The Future of Europe

1. The Future of Europe Alberto Alesina Barcelona May 2008

2. Acknowledgments • Much of the material is from “The Future of Europe: Reform or Decline” Alberto Alesina and Francesco Giavazzi MIT Press 2006, Spanish Translation forthcoming, Antoni Bosch

3. Since the late 1980’s Europe is loosing groundIncome per person relative to the U.S.

4. Why has the European miraclestopped sometime in the 1980’s • Policies • the answer to social demands of the 1960’s. Effects on • Meritocracy • Inflation • Public Finance • industrial policy to help incumbents: firms, workers. New firms, consumers never entered the picture • Technology • an economy able to imitate but not to innovate (like Japan)

5. What explains differencesin income per person? Differences in: • fraction of the population employed • hours worked per person employed • hourly productivity

6. Decomposing the growth rate of income per person(growth rates, 1980-95)

7. Decomposing the growth rate of income per person(growth rates, 1995-2006)

8. Annual hours Worked Over Time

9. 30 Islanda Nuova Zelanda USA 25 Canada Austria Ore settimanali per persona Messico Rep. Ceca Regno Unito Danimarca Irlanda Grecia 20 Norvegia Finlandia Rep. Slovacca Svezia Germania Spagna Francia Belgio Olanda Portogallo Italia 15 .3 .4 .5 .6 .7 Tasso marginale di tassazione Weekly hours worked per person vs. marginal tax rates

10. 2200 2000 Giappone Australia USA Nuova Zelanda Spagna 1800 Finlandia Portogallo Regno Unito Canada Media Ore Annuali tra Impiegati Full Time Svizzera Belgio 1600 Svezia Austria Francia Germania Norvegia 1400 Olanda 20 40 60 80 100 Copertura da Contrattazione Collettiva Annual hours worked per full time employee vs. share of workers covered by collective wage agreements

11. Job creation: Europe vs. U.S.

12. What can be done? • Liberalization of goods and services markets: then it will also be easier to liberalize the labor market • Labor Market: less judges, more generalized unemployed protection networks

13. The lack of competition affects the labor market Source: Giuseppe Nicoletti et al, OCSE, 1999.

14. What can be done? 3.Welfare: taking from someone and giving to others (often to the same ones) is often a waste and it does not reduce inequalities and poverty: you’d better tax people less

15. Expensive but ineffective welfare systemsper cent of households at risk of poverty before and after social transfers (2003) Source: Eurostat

16. What can be done? • University & Research: different rules, more incentives, more competition among universities (the legal recognition of the degree should be abolished) • Reduce market entry barriers and the cost of doing business • An inefficient civil justice is an entry barrier

17. Could the EU be a solution? • The EU has two “souls”: • a pro market one (single market polices, protection of competition, harmonization of rules of commerce) • a dirigiste one: “Lisbon agenda”, harmonization of social policies, imposition of common social goals to all member countries

18. Could the EU be a solution? • Single market, competition, euro: YES • Rhetoric of coordination, social policies harmonization, Lisbon agenda: NO

19. So what should the EU do? • Do relatively little but do it well: single market, competition, encourage structural reforms • Stay out of areas where differences of opinions amongst members are much more important than the benefits of coordination

20. Are European anti-market? Yes !Would you agree with a market economy?(results of a survey by the University of Maryland)

21. Why ? • Incorrect perception that any market oriented reform generate injustice, and inequality • This is wrong. Often in justice and inequalty are created by distoretd socila and wlefare polcies

22. Current Events • Major Credit crunch avoided • The new seventies? • Oil, wages and monetary polciy

23. Risks • Anti market sentiments on the rise. • Protectionism in US? • Protectionism in Europe? • Inflation on the rise: ECB in a bind • Adjustment in Portugal Italy and Spain, strain on EMU.