Europe's Productivity Slowdown Revisited. A Comparative Perspective to the United States
Bart van Ark
Following almost a decade of what now seems like fairly solid economic growth, the economic and financial crisis of 2008-9 has thrown the EU into two recessions (2008-9 and 2011-12) of decline and potentially a longer period of stagnation. Average output growth has been significantly slower than before the crisis, caused by a decline in employment, and a serious slowing in the growth rate of total factor productivity (TFP). However, the post-crisis stagnation can by no means be seen independently from the pre-crisis period. As documented in earlier work, most European countries exhibited a significant slowdown in their long-term productivity trend, especially in the 'original' (pre-2004 membership) EU15 economies and the Eurozone (Van Ark, O'Mahony, andTimmer, 2008, 2012;Timmer etal., 2010).
The growth shortfall of Europe is visible at the most aggregate level of gross domestic product (GDP) for the entire economy. In 1980 the level of GDP of what constitutes the EU28 today was still 45 per cent above that of the United States (US) (Figure 1.1). The gap gradually narrowed to about 10 per cent just before the 2008-9 crisis, and was only 6 per cent above the US level in 2014. GDP performance for the Eurozone was even weaker relative to the US. In the early 1980s the level of GDP in the Eurozone wasroughly the sameasinthe US, but wasabout 20 percentlower than the US level by the mid-2000s, and 75 per cent of the US level in 2014.
Figure 1.1. Level of GDP, in trillion 2014 US$ (PPP-converted), 1980-2014
Note: GDP is converted at 2011 PPPs from the International Comparisons Project (World Bank), with GDP rebased to 2014.
Source: The Conference Board Total Economy Database, May 2015
Before the mid-1990s, the weaker GDP performance in Europe was primarily the result of much weaker employment growth. In fact, until about 1995, productivity in Europe still caught up with the US. Between 1995 and the start of the 2008-9 crisis, as the growth gap between Europe and the US widened further, the main culprit was not employment but weaker productivity performance, especially in the Eurozone (Figure 1.2). Since the onset of the crisis, the American and European economies experienced a drastic decline in both employment and productivity growth, but the US held up better than Europe. The initial collapse in employment, the rise in unemployment, and the slowdown in productivity were in part related to cyclical factors. However, beyond some short-lived procyclical improvements in 2010, there have been virtually no signs of a significant recovery in European productivity growth.
The sluggish recovery in productivity suggests that medium-term factors are still predominant in explaining the productivity slowdown. The emergence of negative TFP growth rates across countries, as documented in this chapter, points at the possibility of a long-term (or 'secular') stagnation due to a persistent shortfall in demand and an erosion of supply-side factors as established by the long-term slowdown
Figure 1.2. Growth contributions of employment, hours per worker, and output per hour to GDP, in log growth
Source: The Conference Board Total Economy Database, May 2015
of potential output growth (Teulings and Baldwin, 2014). However, it is also possible that there is a lull in the emergence of productive technology applications or that the negative productivity impact of the regulatory environment is playing a larger role than before the crisis. These factors significantly impact on the timing and speed of the productivity recovery.
Section 1.2 of this chapter looks in greater detail at the most recent evidence of the sources of growth in Europe from a growth accounting perspective, updating our earlier work from Van Ark, O'Mahony, Timmer (2008, 2012) and Timmer etal. (2010). A comparison with the US shows that, between 1999 and 2007, the GDP growth shortfall of Europe, and especially the Eurozone relative to the US, was largely driven by slower growth in information and communication technology (ICT) investment and weaker TFP growth. In contrast, average employment growth was slightly faster in Europe than in the US from
1999 to 2007. Since the crisis hit, both employment and TFP growth in the EU28 as a whole were more strongly impacted than in the US, even though the growth contribution of ICT capital dropped off more in the US. Overall, the growth differential between Europe and the US increased substantially between 2008 and 2014, although the patterns differed widely between countries.
Section 1.3 zooms in on one key asset to drive productivity, which is ICT. It shows that production, investment and use of ICT in Europe grew much slower than in the US before the crisis. The growth contribution from the ICT-producing sector weakened considerably in European economies, while it remained relatively strong in the US. However, beyond ICT production, the contribution of ICT capital services to growth in Europe declined only moderately since the crisis. In contrast, TFP growth emerging from ICT utilization has declined in Europe since 2008 at a much faster rate than in the US. The discussion suggests that weaker network effects from ICT are a key explanation for the overall slowdown in TFP growth.
Section 1.4 broadens our perspective on the knowledge economy by discussing how the shift from investments in tangible assets (machinery, equipment, and structures) to intangible assets (software, databases, research and developments, other innovative property, marketing and branding, and organizational improvements) has proceeded since the crisis. The latter have become a more important source of growth in the past decades also in Europe (Corrado etal., 2013). While investment in human capital and intangible assets have held up much better than other growth sources since the recession, the intensity level of intangible assets is still much lower across Europe than in the US. Evidence of a strong correlation between intangible assets investment and TFP growth and the possibility of TFP spillovers from intangible investments is beginning to emerge more clearly in the literature. Intangible investment could become a key driver to the recovery of productivity, providing an important catalyst for Europe's future growth.
Section 1.5 draws some conclusions about avenues that Europe could explore in order to revive long-term productivity growth. The implementation of structural policy measures, ranging from more investment in hard and soft infrastructure to smarter regulation, more innovation, and greater room for entrepreneurship, will hugely matter in improving structural conditions. There are also lessons to be learned from more and less successful growth strategies within Europe, as documented in the various country-specific chapters in this volume. In addition to policy actions which support the creation of knowledge and investments in intangible assets, there is a strong need to generate productivity-enhancing scale effects from a larger single market in services to strengthen Europe's future growth performance.
-  See Van Ark and O'Mahony (2016) for more details on human capital investment.