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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.

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

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  1. 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

  2. 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?

  3. 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).

  4. 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

  5. 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).

  6. 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%

  7. 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?”

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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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