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Prospects for Growth in the Euro Area

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  • Kieran McQuinn
  • Karl Whelan

Abstract

We review the recent performance of the Euro area economy, focusing in detail on the separate roles played by labour input, capital input and total factor productivity (TFP). After a long period of catching up with US levels of labour productivity, Euro area productivity growth has, since the mid-1990s, fallen significantly behind. We show that this recent divergence has accelerated since 2000, and that this is mainly due to the poor rate of Euro area TFP growth. Based on prevailing trends, we estimate that potential output growth in the Euro area currently may be running as low as 1.7 percent per year. In addition, if TFP growth stays at recent levels, the output growth rate will decline further due to weaker capital deepening. To consider future Euro area prospects for growth, we examine a set of alternative scenarios, each of which posits a potential increase in a determinant of output growth. One of these scenarios focuses on the potential effects of greater labour market deregulation. (JEL codes: O10, O47, O52, J11) Copyright , Oxford University Press.

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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 54 (2008)
Issue (Month): 4 (December)
Pages: 642-680

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Handle: RePEc:oup:cesifo:v:54:y:2008:i:4:p:642-680

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  1. Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U. S. and Europe: Why so Different?," Harvard Institute of Economic Research Working Papers 2068, Harvard - Institute of Economic Research.
  2. Guido Schwerdt & Jarkko Turunen, 2007. "Growth In Euro Area Labor Quality," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(4), pages 716-734, December.
  3. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  4. Lawless, Martina, 2006. "Measurement Issues and International Comparisons of Output and Productivity Growth," MPRA Paper 10007, University Library of Munich, Germany.
  5. André Sapir & Philippe Aghion & Giuseppe Bertola & Martin Hellwig & Jean Pisani-Ferry & Bernard Lange & José Viñals & Helen Wallace & Marco Buti & Mario Nava & Peter Smith, 2004. "An agenda for a growing Europe: the Sapir report," ULB Institutional Repository 2013/8070, ULB -- Universite Libre de Bruxelles.
  6. Olivier Blanchard, 2004. "The Economic Future of Europe," NBER Working Papers 10310, National Bureau of Economic Research, Inc.
  7. Edward C. Prescott, 2004. "Why do Americans Work so Much More than Europeans?," NBER Working Papers 10316, National Bureau of Economic Research, Inc.
  8. Alberto Musso & Thomas Westermann, 2005. "Assessing potential output growth in the euro area - a growth accounting perspective," Occasional Paper Series 22, European Central Bank.
  9. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  10. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 217-33, June.
  11. McQuinn, Kieran & Whelan, Karl, 2006. "Conditional Convergence Revisited: Taking Solow Very Seriously," Research Technical Papers 7/RT/06, Central Bank of Ireland.
  12. Angela Maddaloni & Alberto Musso & Philipp Rother & Melanie Ward-Warmedinger & Thomas Westermann, 2006. "Macroeconomic implications of demographic developments in the euro area," Occasional Paper Series 51, European Central Bank.
  13. Lawless, Martina, 2006. "Measurement Issues and Int. Comparisons of Output and Productivity Growth," Quarterly Bulletin Articles, Central Bank of Ireland, pages 108-120, April.
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Cited by:
  1. Karl Whelan, 2009. "Policy Lessons from Ireland’s Latest Depression," Working Papers 200914, School Of Economics, University College Dublin.
  2. Linehan, Suzanne & McQuinn, Kieran, 2008. "A Sectoral Analysis of the Average Work Week in Euro Area Countries," Quarterly Bulletin Articles, Central Bank of Ireland, pages 68-88, October.

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