Ten Economic Challenges

1. The 2009 Euro Challenge | Ten Economic Challenges Ten Economic Challenges Presentation by Nigel Nagarajan Student Orientation – 2009 Euro Challenge Miami-Florida European Union Center of Excellence January 22nd, 2009 Concepts and Key Issues

2. The 2009 Euro Challenge • The Competition Task • 2. Select one economic-related challenge confronting the euro area as a whole (from the list provided), and pick one of the 16 member countries of the euro area to illustrate that challenge. • Pick a different challenge and country from last year! • Use the Interactive Exercise on the Website! • 3. Recommend a policy or policies for addressing the challenge you identified in the country you selected. Be sure to include in your recommendation a discussion of how having a single currency may or may not affect the policy choices for addressing the challenge.

3. The2009 Euro Challenge • 1. Slow Growth

4. The2009 Euro Challenge • Slow Economic Growth: • Key Concepts • Gross Domestic Product (GDP): growth (%), not level • GDP per capita (to compare across countries) • Is the slowdown in growth the consequence of normal business cycle ups and downs, or of “fundamentals” (structural issues)? • Potential growth. Why is it important for a country’s GDP to grow at a solid and sustainable rate? What can’t countries afford with low growth? • How can a country or region promote faster growth? Short-to medium-term policies (e.g., government spending, interest rate cuts) versus longer-term policies (e.g., investment in education, technology, infrastructure) • Lisbon Strategy designed to increase growth and jobs

5. The2009 Euro Challenge • 2. High Unemployment

6. The 2009 Euro Challenge • High Unemployment: • Key Concepts • What can cause unemployment to rise or fall? • What is the difference between employment and unemployment? • Is the unemployment rate higher for certain groups (e.g., youth, women, older workers)? • Benefits to the unemployed and incentives to work: welfare state/taxes/unemployment benefits/”non-wage labor costs” • Demand and supply of labor and jobs: do workforce skills and education fit businesses’ skills demands? • What can be done to reduce unemployment?

7. The2009 Euro Challenge Basket of goods 3. Inflation

8. The 2009 Euro Challenge • Inflation: • Key Concepts • Why is inflation a bad thing? Why is deflation a bad thing? (watch the ECB Price Stability video!) • How do we measure inflation? • What is the job of a central bank? (what is the mandate of the ECB?) • Commodity prices: Importance of energy, food and other commodity prices • Inflation expectations: self-fulfilling? Higher prices → higher wages → still higher prices • What policies can or can’t countries pursue to tackle high inflation if they are a member of the euro area?

9. The 2009 Euro Challenge • 4. Adapting to technological change (including raising productivity)

10. The 2009 Euro Challenge • Adapting to technological change (raising productivity) • Key Concepts • Use of new technology in the economy (high-tech, ITC) • Productivity and economic growth • The US has enjoyed stronger productivity growth in recent years than the euro area: what role has adaptation to technological change played in that gap? • Adapting to change: Entrepreneurship, R&D spending, innovation • Education and skills training: quality of vocational / higher (tertiary) education, brain drain/gain

11. The 2009 Euro Challenge Marie-Claude Karl-Heinz • Productivity – a measure of how much each worker produces • Marie-Claude designed 5 web sites • Karl-Heinz designed 8 web sites • Who is more productive? • Marie-Claude worked 200 hours • Karl-Heinz worked 400 hours • Now who is more productive? • Web sites designed per hour – Marie-Claude: 0.025, Karl Heinz: 0.020 • Marie-Claude has a higher hourly productivity than Karl-Heinz • Level of Productivity versus Productivity Growth

12. The 2009 Euro Challenge • 5. Globalization (including immigration)

13. The 2009 Euro Challenge • Globalization (including immigration) • Key Concepts • Globalization: Trade, communication, transport, global integration • Benefits of globalization (larger market for export, cheaper goods to import; cultural diversity) versus costs (greater competition from abroad, loss of jobs in industries that can’t compete globally; potential backlash against cultural diversity and outsourcing) • Global competitiveness (role of domestic wage and price inflation) • Immigration: low- versus high-skill immigrants and how immigrants fit into the labor market; integration of immigrants into the host economy and society

14. The2009 Euro Challenge 6. Aging (including health care)

15. The 2009 Euro Challenge • Aging (including health care) • Key Concepts • Old-Age Dependency Ratio (ratio of number of retirees to number of working age people) • The OADR in Europe is about 1:4 currently; by 2050, it will be 1:2. What impact will that have (on people, on the economy)? • Health care: what does a country spend on health care (as a % of GDP), and how do its health outcomes (life expectancy, infant mortality, etc.) compare with other countries? • Tax burden to fund pensions and health care systems, and its impact on the employment and income of working people • Inability to finance pensions and government-provided health care as demand for these increases due to demographic shift • Unemployment of older people and early retirement

16. The2009 Euro Challenge 7. Living with a single monetary policy “One size fits all”

17. The 2009 Euro Challenge • Living with a single monetary policy • Key Concepts • “One size fits all”: monetary policy is set for the euro area average • What policy tools do countries give up when they join a monetary union? What benefits do they gain? • Consequences of having higher inflation or slower GDP growth than the euro area average • What policy tools can a country use to tackle these problems? • “Convergence”

18. The 2009 Euro Challenge • 8. Sustaining the social system • (welfare state)

19. The2009 Euro Challenge • Sustaining the social system (welfare state) • Key Concepts • Elements of the social welfare system: unemployment benefits; pensions (social security); health care • Not one but many “social models” in Europe • “Sustainability” of the welfare system – how to be able to keep paying for these social programs in the future, when their cost is growing. • How to find a politically viable way of trimming social benefits that is fair to all generations? How can Europe adapt its social models? • Social systems and the concept of distributing wealth (pros and cons) • Can social programs be a disincentive to economic activity (tax burden on companies and households, disincentives to hire workers or to find work)

20. The2009 Euro Challenge high Rhineland: low employment, low inequality Scandinavian: high employment, low inequality unemployment benefits English-speaking: high employment, high inequality Mediterranean: low employment, high inequality low employment protection weak strong Europe has (at least) four different social “models”

21. The 2009 Euro Challenge • 9. Coping with a housing market slowdown

22. The2009 Euro Challenge • Coping with a housing market slowdown • Key Concepts • What is a “bubble”? What happens when a housing bubble bursts or deflates? • Some Euro Area countries (e.g., Ireland, Spain) are experiencing housing market downturns now. In what ways are they similar to or different from the US housing bubble burst? • Impact on economic activity (GDP growth) through construction industry, but also effect on consumer spending through housing-related purchases and “wealth effect” of house prices. • What policies can a country undertake to help overcome a housing market downturn?

23. The 2009 Euro Challenge • 10. High government deficits and debt

24. The 2009 Euro Challenge • High government deficits and debt • Key Concepts • What’s the difference between a government deficit and debt? Hint: the bathtub analogy • What is “long-term sustainability”? • Stability and Growth Pact: fiscal rules to keep national governments in Europe from pursuing irresponsible fiscal policies • What happens when governments borrow too much? (generally, interest rates rise, currencies depreciate, and inflation expectations rise – not good for the economy!) • Different generations value government spending differently (bridges versus parties) • Fiscal stimulus: e.g. deficit spending or tax cuts to stimulate domestic consumption. When does it make sense? When does it not make sense? (tradeoffs, short-term benefit versus long-term cost) • Fiscal contraction: e.g. raising taxes or cutting spending to reduce the deficit/debt

25. FOR MORE INFO . . . For additional resources to prepare for the Euro Challenge: www.euro-challenge.org For more information on the European Union in the US, please visit: www.eurunion.org To access EUROPA, the EU’s official web portal, please visit: http://ec.europa.eu/