[OPE] The credit squeeze and the EU economy...

EU faces permanent loss of output
By Tony Barber in Stockholm
FT July 2 2009

Europe is likely to suffer a permanent loss in potential economic output as
a result of the global crisis, and government finances will be under
pressure for years to come, according to a new European Commission study.
(...) The report notes that, even before the crisis, the eurozone's
potential economic growth rate was projected to fall from 2.2 per cent in
2007-2020 to 1.5 per cent in 2021-2030 and a meagre 1.3 per cent in
2041-2060. The report says potential economic growth will slump to 0.7 per
cent this year and in 2010, but predicts that it should make a gradual
recovery over the medium term. However, it cautions: "Empirical evidence of
the effect of past crises shows. that the economy will not return to its
pre-crisis expansion path but will shift to a lower one. In other words, the
crisis will entail a permanent loss in the level of potential output." (...)
http://www.ft.com/cms/s/0/247ffa48-66f0-11de-925f-00144feabdc0.html

This phraseology is a bit misleading - they are talking about the real
growth rate of real GDP for a given capital supply, i.e. the real value of
gross value added or net output. They abstract from property income. Of
course, physical output could increase, although its price level falls.

Experience shows, however, that it is not very useful to make forecasts for
more than 7-10 years, since in the longer term many interrelated aspects of
the economy could change, including the organisation of work, the
restructuring of finance, and the priorities of production. But, probably,
this "ceteris paribus" appraisal is on the whole pretty accurate.
Ideologically, the likely effect is that GDP will decline in importance as
the central economic measure. Obviously such a drop of GDP growth correlates
directly with the employment level.

I cannot track down the actual report from the EC site and I don't know what
it is called. I still continue to believe that the EU should invest much
more in thoughtful website design, finding the information should be no more
difficult than driving a vehicle.

Jurriaan

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Received on Thu Jul 2 17:43:41 2009