Tuesday, July 27, 2004

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So how's European integration going?

The OECD just released its economic survey of the Euro area for 2004. Here's the first bullet point fromthe executive summary:

Income per capita is lower in the euro area than in the best performing OECD countries and the gap is widening. Moreover, although the epicentre of many of the adverse shocks that prompted the global downturn since 2001 was in the United States, slack has been more persistent in the euro area. Key challenges are to reduce the persistent underutilisation of labour resources, to boost productivity growth and to bolster the area’s resilience against shocks.

In the Financial Times, Scheherazade Daneshkhu has more. :

Membership of a single currency has failed to inject dynamism into the economies of the eurozone or to raise their long-term growth rate, the Organisation for Economic Co-operation and Development said on Tuesday.

In its most critical report on the eurozone's economic performance, the Paris-based body said the first five years of European monetary union had been "more challenging than expected".

The eurozone had been "disappointing" in its lack of resilience to shocks, and its income gap against the OECD's best-performing countries remained large and widening. The differences between individual euro-area countries was even more striking, the OECD said.

Laurence Boone, one of the report's authors, said: "There's a huge potential for the euro area to gain from economic integration but not enough has been done to reap the benefits."

....Labour mobility was low and unemployment "stubbornly high". But the structural reforms needed to move the euro economy closer to the ambitious targets set at the Lisbon summit in 2000 had been "hesitant and piecemeal".

The need for reforms to boost non-inflationary growth and strengthen the public finances in the face of ageing populations had gained urgency with the accession of the 10 new members this year.

The OECD lamented the failure by countries to take advantage of the last economic upswing to improve their budgets. "Countries should avoid past fiscal mistakes by rooting their budgets in medium-term frameworks," the OECD advised. "More ambition in consolidating budgets is needed, independent of the fiscal rules enshrined in the Maastricht Treaty and the Stability and Growth Pact."

For those who believe this is me gloating about European stagnation, it's not. Sclerotic European growth reduced demand for U.S. exports, which widens the trade deficit, which increases protectionist sentiments in the United States (although protectionist sentiment in the EU is all too alive and well). I'm much rather see the Euro area growing like gangbusters.

[Well, yeah, but the Europeans have a higher quality of life than Americans, right?--ed. Not according to the latest UN Human Development Indicators, which incorporates health and education measures along with per capita income (link via the Economist). The United States ranks eighth; the average rank of the Euro 15 countries is 14, and eyeballing where the countries are, that looks like what their weighted average would be as well.]

posted by Dan on 07.27.04 at 04:59 PM


Maybe it's the way Dan clipped the FT piece, but the FT piece is being sloppy about the EU versus Eurozone distinction. The issues of Lisbon, accession etc are EU issues, not Eurozone issues. The EU has a much wider range of growth experiences than the Eurozone does because of the excellent UK performance and the good growth potential of the eastern periphery.

posted by: P O'Neill on 07.27.04 at 04:59 PM [permalink]

That UN data Dan links to looks screwy to me. Ireland has a higher GDP per capita than the United States ($36,360 to $35,750)??? Doubtful!

posted by: Al on 07.27.04 at 04:59 PM [permalink]

Isn't Scheherazade Daneshkhu a great name, though? And she has even been accorded a Chinese version.

posted by: pekingdork on 07.27.04 at 04:59 PM [permalink]

Al -- yes, the Ireland data should not be presented like that. The method of calculation is OK, but Irish GDP contains a huge chunk of profit repatriation by multinationals. Lower the figure by 20% to get something that can be compared to other countries.

posted by: P O'Neill on 07.27.04 at 04:59 PM [permalink]

The CIA World Fact Book puts Ireland's per capita GDP for 2003 at just under $30k - see http://www.cia.gov/cia/publications/factbook/geos/ei.html.

With all these numbers I always wonder how variations in the exchange rates (e.g. Euro/$) are factored in. Given how close the HDI values of the top 15 countries are, you could probably cook up some funny statistics simply based on exchange rate fluctuations.

Also, Dan, don't you think your statement "the average rank of the Euro 15 countries is 14" is close to meaningless? First, there are only 12 Euro countries. Second, which average rank would you expect 15 countries to have? The highest they could possibly get is 7.5 - and that would assume that the rest of the World is worse off than they are!

Finally, since the Euro hold-outs are countries that thought they could do well without the other countries it's unfair to now compare them without looking at whether they improved relative to the others (or not) since their decision not to join the Euro.

I'm just observing these things - not trying to make any particular point. :-)

posted by: gw on 07.27.04 at 04:59 PM [permalink]

gw - the dollar was stronger in 2002 (the year used in the UN's analysis) than in 2003, when the CIA has GDP/capita at under $30k. And other countries don't seem to be affected. In any event, I thought Purchasing Power Parity (PPP - or whatever the acronym is) was supposed to eliminate that problem.

Something just looks mighty odd.

posted by: Al on 07.27.04 at 04:59 PM [permalink]

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