From Mind the Gap to Closing the Gap. Avenues to Reverse Stagnation in Europe through Investment and Productivity Growth

This paper looks at the growth stagnation in Europe since the beginning of the crisis, and places it in the light of the longer-term growth slowdown since the 1990s, as well as the projections forward for the remainder of the decade. Using a growth accounting approach, we compare the sources of the growth gap before and since the crisis. We observe a particularly rapid decline in the contributions of employment and total factor productivity to output growth. The projections to 2020 show that there is a continued large negative growth contribution from total factor productivity, which appears unsustainable. Looking at the growth gap relative to the United States, we find that while ICT capital intensity in Europe has largely converged on the US, the productivity effects were severely impacted by the crisis, especially because of a drop in the returns-to-scale from ICT use in non-ICT producing sectors. In the final part of the paper we focus on one key area to narrow (or even close) the TFP growth gap, by focusing on a shift in investment towards intangible (or knowledge) assets, such as ICT, innovative property and economic competencies. We find that at present the intensity of intangible investment in Europe is still much lower than in the United States. In the final section of the paper we draw conclusions with regard to the policy setting to revive long-term productivity growth through supporting the shift in its asset composition towards knowledge assets, notably the need to complete the single market in services, especially in the digital economy.