The Future of Europe
Alberto Alesina BarcelonaMay 2008
Acknowledgments Much of the material is from “The
Future of Europe: Reform or Decline” Alberto Alesina and Francesco Giavazzi MIT Press 2006, Spanish Translation forthcoming, Antoni Bosch
Since the late 1980’s Europe is loosing ground
Income per person relative to the U.S.
1950 1960 1970 1980 1990 2006
France 58 70 82 86 82 76
Germany
32 53 56 59 79 71
Italy 41 58 72 79 79 70
Spain 27 32 49 58 61 70
Euro area
42 56 67 71 75 73
Why has the European miraclestopped sometime in the 1980’s
Policies the answer to social demands of the 1960’s. Effects
on Meritocracy Inflation Public Finance
industrial policy to help incumbents: firms, workers. New firms, consumers never entered the picture
Technology an economy able to imitate but not to innovate (like
Japan)
What explains differencesin income per person?
Differences in:
fraction of the population employed
hours worked per person employed
hourly productivity
Decomposing the growth rate of income per person
(growth rates, 1980-95)
income per person
employment rate
hours worked per employee
hourly productivity
U.S. 2.2 0.5 0.1 1.4Germany
1.7 - 0.1 - 0.9 3.3
France 1.6 - 0.4 - 0.7 3.1
Italy 2.1 0.0 - 0.3 2.5Spain 2.6 - 0.1 - 0.6 3.9
Decomposing the growth rate of income per person
(growth rates, 1995-2006)
income per person
employment rate
hours worked per employed
hourly productivity
U.S. 2.4 0.2 - 0.3 2.6Germany
1.4 0.3 - 0.6 1.8
France 1.9 0.6 - 0.7 2.1
Italy 1.3 1.0 - 0.2 0.4Spain 4.2 4.9 - 0.2 - 0.2
Annual hours Worked Over TimeHours worked per person employed per year (1950-2006)
1,200
1,400
1,600
1,800
2,000
2,200
2,400
usitalyWest GermanyGermanyFranceSpain
Weekly hours worked per person vs. marginal tax rates
Austria
Belgio
Canada
Rep. Ceca
Danimarca
Finlandia
FranciaGermania
Grecia
Islanda
Irlanda
Italia
Messico
Olanda
Nuova Zelanda
Norvegia
Portogallo
Rep. Slovacca
Spagna
Svezia
Regno Unito
USA
1520
2530
Ore
set
timan
ali p
er p
erso
na
.3 .4 .5 .6 .7Tasso marginale di tassazione
Annual hours worked per full time employee vs. share of workers covered by collective wage agreements
Australia
AustriaBelgio
CanadaFinlandia
Francia
Germania
Giappone
Olanda
Nuova Zelanda
Norvegia
Portogallo
Spagna
SveziaSvizzera
Regno Unito
USA
1400
1600
1800
2000
2200
Med
ia O
re A
nnua
li tra
Impi
egat
i Ful
l Tim
e
20 40 60 80 100Copertura da Contrattazione Collettiva
Job creation: Europe vs. U.S.
US Euro area
Germany
France Italy Spain
1980-95total number of jobs (mil.)
25,9 14,5
jobs (annual growth rate)
1,3 0,9 0,3 0,2 0,2 0,2
hourly productivity 1,4 3,3 3,1 2,5 3,91995-06total number of jobs 18,3 18,0jobs (annual growth rate)
1,3 1,3 1,4 1,0 1,2 5,1
hourly productivity 2,6 1,8 2,1 0,4 - 0,2
What can be done?
1. Liberalization of goods and services markets: then it will also be easier to liberalize the labor market
2. Labor Market: less judges, more generalized unemployed protection networks
The lack of competition affects the labor market
Source: Giuseppe Nicoletti et al, OCSE, 1999.
What can be done?
3. Welfare: taking from someone and giving to others (often to the same ones) is often a waste and it does not reduce inequalities and poverty: you’d better tax people less
Expensive but ineffective welfare systemsper cent of households at risk of poverty before and after social transfers
(2003)
before
after
Sweden 29 11Finland 28 11Holland 22 12
Denmark 32 12
before after
Germany
24 16
France 26 12Belgium 29 16
Italy 22 19Spain 22 19
Greece 24 21U.K. 26 18
Source: Eurostat
What can be done?
4. University & Research: different rules, more incentives, more competition among universities (the legal recognition of the degree should be abolished)
5. Reduce market entry barriers and the cost of doing business
6. An inefficient civil justice is an entry barrier
Could the EU be a solution?
The EU has two “souls”:
a pro market one (single market polices, protection of competition, harmonization of rules of commerce)
a dirigiste one: “Lisbon agenda”, harmonization of social policies, imposition of common social goals to all member countries
Could the EU be a solution?
Single market, competition, euro: YES
Rhetoric of coordination, social policies harmonization, Lisbon agenda: NO
So what should the EU do?
Do relatively little but do it well: single market, competition, encourage structural reforms
Stay out of areas where differences of opinions amongst members are much more important than the benefits of coordination
Are European anti-market? Yes !Would you agree with a market economy?
(results of a survey by the University of Maryland)
France 36% Germany 65%
Argentina 44% Canada 65%
Russia 44% Nigeria 65%
Turkey 46% UK 67%
Brasile 55% Indonesia 68%
Kenya 56% India 70%
Italy 59% Korea 70%
Mexico 59% USA 73%
Poland 62% Philippines 74%
Spain 65% China 75%
Why ?
Incorrect perception that any market oriented reform generate injustice, and inequality
This is wrong. Often in justice and inequalty are created by distoretd socila and wlefare polcies
Current Events Major Credit crunch avoided The new seventies? Oil, wages and monetary polciy
Risks Anti market sentiments on the rise. Protectionism in US? Protectionism in Europe? Inflation on the rise: ECB in a bind Adjustment in Portugal Italy and
Spain, strain on EMU.
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