Potential Growth in the EU : Prospects from Technical Progress and Eastern Enlargment

In sharp contrast with the buoyant economic dynamism observed in most other areas of the world, slow growth and persistently high unemployment have been characterizing the European Union (EU) economy for a number of years. This report investigates some of the possible causes of this poor macroeconomic performance, analyzing in depth the hypotheses of technological backwardness and of inappropriate economic policies, as major determinants of potential growth. It then proposes some contrasted scenarios for economic and social policies in the EU and explores, with the help of the INGENUE, overlappinggenerations, general-equilibrium model of the world economy, some of the possible long-term evolutions of economic growth and other macroeconomic indicators for various scenarios. In particular, we look at the aggregate economic consequences over the next decades of various ways in which the combination of policies being implemented and the recent enlargement of the European Union may affect the growth potential of the area. More specifically, among the many possible changes that may be forthcoming with this new EU enlargement, we simulate the changes in the time-path of macroeconomic variables resulting from the achievement of the "Lisbon strategy" objective of higher employment rates in the EU, from faster technological convergence of Eastern European economies towards Western European levels of total factor productivity (TFP), and from larger migration flows from Eastern European new members to the EU-15 countries. Although the consequences may in some cases be quite large for the enlarged EU economy, the induced effects on the rest of the world are, in all cases, relatively small, due to the small weight of Eastern Europe in the world economy and population.