How to overcome the crisis of the European growth potential? The role of the government

Abstract

We suppose that the dramatic decline in the European output is more than a cyclical diversion from the potential output. We performed a medium term quantitative analysis combining data based on the production function and growth accounting approach. Our results show that the erosion of the European growth potential has been a longer latent process. It began well before the outbreak of the latest economic crisis. Simulations suggest that the recovery in the rate of potential growth can only be partial in the medium term and further erosion of the European growth potential can be expected in the longer term. Our analysis suggests that more attention should be focused on TFP growth. Therefore, the last part of our study tries to identify the factors that insurea more dynamic TFP growthand examine what the governments can do in order to increase productivity and overcome the crisis of the growth potential.

Keywords

• potential growth
• growth accounting
• european union
• crisis
• total factor productivity