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CESifo Economic Studies Advance Access originally published online on July 26, 2008
CESifo Economic Studies 2008 54(4):642-680; doi:10.1093/cesifo/ifn024
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© The Author 2008. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Prospects for Growth in the Euro Area

Kieran McQuinn* and Karl Whelan{dagger}

* Central Bank and Financial Services Authority of Ireland, Email: kmcquinn{at}centralbank.ie
{dagger} Central Bank and Financial Services Authority of Ireland, Email: karl.whelan{at}centralbank.ie.

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)

Key Words: Euro area • growth • total factor productivity

The views expressed in this paper are our own, and do not necessarily reflect the views of the Central Bank and Financial Servies Authority of Ireland or the ESCB.


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