Rediscovering Growth by Sentance Andrew;

Author:Sentance, Andrew;
Language: eng
Format: epub
Publisher: London Publishing Partnership
Published: 2013-12-10T00:00:00+00:00

Figure 4.5. Southern Europe: mixed fortunes. Source: IMF.

There appear to be three main problems affecting the economic prospects of these southern European economies. First, with the exception of Spain, they appear to have poor growth fundamentals. Greece, Italy and Portugal have not increased their GDP over more than a decade since 2000, a worse performance than Japan’s lost decade in the 1990s and early 2000s. In all three countries, GDP per head in 2013 was lower in real terms than in 2000, and in the case of Italy the decline has been over 6%. Second, the unwinding of boom–bust cycles in Spain and Greece has created the need for financial write-offs. In the case of Greece, this has involved a write-down of government debt; in Spain, there is a need to recognize large losses within the banks, particularly in relation to their property lending. Third, all four countries need to achieve a more sustainable position for their public finances, which requires a prolonged period in which government spending is constrained and/or taxes rise.

It is likely to be a long haul while these adjustments take place. And a successful transition to more growth-friendly policies in Greece, Italy, Portugal and Spain will require a high degree of political commitment over a period of five to ten years, not dissimilar from the transition which the UK economy made under Margaret Thatcher in the 1980s. It remains to be seen whether this can be achieved, particularly in Greece and Italy, where there is a long tradition of political instability.

Northern Europe: Grounds for optimism

By contrast with southern Europe, the economies of northern and central Europe look better placed to achieve a recovery in growth in the New Normal world. There are three main reasons for being more optimistic about their prospects. First, Germany, Scandinavia and a number of other northern European economies have strong and competitive export-­oriented industrial sectors which have been successful engines of economic growth for many decades. This success is built on developing strong positions in industries where technology and skills support high value added per person employed. Though the United Kingdom is very successful in some key sectors – like aerospace, pharmaceuticals and high-value-added engineering – it does not have such a broad manufacturing base as some other northern European economies. Manufacturing accounts for just over 10% of GDP in the British economy compared with over 20% in Germany, 19% in Austria and Finland and 16% in Sweden. However, the United Kingdom is a very successful exporter of services, second behind the United States in the value of services exports, and the largest exporter of services among the major economies on a per capita basis.23

Second, over the last three decades, most countries in northern Europe have undertaken labour market reforms aimed at increasing the flexibility of their economies. These reforms have encouraged the growth of service sector jobs and flexible employment patterns. They have also involved the use of so-called active labour market policies, which are government programmes targeted at raising the skill levels and employment prospects of disadvantaged groups in the labour force.

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