Prospects for Growth in the Euro Area

Posted: 2 Dec 2008

See all articles by Kieran McQuinn

Kieran McQuinn

Central Bank and Financial Services Authority of Ireland

Karl Whelan

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Date Written: December 2008

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)

Keywords: Euro area, growth, total factor productivity

Suggested Citation

McQuinn, Kieran and Whelan, Karl, Prospects for Growth in the Euro Area (December 2008). CESifo Economic Studies, Vol. 54, Issue 4, pp. 642-680, 2008, Available at SSRN: https://ssrn.com/abstract=1308365 or http://dx.doi.org/ifn024

Kieran McQuinn (Contact Author)

Central Bank and Financial Services Authority of Ireland ( email )

P.O. 559 Dame Street
Dublin 2, D2
Ireland

Karl Whelan

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

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