Growing Pains: Europe’s Dilemma

by Bas Bakker

iMDdirect
October 21, 2011

As the crisis in Europe deepens, it is worth asking how it all went wrong in the first place. In the past decade there have been stark differences in per capita GDP growth in Europe. Growth rates have ranged from close to zero in Italy and Portugal to more than 4 percent in the best performers. Why do some countries in Europe grow much faster than others? And how can those falling behind catch up before it is too late?

In part, these differences reflect “convergence”. It is much easier for poor countries to grow faster than it is for rich countries because they can import technology they do not already have. It is much more difficult to grow fast if you are already rich and at the technology frontier—now you can only get richer by innovation.

But convergence is only part of the story. Some countries have grown much slower than what could be expected given how rich―or poor―they are, while others have grown much faster. For instance, Italy and Portugal have grown slower than expected, while the Slovak Republic and Sweden have grown faster.

Integration into the global economy matters

What explains these differences? Both macroeconomic policies and barriers to growth.

Heavily regulated goods and labor markets and inadequate institutions and macroeconomic policies have kept some countries less flexible, less competitive, and less integrated into the global economy than their better-performing peers.

Indeed, it is striking that better performing countries are much more integrated in the world economy than are poor performers. Strong performers enjoyed high and increasing levels of trade, both in exports and in imports, while many of the poor performers have lower and stagnating levels.

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