Productivity, Growth Potential and Monetary Policy in the EMU

The reversal in the trend of productivity growth between the US and the UK on\none side, and the main countries of continental Europe on the other, appears\nwith great evidence from the data. The current debate focuses on differences in\nlabour market performance, which should account for the growth and\nproductivity divergence. While some measures aimed at increasing the\nparticipation and employment rates in the EU are certainly desirable, excessive\nprecariousness of the labour market would have deep social implications, and\nshould be subject to democratic approval.\nFurthermore, one striking aspect of the debate on productivity growth is the\nmoderate emphasis given to investment and capital accumulation. By looking\nback to the late 1960s, one can observe a striking positive correlation between\nproductivity growth and both private and public investment. If we consider the\ninherently long term features of investment, the data also show a positive\ncorrelation between investment and trend growth (the OECD measure for\npotential growth).\nThe correlation between investment, productivity, and potential growth, should\nbe better understood and investigated than what is done in the current debate.\nBy doing that, we should also reassess policy in terms of its capacity to provide\na favourable environment for capital accumulation. In this respect, the self\ncomplacency of policy makers in the EU may appear excessive. The Stability\nand Growth Pact has seriously affected the capacity of large European\ncountries to invest (the comparison with the golden rule of the UK is in this\nrespect telling), and when assessed with respect to the growth performance of\nthe Euro zone, the monetary policy of the ECB seems less accommodating than\nusually believed. Excessive interest rates may contribute to explain investment\nstagnation in the past decade, especially when seen in comparison with the US.