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.