Abstract
Introduction The economic and financial crisis which started in 2008/2009 has thrown the European economy into a '‘double-dip” recession with overall stagnant growth for a lengthy period of time, in terms of significantly slower growth, a decline in employment, and a negative growth rate in total factor productivity (TFP). However, the perils that the crisis inflicted on the European economy can by no means be seen independently from the pre-crisis period. Well before the crisis hit, most European countries exhibited a significant slowdown in their long-term trend growth, driven primarily by slowing productivity growth, especially in the '‘original” EU-15 economies and the Euro Area. The long-term structural weaknesses of Europe’s economy have been well documented in our earlier work (van Ark, O’Mahony, and Timmer 2008; 2012; Timmer et al. 2010). First, a remarkable recovery in employment growth in Europe since the mid-1990s went together with slowing productivity growth. Second, the weak productivity performance could be largely attributed to a low contribution of information and communication technology (ICT) to productivity growth. And third, much of the weakness in productivity growth seemed concentrated in the services sector of the economy, while manufacturing was relatively strong in terms of productivity growth, at least compared to the United States. To better understand how the economic landscape has changed, this chapter revisits our earlier work on the growth drivers of Europe’s economies until the mid-2000s, and places it in the light of the experiences since the beginning of the crisis. Since the onset of the crisis, European economies experienced a drastic decline in employment growth whereas productivity growth showed no signs of recovery. Clearly a significant part of the employment slowdown and the rise in unemployment related to cyclical factors. However, beyond some short-lived pro-cyclical improvements in 2010, there have been virtually no signs of a significant recovery in productivity growth, especially not in TFP. This suggests that medium-term factors remain predominant in explaining the productivity slowdown. The emergence of negative TFP growth rates across countries and sectors points to the possibility of a long-term (or '‘secular’') stagnation due to a persistent shortfall in demand and an erosion of supply side factors as established by the long-term slowdown of potential output growth (Teulings and Baldwin 2014).
| Original language | English |
|---|---|
| Title of host publication | The World Economy |
| Subtitle of host publication | Growth or Stagnation? |
| Publisher | Cambridge University Press |
| Pages | 111-152 |
| Number of pages | 42 |
| ISBN (Electronic) | 9781316534502 |
| ISBN (Print) | 9781107143340 |
| DOIs | |
| Publication status | Published - 1 Jan 2016 |
