P foley

Europe’s two growth problems

1. Secular stagnation

2. Legacy of the crisis

§ Ageing populations

§ Ongoing demand deficiency

§ Weak productivity growth

§ Debt overhang § Banking sector restructuring § Weak investment § High long-term unemployment

1

Secular stagnation Ageing populations a headwind to growth Old-age dependency ratio, % Over 65 as percentage of 15-64 0

10

20

30

40

50

Ireland Belgium UK Denmark Austria EU28 France Spain Netherlands Italy Greece Portugal Germany 2013

2030

Source: Eurostat 2

Secular stagnation Can future productivity growth offset ageing?

GDP/worker, % annual growth UK Greece France Germany Italy Portugal Ireland Spain USA Eurozone 0

0.5

1 1995-­‐2007

1.5

2

2.5

3

2014-­‐2030

Source: Nicholas Crafts, Secular stagnation: US hypochondria, European disease?, VoxEU, 2014, based on data from the Conference Board and projections from the OECD 3

Legacy of the crisis Weak investment makes productivity catch-up harder Investment, Index 2008Q1=100

4

Legacy of the crisis Public sector not investing despite near-zero bond yields General government fixed investment, % of gdp 0 1 2 3 4 5 Belgium Germany Italy

Denmark

§ Pre crisis – German government was investing less than any country except Belgium § Post crisis – Reduced investment in all periphery countries – Not offset by more investment in core

UK Austria Portugal

France Netherlands

– Germany investing a bit more, but less than any country except Spain, Ireland

Spain Greece

Ireland Source: Eurostat

6

2008

2013 5

Legacy of the crisis Business investment depressed Business gross investment, % of gdp 0

5

10

Ireland Greece

Netherlands Germany

20

§ Pre crisis – Low investment in some core countries – “Socially useless” investment in periphery § Post crisis – Reduced business investment in all countries

France Italy Denmark Belgium

– Demand uncertainty

Portugal

– Poor long run growth prospects

Austria

– Debt overhang

Spain Source: Eurostat

15

2008

2012

– Credit access/cost 6

Legacy of the crisis Human capital (dis)investment Unemployment rate, 2014, % Austria 1.2 3.7 Germany

4.9

2.6 3.9

France

4.3

7.4

4.6

6.8

Italy

7.2

Portugal

8.0

– more than total unemployment rate in US, UK

8.5

5.9

Ireland

Greece

6.6

4.8

Belgium

Spain

• 6% of the workforce in the Eurozone have been unemployed for more than 12 months

2.2 2.8 5.0

Denmark 1.7 Netherlands

4.9

10.2

4.5

11.3

5.5 6.1

12.2

• Hysteresis effects on future growth potential

12.7 14.1

– skills deplete

12.3

24.5

17.8

8.7

>12 months

<12 months

– Incentives weaken

26.5 Source: Derived from Eurostat data 7

Three risks

1. Stagnation risk Legacy of the crisis

Secular stagnation

2. Monetary union risk 3. Political risk

8