European Reform: 1979-2001
The European growth slowdown since 1979
The periodisation of EU economic performance
● Crafts and Toniolo (2010) - Golden Age (1950-73), slowdown then New
Economy with ICT (from the 1990s)
● Golden Age driven by capital deepening and TFP growth
○ TFP growth more important in most W.European countries
○ From tech transfer, EoS, structural change and reconstruction
● Capital deepening and TFP growth slow during the decline
● 1990-2003 - more diverse performance
○ Rapid TFP growth in Ireland, negative in Spain
Major recessions
● Battilossi et al (2010) - 3 major recessions, 2 of which were global
○ Oil and food price shock (1974-5)
○ 2nd oil shock, austerity (1980-2)
○ European specific - German unification, tight monetary policy (1992-3)
■ European semi-fixed exchange rate spread this across Europe
(EU Monetary System crisis)
● Country specific recessions are rare from 1958-74 but occur between 1970-
90s
○ Related to financial liberalisation and fixed exchange rate
○ Nordic crisis (1990-3) - liberalisation and low interest rates caused debt
accumulation and a boom in asset prices. Forced monetary
intervention to curb inflation
The growth slowdown
● Crafts and Toniolo (2010) - unavoidable slowdown. End of reconstruction,
diminishing returns and less catch up possible
● Shift of manufacturing to Asia, rise of services
● Convergence in labour productivity with the US (more than GDP per capita)
○ EU work less - unemployment, holidays, female labour force
participation
○ Some say EU labour markets are overregulated
○ EU unions are more powerful than the US
● Wage moderation and high investment replaced by unions, capital mobility
and floating exchange rate in the 1970s
● Distortionary taxes fund welfare state expansions (1970s)
● EU product markets are more regulated than the US
, ○ Discourages entry, increases the mark-up that the incumbent can
charge
The New Economy
● Crafts and Toniolo (2010) - US revival since mid 1990s - outpacing W.EU
● US view - EU constrained by high taxes, regulation and little competition
○ These predate 1995 EU
● Regulation most harmful in the case of new tech
○ Slow diffusion of ICT
○ Strong correlation between product market regulation and ICT
contribution to productivity growth
● ICT contributed more to TFP in the US than EU
○ Important in US acceleration post 1995
○ Is the adoption of tech by firms, not the growth of tech firms
● ICT is also important in less regulated UK and Irish cases
The welfare state in postwar Europe
Before 1979
● Baines et al (2010) - poor relief and limited education until the late 1700s
● Late 19th c - growth of a “welfare state” - payments into a fund that helps in
the case of accidents, sickness…
● 1945 - expansion to social protection, universal coverage with income
support/unemployment benefits/healthcare
○ Changed the role of the state and created a lower bound for
government spending
Since 1979
Baines et al (2010) explored patterns of welfare expenditure since 1995
● Scandinavia - see social protection as a right. Universal coverage and central
admin. Financed by general tax
● UK / Ireland - more modest benefits, means-tested, healthcare from general
tax and the rest contribution-based
● Benelux, Austria, Germany, France - employment / family status offering
entitlements, contribution-based
○ Bismarckian welfare state
○ Different regulations across occupations
● Greece, Italy, Portugal, Spain - mix of Bismarckian and social insurance for
the uninsured. More gaps in coverage
Social expenditure growth slowed from the 1980s
The European growth slowdown since 1979
The periodisation of EU economic performance
● Crafts and Toniolo (2010) - Golden Age (1950-73), slowdown then New
Economy with ICT (from the 1990s)
● Golden Age driven by capital deepening and TFP growth
○ TFP growth more important in most W.European countries
○ From tech transfer, EoS, structural change and reconstruction
● Capital deepening and TFP growth slow during the decline
● 1990-2003 - more diverse performance
○ Rapid TFP growth in Ireland, negative in Spain
Major recessions
● Battilossi et al (2010) - 3 major recessions, 2 of which were global
○ Oil and food price shock (1974-5)
○ 2nd oil shock, austerity (1980-2)
○ European specific - German unification, tight monetary policy (1992-3)
■ European semi-fixed exchange rate spread this across Europe
(EU Monetary System crisis)
● Country specific recessions are rare from 1958-74 but occur between 1970-
90s
○ Related to financial liberalisation and fixed exchange rate
○ Nordic crisis (1990-3) - liberalisation and low interest rates caused debt
accumulation and a boom in asset prices. Forced monetary
intervention to curb inflation
The growth slowdown
● Crafts and Toniolo (2010) - unavoidable slowdown. End of reconstruction,
diminishing returns and less catch up possible
● Shift of manufacturing to Asia, rise of services
● Convergence in labour productivity with the US (more than GDP per capita)
○ EU work less - unemployment, holidays, female labour force
participation
○ Some say EU labour markets are overregulated
○ EU unions are more powerful than the US
● Wage moderation and high investment replaced by unions, capital mobility
and floating exchange rate in the 1970s
● Distortionary taxes fund welfare state expansions (1970s)
● EU product markets are more regulated than the US
, ○ Discourages entry, increases the mark-up that the incumbent can
charge
The New Economy
● Crafts and Toniolo (2010) - US revival since mid 1990s - outpacing W.EU
● US view - EU constrained by high taxes, regulation and little competition
○ These predate 1995 EU
● Regulation most harmful in the case of new tech
○ Slow diffusion of ICT
○ Strong correlation between product market regulation and ICT
contribution to productivity growth
● ICT contributed more to TFP in the US than EU
○ Important in US acceleration post 1995
○ Is the adoption of tech by firms, not the growth of tech firms
● ICT is also important in less regulated UK and Irish cases
The welfare state in postwar Europe
Before 1979
● Baines et al (2010) - poor relief and limited education until the late 1700s
● Late 19th c - growth of a “welfare state” - payments into a fund that helps in
the case of accidents, sickness…
● 1945 - expansion to social protection, universal coverage with income
support/unemployment benefits/healthcare
○ Changed the role of the state and created a lower bound for
government spending
Since 1979
Baines et al (2010) explored patterns of welfare expenditure since 1995
● Scandinavia - see social protection as a right. Universal coverage and central
admin. Financed by general tax
● UK / Ireland - more modest benefits, means-tested, healthcare from general
tax and the rest contribution-based
● Benelux, Austria, Germany, France - employment / family status offering
entitlements, contribution-based
○ Bismarckian welfare state
○ Different regulations across occupations
● Greece, Italy, Portugal, Spain - mix of Bismarckian and social insurance for
the uninsured. More gaps in coverage
Social expenditure growth slowed from the 1980s
