Productivity, Growth Potential and Monetary Policy in the EMU

The reversal in the trend of productivity growth between the US and the UK on one side, and the main countries of continental Europe on the other, appears with great evidence from the data. The current debate focuses on differences in labour market performance, which should account for the growth and productivity divergence. While some measures aimed at increasing the participation and employment rates in the EU are certainly desirable, excessive precariousness of the labour market would have deep social implications, and should be subject to democratic approval. Furthermore, one striking aspect of the debate on productivity growth is the moderate emphasis given to investment and capital accumulation. By looking back to the late 1960s, one can observe a striking positive correlation between productivity growth and both private and public investment. If we consider the inherently long term features of investment, the data also show a positive correlation between investment and trend growth (the OECD measure for potential growth). The correlation between investment, productivity, and potential growth, should be better understood and investigated than what is done in the current debate. By doing that, we should also reassess policy in terms of its capacity to provide a favourable environment for capital accumulation. In this respect, the self complacency of policy makers in the EU may appear excessive. The Stability and Growth Pact has seriously affected the capacity of large European countries to invest (the comparison with the golden rule of the UK is in this respect telling), and when assessed with respect to the growth performance of the Euro zone, the monetary policy of the ECB seems less accommodating than usually believed. Excessive interest rates may contribute to explain investment stagnation in the past decade, especially when seen in comparison with the US.