CHALLENGES FOR THE EU CHALLENGES FOR THE EU IN COMPETING IN COMPETING

AGAINST CHINA, THE USAAGAINST CHINA, THE USAAND THE WORLDAND THE WORLD

AA. . IllarionovIllarionov

Institute of Economic AnalysisInstitute of Economic Analysis

33rdrd European Resource Bank Meeting European Resource Bank Meeting

ViennaVienna, , June 30,June 30, 200 20066..

© © Institute of Economic AnalysisInstitute of Economic Analysis

www.iea.ruwww.iea.ru

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

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……while world economic growth is picking up.while world economic growth is picking up.

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

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As a ratio to the EU-25 GDP per capita in China rose from As a ratio to the EU-25 GDP per capita in China rose from 4% in 4% in 191976 to 25% in 76 to 25% in 20020066..

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As a ratio to the USA GDP per capita in the EU-25 As a ratio to the USA GDP per capita in the EU-25 fell from 72% in fell from 72% in 191982 to 66% in 82 to 66% in 20020066..

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As a ratio to the World GDP per capita in the EU-25 As a ratio to the World GDP per capita in the EU-25 fell from 306% in 2001 to 293% in fell from 306% in 2001 to 293% in 20020066..

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As a ratio to the World GDP in the EU-25 As a ratio to the World GDP in the EU-25 fell from 30,7% in 1963 to 20,3% in fell from 30,7% in 1963 to 20,3% in 20020066..

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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?

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

and in the EU-15 – from 79% to 73%and in the EU-15 – from 79% to 73%..

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In 1992-2006 GDP per capita as a ratio to the USA In 1992-2006 GDP per capita as a ratio to the USA in the EU-15 fell from 78 to 73%, in the EU-15 fell from 78 to 73%,

but in EU-10 it rose from 30 to 37%but in EU-10 it rose from 30 to 37%..

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Hypothesis 1 –

because of inclusion into the EU of underdeveloped, slow growing economies –

must be rejected.

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Hypothesis 2:

Because of policies pursued in the EU countries?

The key ingredient of policies pursued is size of government.

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Size of Government in the EU-15, the USA and China, Size of Government in the EU-15, the USA and China, 1991−20051991−2005

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Economic Growth in the EU-15Economic Growth in the EU-15, , the USA and China, the USA and China, 1991−2005.1991−2005.

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On average in 1991-2005, size of government in the EU-10 was 17 p.p. smaller than in the EU-15.

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In 1991-2005 economic growth in the EU-10 was almost twice faster than in the EU-15.

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Negative correlation between size of government and Negative correlation between size of government and economic growth is well known.economic growth is well known.

Size of government andSize of government and economic growtheconomic growthinin the EU-25, 1the EU-25, 1999494-200-2005.5.

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

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Deviation in actual size of government from predicted one and Deviation in actual size of government from predicted one and economic growth in 3 groups of the EU countries – the EU-3, economic growth in 3 groups of the EU countries – the EU-3,

the EU-6 and the EU-8the EU-6 and the EU-8, , 1982−20051982−2005

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In 1975-2005 GDP pc as % of the EU-17 has changed: In 1975-2005 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-3 it rose by 52 p.p. – from 79% to 131%,

in the EU-6 remained at the same level – 83%, in the EU-6 remained at the same level – 83%, in the EU-8 it fell by 19 p.p. – from 120% to 101%. in the EU-8 it fell by 19 p.p. – from 120% to 101%.

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Since 1982 GDP pc as % of the USA level has changed: 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-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-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%. in the EU-8 it fell by 8 p.p. – from 84 to 76%.

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Hypothesis 2 –

because of policies pursued in the EU countries (size of government) –

is overwhelmingly supported.

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After some decline from 50% of GDP in 1985 After some decline from 50% of GDP in 1985 to 43,7% in 2000 size of government in the EU-25 to 43,7% in 2000 size of government in the EU-25

is again rising – up to 45,3% in 2005.is again rising – up to 45,3% in 2005.

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Inversed correlation between size of government and Inversed correlation between size of government and economic growth for the EU economies economic growth for the EU economies

is once again confirmed.is once again confirmed.

Economic decline is the price Economic decline is the price

that European countries are paying for that European countries are paying for the excessive size of their governments. the excessive size of their governments.

Continuing increase in size of governmentContinuing increase in size of governmentpresents the most serious challengepresents the most serious challenge

to economic positions of Europe in the world.to economic positions of Europe in the world.