The Future of Europe

The Future of Europe Alberto Alesina Barcelona May 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 France Germany 1960 70 53 1970 82 56 1980 86 59 1990 82 79 2006 76 71 58 32 Italy Spain 41 27 58 32 72 49 79 58 79 61 70 70 Euro area 42 56 67 71 75 73 Why has the European miracle stopped 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 differences in 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. Germany 2.2 1.7 0.5 - 0.1 0.1 - 0.9 1.4 3.3 France Italy Spain 1.6 2.1 2.6 - 0.4 0.0 - 0.1 - 0.7 - 0.3 - 0.6 3.1 2.5 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. Germany 2.4 1.4 0.2 0.3 - 0.3 - 0.6 2.6 1.8 France Italy Spain 1.9 1.3 4.2 0.6 1.0 4.9 - 0.7 - 0.2 - 0.2 2.1 0.4 - 0.2 Annual hours Worked Over Time Hours worked per person employed per year (1950-2006) 2,400 2,200 us 2,000 italy West Germany Germany France Spain 1,800 1,600 1,400 1,200 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 04 Weekly hours worked per person vs. marginal tax rates 30 Islanda Ore settimanali per persona 20 25 Nuova Zelanda USA Canada Austria Messico Irlanda Regno Unito Grecia Norvegia Rep. Ceca Danimarca Rep. Slovacca Svezia Finlandia Germania Belgio Spagna Portogallo Francia Olanda Italia 15 .3 .4 .5 .6 Tasso marginale di tassazione .7 Annual hours worked per full time employee vs. share of workers covered by collective wage agreements 2200 Media Ore Annuali tra Impiegati Full Time 1400 1600 1800 2000 Giappone Australia USA Nuova Zelanda Spagna Canada Regno Unito Portogallo Finlandia Svizzera Svezia Belgio Austria Francia Germania Norvegia Olanda 20 40 60 80 Copertura da Contrattazione Collettiva 100 Job creation: Europe vs. U.S. US Euro area Germany France Italy Spain 1980-95 total number of jobs (mil.) jobs (annual growth rate) hourly productivity 25,9 1,3 1,4 14,5 0,9 0,3 3,3 0,2 3,1 0,2 2,5 0,2 3,9 1995-06 total number of jobs jobs (annual growth rate) hourly productivity 18,3 1,3 2,6 18,0 1,3 1,4 1,8 1,0 2,1 1,2 0,4 5,1 - 0,2 What can be done? 1. Liberalization of goods and services markets: then it will also be easier to liberalize the labor market Labor Market: less judges, more generalized unemployed protection networks 2. 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 systems per cent of households at risk of poverty before and after social transfers (2003) before before after after Sweden Finland Holland 29 28 22 11 11 12 Germany France Belgium Italy Spain 24 26 29 22 22 16 12 16 19 19 Denmark 32 12 Source: Eurostat Greece U.K. 24 26 21 18 What can be done? 4. University & Research: different rules, more incentives, more competition among universities (the legal recognition of the degree should be abolished) Reduce market entry barriers and the cost of doing business An inefficient civil justice is an entry barrier 5. 6. 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 Argentina 36% 44% Germany Canada 65% 65% Russia Turkey 44% 46% Nigeria UK 65% 67% Brasile Kenya 55% 56% Indonesia India 68% 70% Italy Mexico 59% 59% Korea USA 70% 73% Poland Spain 62% 65% Philippines China 74% 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.