EU economic growth outrunning US

[St Disibod]

Following on from this thread on the Lisbon Agenda, it appears that the EU productivity rate improved more than the US’ last year for the first time this decade (Financial Times story here).

Output per hour worked rose 1.5 per cent in 2006 across the 27 European Union member states, compared with an improvement of 1.4 per cent in the US.
However, the improved European average masked strong performances by Germany and both Nordic and eastern European countries, which contrasted with serious weakness in Spain, Italy and Portugal.

A good showing by the performers, but surely we now need to scrutinise the efforts of those lagging behind. Spain and Portugal benefit immensely from EU funds and yet have little to show for it when measured against Ireland. They’re fighting tooth and nail to prevent their funding being spread across the poorer Eastern countries, but if they’re only going to eat up the money without ever expecting to become net-contributers surely we’d be better to send our money across the Elbe where the 12 new member states clocked up a 4.1 per cent growth rate.

As well as certain countries shuffling their feet there is a second problem, we’re still way behind the growth rates we’re supposed to be challenging. China’s productivity rose 9.5 per cent in 2006, and India’s 6.9 per cent. The Lisbon strategy sought to “make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world.” How are we meant to hit the target if it is moving faster than our bullets?

Of course the growth rates of the Chinese dragon and the Indian tiger may be completely out of reach for Europe barring some sort of unexpected technological revolution. Many of the countries in most dire need of reform have to choose between shaving percentages off the public budget or increasing public sector efficiency, or both- and these are notoriously difficult operations in a working democracy. Technocratic China simply does not have to concern itself with obstructive public and civil servants; and one would be foolish to think that India is all sweetness and light. The caste system used by Hindus amounts to a slave-based economy in parts of the country. But that does not excuse the fact that Europe is attempting a long distance journey in first gear and then wondering why others are passing it out even though Europe is using more fuel- apologies, my mind must be in metaphorical mode (hmmm, and alliterative mode- my history-essay-sense must be tingling).

So, how do we go about getting into second gear? I for one would suggest that tying EU contributions to improved productivity would provide a much needed kick. Though open to the charge of leaving the most needy out, it’s Europe so no one is going to starve.

[Thewarrior007]

Good lets hope it keeps up.Whos in favour of O,N,E One>Nation<Europe?

[ibis]

Spain and Portugal benefit immensely from EU funds and yet have little to show for it when measured against Ireland. They’re fighting tooth and nail to prevent their funding being spread across the poorer Eastern countries, but if they’re only going to eat up the money without ever expecting to become net-contributers surely we’d be better to send our money across the Elbe where the 12 new member states clocked up a 4.1 per cent growth rate.

By which measure our own funding would have been withdrawn in the 80's.

As well as certain countries shuffling their feet there is a second problem, we’re still way behind the growth rates we’re supposed to be challenging. China’s productivity rose 9.5 per cent in 2006, and India’s 6.9 per cent. The Lisbon strategy sought to “make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world.” How are we meant to hit the target if it is moving faster than our bullets?

That doesn't really compare like with like. China, India, and the new accession countries are growing from very low bases, whereas the EU contains the oldest 'modern' economies in the world.

So, how do we go about getting into second gear? I for one would suggest that tying EU contributions to improved productivity would provide a much needed kick. Though open to the charge of leaving the most needy out, it’s Europe so no one is going to starve.

Now if only we could predict how everyone's economies will do in the longer term, just to be sure that we're not withdrawing the funding just before the next Celtic Tiger takes off....

[St Disibod]

Whos in favour of O,N,E One>Nation<Europe?

Well if you're referring to a single European state, I'm not and it's way off topic.

If you're arguing that European citizens constitute a national group, it is an interesting debate but one that has failed to convince me. Still though, way off topic.

By which measure our own funding would have been withdrawn in the 80's. [...] Now if only we could predict how everyone's economies will do in the longer term, just to be sure that we're not withdrawing the funding just before the next Celtic Tiger takes off....

But looking back on the whole experience we did not get our act together until the IMF came hammering at the door with a very scary warrant. Had the EU (or its then equivalent) threatened us earlier we could well be a few additional years down the successful track by now. Regardless, Ireland enjoyed several years of continued and healthy growth before the Celtic Tiger was christened- we had to set the course before we were putting the resources to good use. My suggestion is aimed at speeding up the course setting stage so that tangible progress can come on stream earlier than it otherwise would. Towards Eastern and Central Europe, we have seen how successful incentivisation is in the form of the Copenhagen criteria; and how quickly things stall when the incentives are taken away, at least as far as political reform is concerned (and economic reform may well follow suit).

Of course the EU does not have an infinite supply of carrots to hand out, and the moral issue of treating countries as pavlovian test subjects is not an inconsiderable one; but from 2000-2006 Spain was handed €12 billion from the Cohesion Fund. The combined total of the next thirteen largest beneficiaries hovers at about the €14 billion point. Surely we should question if Spain is providing good value for European money, especially if they are refusing to share the fund with the new member states unless their current funding is protected from the inevitable outcome of the maths involved. If Eastern Europe can spend less money to more effect, surely that's where we should send it. I don't want to see Spain's money get cut off, I want to see Spain spend it better. What's the use of watering plants if they're not going to grow?

That doesn't really compare like with like. China, India, and the new accession countries are growing from very low bases, whereas the EU contains the oldest 'modern' economies in the world.

Indeed. But the Lisbon strategy was global in its aims. India and China might be behind us in distance travelled, but they are charging ahead in terms of speed. Increasingly they are more "competitive" and "dynamic," the two areas where we are meant to be pulling away from the pack. It is very possible (perhaps probable) that their momentum will dampen the further they travel, and there are many sticks that might land between their spokes on the journey, but none of that negates the fact that we are losing ground due to political and economic stagnation. It's not because they are behind us on the economic ladder, it's because we are not bothered to climb it swiftly enough.

[ibis]

By which measure our own funding would have been withdrawn in the 80's. [...] Now if only we could predict how everyone's economies will do in the longer term, just to be sure that we're not withdrawing the funding just before the next Celtic Tiger takes off....

But looking back on the whole experience we did not get our act together until the IMF came hammering at the door with a very scary warrant. Had the EU (or its then equivalent) threatened us earlier we could well be a few additional years down the successful track by now.

Hmm. IMF intervention was the 1980's. I don't particularly recall us 'getting our act together' in the aftermath - although we did begin to move away from the ridiculous ideas of "national self-sufficiency" so beloved of Dev. Nor, really, was the the nascent EEC in a position to do any threatening.

Regardless, Ireland enjoyed several years of continued and healthy growth before the Celtic Tiger was christened- we had to set the course before we were putting the resources to good use.

Throughout which time we received generous subventions from the EU with very few strings attached.

My suggestion is aimed at speeding up the course setting stage so that tangible progress can come on stream earlier than it otherwise would. Towards Eastern and Central Europe, we have seen how successful incentivisation is in the form of the Copenhagen criteria; and how quickly things stall when the incentives are taken away, at least as far as political reform is concerned (and economic reform may well follow suit).

Of course the EU does not have an infinite supply of carrots to hand out, and the moral issue of treating countries as pavlovian test subjects is not an inconsiderable one; but from 2000-2006 Spain was handed €12 billion from the Cohesion Fund. The combined total of the next thirteen largest beneficiaries hovers at about the €14 billion point. Surely we should question if Spain is providing good value for European money, especially if they are refusing to share the fund with the new member states unless their current funding is protected from the inevitable outcome of the maths involved. If Eastern Europe can spend less money to more effect, surely that's where we should send it. I don't want to see Spain's money get cut off, I want to see Spain spend it better. What's the use of watering plants if they're not going to grow?

Fair point. However, to implement such an idea requires us to take a totally different approach to the EU. Outside of world-building games and the occasional autocrat, investment in regions specifically in hopes of increased return has been almost non-existent.

It's worth remembering that the essential purpose of the EU, its founding vision, is the prevention of a European war.

That doesn't really compare like with like. China, India, and the new accession countries are growing from very low bases, whereas the EU contains the oldest 'modern' economies in the world.

Indeed. But the Lisbon strategy was global in its aims. India and China might be behind us in distance travelled, but they are charging ahead in terms of speed. Increasingly they are more "competitive" and "dynamic," the two areas where we are meant to be pulling away from the pack. It is very possible (perhaps probable) that their momentum will dampen the further they travel, and there are many sticks that might land between their spokes on the journey, but none of that negates the fact that we are losing ground due to political and economic stagnation. It's not because they are behind us on the economic ladder, it's because we are not bothered to climb it swiftly enough.

If the only yardstick you use is growth rate, it's hard to see how these claims make sense - one is irrelevant, the other tautological. 'Competitive' generally means 'able to deliver the same output at lower cost', which is hardly surprising given the depth of rural poverty in China and India - something we don't really benefit from ourselves. 'Dynamic' usually seems to mean 'growing quickly', which is tautological.

Do you not see how starting from a base of largely rural population and poverty makes it possible to show a higher growth rate more easily?

[St Disibod]

Okay, I'm no economist so I'm learning on my feet here. Anyone feel free to correct me if I put a foot wrong.

Hmm. IMF intervention was the 1980's. I don't particularly recall us 'getting our act together' in the aftermath

The later 1980's were precisely when we got our act together. The IFSC, the Celtic Tiger's shrine, was legislated for in 1987. This is the same year as the politically disastrous but (in my opinion) stately Tallaght Strategy was adopted by Fine Gael, whereby they promised not to oppose economic reforms in the national interest. It's not like the Celtic Tiger is manna, we are reaping a harvest sown in the 1980's and maintained rather successfully since.

Nor, really, was the the nascent EEC in a position to do any threatening [...] we received generous subventions from the EU with very few strings attached [...] to implement such an idea requires us to take a totally different approach to the EU. Outside of world-building games and the occasional autocrat, investment in regions specifically in hopes of increased return has been almost non-existent.

Indeed, I am advocating a course-change.

It's worth remembering that the essential purpose of the EU, its founding vision, is the prevention of a European war.

But that is not its primary purpose today. It is a ludicrous argument to propose that if the EU was to fold tomorrow the Krauts would be storming Kent by Friday. The risk of a European war (that is, a war between current EU states) is simply not an issue for the Union anymore- even looking for extraterrestrials is a far more pressing matter at this stage. The EU does not serve us by keeping the peace, and has not done so for some time. It has a new role to play, again for some time- so it's not very new. Every day we not at war with Italy does not indicate the EU is doing its job, that part is done and while we should say "well done" we should also say "what's next?"

If the only yardstick you use is growth rate, it's hard to see how these claims make sense - one is irrelevant, the other tautological. 'Competitive' generally means 'able to deliver the same output at lower cost', which is hardly surprising given the depth of rural poverty in China and India - something we don't really benefit from ourselves. 'Dynamic' usually seems to mean 'growing quickly', which is tautological.

Do you not see how starting from a base of largely rural population and poverty makes it possible to show a higher growth rate more easily?

Productivity measures how much the average worker is producing in an hour by value. It's probably the most solid indicator of an economy's performance. Inflation is fleeting by comparison (and it is largely controlled by the European Central Bank who do a sterling job- does that qualify as a pun?). Productivity is about producing useful workers- you can't skew the statistics by hiring people for the sake of it and giving them menial tasks. It is connected to education, infrastructure, the lot. It is what Ireland does so well and what Spain does so poorly.

If China can upskill farmers from growing rice to making clothes (I mean upskill in the economic sense, I don't imagine growing rice is necessarily easier or less onerous) and India can upskill its clothes makers to be typists and tele-sales-people; we have to upskill our typists and tele-sales-people. It's about increasing the value of our workers' produce. We can roll out technology on a state-wide scale far faster than either India or China, so being ahead is really not an excuse (accept that we have to come up with ideas while they can largely copy ours). It's about encouraging enterprise, but according to each individual state. The UK's route will be very different to Germany's- Germany has a large manufacturing sector so it can choose between increasing the value of its goods or speeding up the assembly line. Britain leans heavily on services and a government cannot increase the value of a haircut and should not speed it up (to borrow The Financial Times' safety-conscious example). So Britain needs to nurture entrepreneurship.

Barring some sort of second industrial revolution we probably cannot grow at the same pace as China; but the reason we are not at least partly bridging the gap is not because we can't, it's for a lack of trying.

[Respvblica]

Surely we should question if Spain is providing good value for European money, especially if they are refusing to share the fund with the new member states unless their current funding is protected from the inevitable outcome of the maths involved. If Eastern Europe can spend less money to more effect, surely that's where we should send it. I don't want to see Spain's money get cut off, I want to see Spain spend it better. What's the use of watering plants if they're not going to grow?

Well in fairness to the Spanish, they have spent the money on a world class transport infrastructure and many EU citizens who are resident there or visting benefit from a very competant and efficient health service. In addition the economy has been growing strongly for the last 10 years which is more than one can say for Italy, Greece and Portugal. However while Spain is better than her neighbors, she is still one of the least productive countries in Europe.

The root problem with the mediteranean countries is that they do not have a proper concept of citizenship in their cultures,(ironic becuase they inveted the concept). Theres a fundamental lack of honesty and transparancy and thats bad for business. The black market is huge, and the government is defrauded of billions every year, but the government is partly to blame because of all the red tape and high taxes that it puts in the way of doing business. The high taxes are of course to pay the burgeoning class of unfireable civil servants, and to be honest who wouldnt be a funcionario, when the choice is working for 800€/month for a slave driver who will keep giving you a 6 month contract to avoid having to take you on permanently. These are states that would probably not survive if they were outside the EU.
The hand outs should be linked to need, but also be conditioned based on transparency, business friendly policies and measures taken to deal with the black market. Otherwise you are just pouring your money down a black hole.

[irishpeoplearewhingers]

Quite reasonable. We can grow by breaking into more produtive industries and redirecting our capital, labour and policy towrds those ends. Easier said than done, though, especially given the lack of serious political drive to do so.

[ibis]

Productivity measures how much the average worker is producing in an hour by value. It's probably the most solid indicator of an economy's performance. Inflation is fleeting by comparison (and it is largely controlled by the European Central Bank who do a sterling job- does that qualify as a pun?). Productivity is about producing useful workers- you can't skew the statistics by hiring people for the sake of it and giving them menial tasks. It is connected to education, infrastructure, the lot. It is what Ireland does so well and what Spain does so poorly.

If China can upskill farmers from growing rice to making clothes (I mean upskill in the economic sense, I don't imagine growing rice is necessarily easier or less onerous) and India can upskill its clothes makers to be typists and tele-sales-people; we have to upskill our typists and tele-sales-people. It's about increasing the value of our workers' produce. We can roll out technology on a state-wide scale far faster than either India or China, so being ahead is really not an excuse (accept that we have to come up with ideas while they can largely copy ours). It's about encouraging enterprise, but according to each individual state. The UK's route will be very different to Germany's- Germany has a large manufacturing sector so it can choose between increasing the value of its goods or speeding up the assembly line. Britain leans heavily on services and a government cannot increase the value of a haircut and should not speed it up (to borrow The Financial Times' safety-conscious example). So Britain needs to nurture entrepreneurship.

Barring some sort of second industrial revolution we probably cannot grow at the same pace as China; but the reason we are not at least partly bridging the gap is not because we can't, it's for a lack of trying.

Consider the following:

If we take 10 subsistence rice farmers, their net contribution to the economy is zero. We'll call the value of their product 0.5 each, for a total of 5 - which represents the size of our 'economy'.

Now say we improve agricultural efficiency over the next 5 years, so that 5 farmers can produce enough to feed all 10 people. We have a spare labour pool of 5 people. This is the equivalent of the decollectivisation of Chinese agriculture. We'll keep one on the land to produce agricultural exports - value 1 (an arbitrary value assigned to 1 produced unit of agricultural product).

Let's assign the 4 remaining of these to cloth factories - productivity of 1, value of 2.

Total value of our economy: (6x1) + (4x2) = 14
Growth rate: from 5 to 14 (+180%) over 5 years = 36% annually

Now we're going to reassign 3 of our cloth workers to electronics production, value 4, over the next 5 years:

Total value of our economy: (6x1) + (1x2) + (3x4) = 20
Growth rate: from 14 to 20 (+43%) over 5 years = 8.6% annually

Our next growth opportunity is to upskill to telesales, value 6 - we still need cloth and electronics, so we can reassign 2 workers:

Total value of our economy: (6x1) + (1x2)+ (1x4) + (2x6) = 24
Growth rate: from 20 to 24 (+20%) over 5 years = 4% annually


Meanwhile, in the last 5 years, the EU, which started with half the population, but had 1 farmer (producing 6 agriculture), 1 cloth worker, 1 electronics, 2 telesales - total 24 - has upskilled one of the telesales workers to software (value 8). The difference is 2, so the economy has grown from 24 to 26, a rise of 8.3%, or 1.67% per year.


Economic growth is much easier in the earlier stages of modernising your economy. China is growing from a largely subsistence-agriculture base by putting surplus labour to work at higher-value products. The EU, on the other hand, already devotes most of its economy to those higher-value products, and is growing by increasing efficiency.

[St Disibod]

Consider the following:

[…]

Economic growth is much easier in the earlier stages of modernising your economy. China is growing from a largely subsistence-agriculture base by putting surplus labour to work at higher-value products. The EU, on the other hand, already devotes most of its economy to those higher-value products, and is growing by increasing efficiency.

Fine, I accept that. Twice I noted as much: “Of course the growth rates of the Chinese dragon and the Indian tiger may be completely out of reach for Europe barring some sort of unexpected technological revolution” and “Barring some sort of second industrial revolution we probably cannot grow at the same pace as China.” But while I accept there is constraint, I fear we are failing to distinguish between constraint and underperformance.

Between 1996 and 2005, EU productivity grew at a sluggish 1.4 per cent against the US’ 2.3 per cent. Although such a difference might seem a mere sliver, when held relative to one another they paint a bleak picture for Europe. When you limit it to the Euro Area our growth slows further to just 1 per cent, and the US was not upskilling paddy-field workers.

By your logic growth should have proven more difficult as Irish workers became more skilled and Ireland’s economy became more modern. But the opposite is the case as Ireland squared a modernising economy with an accelerating productivity growth rate. Irish productivity growth rates grew at over 4 per cent per annum from 1981-1990, at over 3.5 for 1991-1995, and over 5 per cent 1996-2002. When you switch the figures to use GNP instead of GDP you do get a reduction, but a more consistent pattern of improved growth: 3 per cent, 3.5 per cent, and almost 4 per cent relatively.*

Although India is still ahead on 6.9 per cent, 4 per cent would be sufficient to see is stay in the fight a great deal longer- perhaps long enough to stay on top as they hit a glitch. It’s not necessarily that I wish to see India slow down, but I think Europe should strive to stay in the lead. Economic power transfers readily enough into political and diplomatic capital. If we are outpaced, we lose our grip on the world’s levers. Plus growth means snazzier TV’s and computers.

Between 1981-1990, Greece’s productivity growth barely featured on the bar charts. From 1992-1998 they managed half a per cent, from 1999-2005 they pulled into the Euro Area lead with 3.5 per cent. For the same three periods, Spain’s growth nosedived from just under 3 per cent, to 1.5 per cent to less than half a per cent.** We’re not slaves to fortune, it’s a matter that warrants an old and battered cliché: we’ve got to pull ourselves up by the bootstraps.

The way I see it, it’s a three pronged approach that is required. From the top: entrepreneurship and R&D and the idea stuff. All the way along: improved efficiency. And from the bottom: education systems must not graduate or ‘leak’ unemployable students. Preferably, all students emerging from second level (whether on completion or before) should do so with a skill, or an apprenticeship lined up, or a track onto alternative education mapped out. At least no one should emerge unable to do basic arithmetic or without a good grasp of the English language. Human Resources managers are freaking over the CV’s that cross their desk- and anyone who sees a sample will understand. I’ve read the CV’s of well-to-do, privately educated students who I considered unemployable from a single glance at their CV (I don't mean to indicate that private education is better as I don't believe it is, but if students whose families can afford additional education costs are coming out without the most rudimentary skills, what chance is their for similar students from poorer backgrounds?). Increasingly you have to reach into the ‘unpronounceables’ to find employees with a working level of English and a capability to advance in the workplace.

* - Figures are filched from Productivity in Ireland: trends and issues by Mark Cassidy, published by the Central Bank (first link here, page 90).
* - Additional information from The EU Economy 2006 Review, published by the Commission of the European Communities, (available here, page 26).