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Growth Prospects in the EU: Inside or Outside the euro area?. Thorvaldur Gylfason Tenth Anniversary Conference of the Viessmann European Research Centre, Wilfrid Laurier University on Challenges for the European Union Beyond 2011 Waterloo, Ontario, Canada October 5, 2011.

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Growth Prospects in the EU: Inside or Outside the euro area?

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Growth prospects in the eu inside or outside the euro area

Growth Prospects in the EU: Inside or Outside the euro area?

Thorvaldur Gylfason

Tenth Anniversary Conference of the Viessmann European Research Centre, Wilfrid Laurier University

on Challenges for the European Union Beyond 2011

Waterloo, Ontario, Canada

October 5, 2011


Outline three main points

Outline: three main points

  • Small can be beautiful

    • A banking lesson from Barbados

  • Confluence of regulation and stabilization: Canada, US, and Europe

    • Reduced volatility – stabilization with regulation! – does not hurt growth

  • Synchronization of periphery and core in Europe, and some convergence

    • From synchronization to growth

    • Lessons for Canada?


Stabilization worked or what

Stabilization worked, or what?

Change in Canada’s per capita GDP from year to year 1871-2003 (%)

Perhaps bank regulation during and after Great Depression also helped stabilize GDP

Canada had no major bank failures during Great Depression, and did not establish its Deposit Insurance Corporation until 1967

Source: Maddison (2003).


Canada

canada

How about the U.S. next door?

  • Standard deviation of per capita GDP fell from 6.6% 1871-1945 to 2.3% 1947-2003

    • Yet per capita GDP growth remained virtually the same (2.1% vs. 2.2%)

  • In postwar period, active stabilization was the norm plus careful federal rather than decentralized financial supervision

  • Canada’s banks are universal, offering both commercial and investment banking services

    • Even so, recent financial crisis passed Canada by

    • Firewalls between commercial banking and investment banking were not in place in Canada


Stabilization worked or what1

Stabilization worked, or what?

Change in US per capita GDP from year to year 1871-2003 (%)

Perhaps bank regulation during and after Great Depression also helped stabilize GDP

Roosevelt-era firewalls between commercial banking and investment banking (Glass-Steagall Act 1933)

Source: Maddison (2003).


United states

From 1980s on, banks again became trouble makers, beginning with the S&L crisis 1982-87

United states

  • Standard deviation of per capita GDP fell from 6.4% 1871-1945 to 2.4% 1947-2003

    • Yet per capita GDP growth remained virtually the same (2.3% vs. 2.1%)

  • From the 1960s onward, active stabilization was the norm, as was federal as well as local financial supervision from 1933 until 1980s

  • Automatic stabilizers helped

    • From 1870 to 1914, federal expenditures decreased from 5% of GDP to 2%, rising back to 5% by 1929

    • From 1945 to date, federal expenditures doubled from 10% of GDP to 20%


That s the spirit paul volcker on us banks

That’s the spirit:Paul Volcker on us banks

  • Paul Volcker, Chairman of the Fed 1979-87, said 8 December 2009 at a conference organized by the Wall Street Journal:

    • “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth – one shred of evidence.”

  • He added that in the US the share of financial services in value added had risen from 2% to 6.5%, and then asked:

    • “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”


Stabilization worked or what2

Stabilization worked, or what?

Europe: Same story

Change in German per capita GDP from year to year 1851-2003 (%)

Stefan Zweig (1942)

Die Welt von Gestern

Perhaps bank regulation during Great Depression also helped stabilize GDP

Regulation came easily to Europe, as did macroeconomic stabilization


Europe vs north america per capita gni 1980 2009 usd ppp

Europe vs. north america:Per capita GNI 1980-2009 (USD, PPP)

More recent trends

From 88% in 1980

to 82% in 2009

Greece: From 95% in 1980 to 85% in 2009

European periphery vs. core

Canada vs. US


Europe vs north america per capita gni 1980 2009 usd ppp1

Europe vs. north america:Per capita GNI 1980-2009 (USD, PPP)

From 88% in 1980

to 82% in 2009

European periphery vs. core

Canada vs. US


Europe vs north america per capita gni 1980 2009 usd ppp2

Europe vs. north america:Per capita GNI 1980-2009 (USD, PPP)

From 88% in 1980

to 82% in 2009

European periphery vs. core

Canada vs. US


Europe vs north america per capita gni 1980 2009 usd ppp3

Europe vs. north america:Per capita GNI 1980-2009 (USD, PPP)

From 88% in 1980

to 82% in 2009

European periphery vs. core

Canada vs. US

More convergence in Europe than in North America


Synchronization between periphery and core i

Synchronization between periphery and core I

Another type of convergence

Source: Computations based on World Development Indicators 2011.

Peripheral countries adopted the euro hoping for synchronization

Even Iceland adjusted, without the euro

Meanwhile, growth correlation between

Canada and US decreased from 0,73 to 0,66


Synchronization between periphery and core ii

Synchronization between periphery and core II

Source: Computations based on World Development Indicators 2011.

Fore more, see Bjarnason (2010),

The Political Economy of Joining the European Union: Iceland’s Position at the Beginning of the 21st Century

Synchronization in Greece came with the euro

Meanwhile, growth correlation between

Canada and US decreased from 0,74 to 0,69


Growth prospects in the eu inside or outside the euro area

conclusion

So, there is more to life than exchange rates

The euro is not solely an economic project

  • Since 2000, Greece, Iceland, Ireland, and Portugal have grown more in sync with the euro area, as was hoped and intended

    • Ireland caught up, Portugal converged, Greece lagged behind, Iceland converged from above

  • In Canada, no such synchronization

    • Meanwhile, though, Canada lagged behind US

      • But Canadians live 2,5 years longer, up from 1,5 years in 1980, and, with their European-like Gini index, share their national income more equally

  • Flexible exchange rates do not clearly set Canada apart from Europe’s periphery

    • Sweden vs. Finland: Same story


Growth prospects in the eu inside or outside the euro area

conclusion

In Greece, the cost of starting up a business is 50 times higher than in Canada

  • Since 2000, Greece, Iceland, Ireland, and Portugal have grown more in sync with the euro area, as was hoped and intended

    • Ireland caught up, Portugal converged, Greece lagged behind, Iceland converged from above

  • In Canada, no such synchronization

    • Meanwhile, though, Canada lagged behind US

      • But Canadians live 2,5 years longer, up from 1,5 years in 1980, and, with their European-like Gini index, share their national income more equally

  • So, flexible exchange rates do not clearly set Canada apart from Europe’s periphery

    • Same applies to Sweden vs. Finland


Growth prospects in the eu inside or outside the euro area

conclusion

In the euro area, the cost of starting up a business is 15 times higher than in Canada

  • Since 2000, Greece, Iceland, Ireland, and Portugal have grown more in sync with the euro area, as was hoped and intended

    • Ireland caught up, Portugal converged, Greece lagged behind, Iceland converged from above

  • In Canada, no such synchronization

    • Meanwhile, though, Canada lagged behind US

      • But Canadians live 2,5 years longer, up from 1,5 years in 1980, and, with their European-like Gini index, share their national income more equally

  • So, flexible exchange rates do not clearly set Canada apart from Europe’s periphery

    • Same applies to Sweden vs. Finland


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