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Prospects for Growth in the Euro Area

  • McQuinn, Kieran

    (Central Bank and Financial Services Authority of Ireland)

  • Whelan, Karl

    (Central Bank and Financial Services Authority of Ireland)

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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Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 12/RT/06.

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Length: 45 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:cbi:wpaper:12/rt/06
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  1. 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.
  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.
  3. 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.
  4. Sapir, Andre & Aghion, Philippe & Bertola, Giuseppe & Hellwig, Martin & Pisani-Ferry, Jean & Rosati, Dariusz & Vinals, Jose & Wallace, Helen, 2004. "An Agenda for a Growing Europe: The Sapir Report," OUP Catalogue, Oxford University Press, number 9780199271498.
  5. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  6. McQuinn, Kieran & Whelan, Karl, 2006. "Conditional Convergence Revisited: Taking Solow Very Seriously," Research Technical Papers 7/RT/06, Central Bank of Ireland.
  7. Olivier Blanchard, 2004. "The Economic Future of Europe," NBER Working Papers 10310, National Bureau of Economic Research, Inc.
  8. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  9. Alberto Musso & Thomas Westermann, 2005. "Assessing potential output growth in the euro area - a growth accounting perspective," Occasional Paper Series 22, European Central Bank.
  10. Edward C. Prescott, 2004. "Why Do Americans Work So Much More Than Europeans?," Levine's Bibliography 122247000000000413, UCLA Department of Economics.
  11. 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.
  12. Lawless, Martina, 2006. "Measurement Issues and Int. Comparisons of Output and Productivity Growth," Quarterly Bulletin Articles, Central Bank of Ireland, pages 108-120, April.
  13. Lawless, Martina, 2006. "Measurement Issues and International Comparisons of Output and Productivity Growth," MPRA Paper 10007, University Library of Munich, Germany.
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