europe in the world economy oct 25th 2012 wilton park

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

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


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


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 +

GDP = GDP

L15-64 L15–64 =

L15-64 L15-64

Ld

Ld GDP


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


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


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.


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


-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




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

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



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


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


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


Ireland

Greece/ Germany


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




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


General government debt Source: Eurostat and BBVA Research

0

50

100

150

200

250

20003 20014 20031 20042 20053 20064 20081 20092 20103 20114



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%)


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


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


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


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


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)

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



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



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


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


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

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

europe in the world economy oct 25th 2012 wilton park

Economy & Finance

growth strategy

recovery strategy

europe eu15

heterogeneous europe

average growth

world gdp

capita growth

agegdp growth