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Prospects for Growth in the Euro Area

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Author Info
McQuinn, Kieran (Central Bank and Financial Services Authority of Ireland)
Whelan, Karl (Central Bank and Financial Services Authority of Ireland)

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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 1.5 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.

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Publisher Info
Paper provided by Central Bank & Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers with number 12/RT/06.

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Length: 45 pages
Date of creation: Nov 2006
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Handle: RePEc:cbi:wpaper:12/rt/06

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Find related papers by JEL classification:
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe

References listed on IDEAS
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  1. Guido Schwerdt & Jarkko Turunen, 2006. "Growth in euro area labour quality," Working Paper Series 575, European Central Bank. [Downloadable!]
    Other versions:
  2. Alberto Alesina & Edward L. Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U.S. and Europe: Why So Different?," NBER Working Papers 11278, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  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. [Downloadable!] (restricted)
    Other versions:
  4. Lawless, Martina, 2006. "Measurement Issues and International Comparisons of Output and Productivity Growth," MPRA Paper 10007, University Library of Munich, Germany. [Downloadable!]
  5. Olivier Blanchard, 2004. "The Economic Future of Europe," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 3-26, Fall. [Downloadable!] (restricted)
    Other versions:
  6. McQuinn, Kieran & Whelan, Karl, 2006. "Conditional Convergence Revisited: Taking Solow Very Seriously," Research Technical Papers 7/RT/06, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
  7. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, Blackwell Publishing, vol. 48(2), pages 217-33, June. [Downloadable!] (restricted)
  8. Edward C. Prescott, 2003. "Why do Americans work so much more than Europeans?," Staff Report 321, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  9. 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. [Downloadable!]
  10. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
  11. Alberto Musso & Thomas Westermann, 2005. "Assessing potential output growth in the euro area - a growth accounting perspective," Occasional Paper Series 22, European Central Bank. [Downloadable!]
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