 40%
1,0
4,0
10,0
30,0
POR
CHI SPA ITA
SLK SLV
MNT
BEL
AUT
FRA
NED FIN LUX
GER (209%)
A recovery strategy (2): internal imbalances in EMU
IRL
GRE
Differences in interest rates and in ECB dependence: two sides of the same coin
A political arrangement needed
Reduction in financial stress: a precondition for the success of fiscal adjustment and structural
reforms
Page 14
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Structural capacity in developed economies Source: IMF and BBVA Research
A long-run growth strategy
Varieties of Capitalism and Comparative Advantage (Hall and Soskice, 2001)
Liberal Market Economies
Coordinated Market Economies Mixed market Economies Avge.
Medium Term UK USA IRL GER FRA NLD BEL AUT FIN DEN SWE JAP SPA ITA POR GRE
Labour market 1 1 1 2 3 2 2 2 1 1 2 1 2 3 3 3 1.9
Corporate regulations 1 1 1 2 2 1 3 2 2 1 1 2 3 2 2 3 1.8
TIC regulations 1 1 3 1 2 1 1 1 2 1 1 2 1 2 2 3 1.6
Retail regulations 1 1 1 1 2 1 3 3 2 2 1 1 2 2 2 3 1.8
Professional services reg.
1 1 1 3 2 1 2 2 1 1 1 1 2 3 2 3 1.7
Long term
Institutions and contracts 1 2 2 1 2 1 2 1 1 1 2 2 2 3 3 3 1.8
Human capital 2 2 1 2 2 1 1 2 1 1 1 1 3 3 3 3 1.8
Infraestructure 1 1 3 1 1 1 2 2 2 1 1 1 1 3 2 3 1.6
R&D 1 1 2 1 1 1 1 2 2 1 1 1 3 2 3 3 1.6
Average 1.1 1.3 1.7 1.6 1.9 1.1 1.9 1.9 1.6 1.1 1.2 1.3 2.1 2.6 2.4 3.0 1.7
Page 15
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
AUS
AUT
BEL
CAN
DEU
DNK
ESP
FIN FRA
GBR
GRE
IRE
ITA
JAP
NLD
NOR
NZL POR
SWE
USA
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
NAIRU,2005
IndicadordeDoingBusiness,2007
Institutions are crucial for long-term growth (e.g., Acemoglu and Robinson, 2012)
Interaction with other economic long-run determinants.
Huge differences among European countries
Doing Business and structural unemployment Source: BBVA Research based on OECD and Doing Business
A long-run growth strategy
AUS AUT
BEL CAN
DEU
DNL
ESP
FIN FRA
G BR
GRE
IRE
ITA
JAP
NLD
NOR
NZL POR SWE
USA
3
4
5
6
7
8
9
1 0
1 1
0,0 0,1 0,2 0,3 0.4 0,5 0,6 0,7 0,8 0,9 Doing Busines, 2007
Page 16
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Human capital is one of the main determinants of GDP per working-age population and other
economic variables (U, R&D, etc.)
Increasing human capital levels in some countries will be a very slow process (demographics) -> on-
the-job training (labour markets reforms)
Huge differences among European countries
Schooling of adult population and GDP per WAP Source: de la Fuente and Doménech (2012)
Page 17
DEU
FRA IT A
E SP GR C
PR T
IRL
BEL
A UT
FIN
NLD S WE
DNK
GBR
US A R ² = 0 .81 7 68
10.4
10.5
10.6
10.7
10.8
10.9
11.0
11.1
11.2
11.3
7 8 9 10 11 12 13 14
G D
P p
e r W
A P , 2 0 1 1 ( i n
l o g s )
Years of schooling of adult population, 2010
A long-run growth strategy
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
The black-box growth
Human capital and R&D Source: BBVA Research based on OCDE
Human capital and R&D activities are deeply correlated. Human capital is the basic input of R&D
activities
Coordination of national and European policies to favour innovation in areas in which each country has
its own comparative advantage
Again, huge differences in R&D investment across European countries
Number of researchers per 1,000 workers, 2007
R&
D invest
ment
over
GD
P (
%),
20
07
Page 18
A long-run growth strategy
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Exports prices have not been the main determinant of exports shares. And aggregate ULCs even less
In a globalized economy, a long-run strategy in terms of international competitiveness is crucial
Not clear pattern between the determinants of aggregate productivity and exports competitiveness
-> significant internal duality in many countries
Heterogeneity in international competitiveness
Page 19
A long-run growth strategy
FR
R U
C AN
JP
IT
US
FIN SUE
GR
DIN
P T
A T
IRL
GER
SPA
NED
- 30
- 20
- 10
0
10
20
30
- 45 - 40 - 3 5 - 30 - 2 5 - 20 - 15 - 10 -5 0
C h
a n g e i n
r e l a
t i v e e
x p o
r t s
p r i
c e s
( % ) , 1
9 9
9 - 2
0 1 1
Change in the shar e of w orld e xpor t s (%), 19 9 9 - 2011
∆(ext – ext ) = ∆st - ∆(pt – pt ) w x x w
Europe in the World Economy: Economic Recovery and Europe 2020 October 2012
Main messages
1
2
3
In 2020 Europe will be a smaller region in the world economy due to (1) lower population growth and (2) lower GDP per capita growth than emerging economies. The challenge is to increase productivity and employment growth. Needed: a recovery strategy and a long-run strategy: convergence with the US. Recovery strategy: (1) a road map to a genuine EMU (four pillars), (2) correction of internal imbalances, and (3) a balance between growth and austerity. Long-run strategy: (1) economic integration to ensure internal convergence (at national and European levels), (2) improve institutional quality, human capital, R&D and infrastructures.
4
5
Page 20
Europe in the World Economy: Economic Recovery and Europe 2020
Rafael Doménech Economic recovery and Europe 2020: Towards smart, sustainable and inclusive growthWilton Park, October 24, 2012
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