Insufficient investment into future growth: the forgotten cause of low growth in Germany

There is a consensus that within the European Union, Germany is presently the country lagging farthest behind in terms of economic dynamics. Most researchers blame rising wages, welfare costs, and overregulated labour markets for this poor position. Some add that as a result of membership in the European Monetary Union, Germany lost the advantage of having low interest rates. To a certain extent, all view German unification as a prime culprit. This article acknowledges that although these factors have contributed to the recent underperformance of Germany, another major reason has been overlooked. A problem was brewing in Germany long before unification, namely the danger of being a high wage country specialised in medium technologies. We show that Germany neither increased its investment into research and education, nor did it embrace ICT technology. Germany lost its position as the European leader in research expenditures relative to GDP. For a set of 16 growth drivers, the dynamics of investment into research, education and information technology during the nineties were the slowest of all EU countries, and according to a quantitative indicator of "total investment into the future" Germany ranked second to last. Investment into future growth is specifically crucial when costs are high and markets are strictly regulated. Comparing the three potential reasons for low growth, namely underinvestment into growth drivers, rising costs and strict regulation, we find the first one to be the most important growth blocker and the least acknowledged in the German debate.The German problem; unification; labour market reforms; high tech industries; structural reforms; Agenda 2010

The Great Recession versus the Great Depression: Stylized Facts on Siblings That Were Given Different Foster Parents

This paper compares the depth of the recent crisis and the Great Depression. We use a new data set to compare the drop in activity in the industrialized countries for seven activity indicators. This is done under the assumption that the recent crisis leveled off in mid-2009 for production and will do so for unemployment in 2010. Our data indicate that the recent crisis indeed had the potential to be another Great Depression, as shown by the speed and simultaneity of the decline in the first nine months. However, if we assume that a large second dip can be avoided, the drop in all indicators will have been smaller than during the Great Depression. This holds true specifically for GDP, employment and prices, and least for manufacturing output. The difference in the depth in the crises concurs with differences in policy reaction. This time monetary policy and fiscal policy were applied courageously, speedily and partly internationally coordinated. During the Great Depression for several years fiscal policy tried to stabilize budgets instead of aggregate demand, and either monetary policy was not applied or was rather ineffective insofar as deflation turned lower nominal interest rates into higher real rates. Only future research will be able to prove the exact impact of economic policy, but the current tentative conclusion is that economic policy prevented the recent crisis from developing into a second Great Depression. This is also a partial vindication for economists. The majority of them might not have been able to predict the crisis, but the science did learn its lesson from the Great Depression and was able to give decent policy advice to at least limit the depth of the recent crisis. (author's abstract

Greece as a bridge to the most vibrant region of the next decades

In the years following the financial crisis, Greece experienced a severe loss in real per capita income and accumulated a public debt much higher than GDP and that of any other EU country. The article briefly analyses the causes of this development, including the policy failures of Greece and the EU. It develops a game-changing strategy, which could return the country to a growth path. This starts with the vision that Greece can make use of its unique location between Europe, Asia and Africa to build a bridge connecting these regions with fascinating and productive complementarities. Given this new strategy, including regional leadership in decarbonisation, youth reform boards, and the Greek diaspora as a manager of reforming and financing new activities, Europe should cut a substantial part of the debt. This would be in the interest of Greece, the EU and Europe's neighbours.Series: Department of Economics Working Paper Serie

Industrial specialisation and geographic concentration: Two sides of the same coin? Not for the European Union

Some recent studies have shown that specialisation of countries has tended to increase, while regional concentration of countries has tended to decrease. This seems to be counterintuitive at first glance. In this paper, we use the entropy index - as the indicator of structural change with the neatest aggregation properties to show how this divergence can happen. The main purpose of the paper is methodological, but we also apply the methodology to a specific case study: Manufacturing in the European Union since 1985. We confirm for this interesting period that increasing industrial specialisation has been offset by faster growth in the smaller Member States, with the net effect that industries have become somewhat less geographically concentrated. In terms of economic geography the evidence is in line with the second part of the inverted U-curve (where decreasing transport costs eventually foster de-concentration). This is no contradiction to increasing specialisation of countries in specific industries as predicted by many models in the old as well as the new trade theory.structural change, geographical concentration, industrial specialisation, European integration, entropy

A Southern Europe strategy based on vision and industrial policy

Este artículo defiende la necesidad de una estrategia de política industrial en los países del sur de Europa para recuperar competitividad y estabilidad. Esa estrategia debe ser diferente del pasado, más sistémica, y debería incluir estrategias de innovación y vías para actualizar la educación. Debería adoptarse la competitividad del mercado nacional e internacional como motores del cambio. Deberían crear y apoyar las zonas industriales y los cluster, que podrían ser la base para la transferencia de tecnología, la inversión extranjera directa y el aprovechamiento de la globalización. Las nuevas políticas industriales deberían priorizar los sectores donde la sociedad tiene intereses a largo plazo, por ejemplo las energías alternativas o el turismo de salud. En resumen, la política industrial es un elemento estratégico necesario en una época de consolidación presupuestaria, especialmente para los países de la periferia del sur de Europa.This paper argues that an industrial policy strategy is needed for the southern European countries for regaining competitiveness and stability. That strategie need to be different from the past industrial policy, more systemic, and should include innovation strategies and ways to upgrade education. They should embrace competition on national and international markets as driver of change. They should create and support clusters and industrial zones, which could then be the basis for technology transfers, foreign direct investment and for making use of globalisation. New industrial policies should emphasise on sectors where society has a long term interest, e.g. alternative energies or health tourism. In short, industrial policy is a necessary strategy element in times of budget consolidation especially for the southern European periphery

Europa zwischen Globalisierung und Renationalisierung

Der Widerstand gegen die Globalisierung in den Industriestaaten wächst, populistische Bewegungen in Europa und den USA gewinnen an Bedeutung wobei rechte, linke und wachstumskritische Bewegungen mit unterschiedlichen Motiven eine Renationalisierung der Politik unterstützen. Die ökonomische Theorie betont die Vorteile der Globalisierung, durch verstärkte Arbeitsteilung, bessere Nutzung der Ressourcen und raschere Dissemination von Wissen und Technologien. Sie betont aber auch dass es Verlierer des Prozesses gibt, wenn Ungleichheiten und Ungleichgewichte sich verschärfen und Globalisierung wirtschaftspolitisch begleitet werden muss. Dieser Artikel untersucht ob die Vorteile aber auch die Ungleichgewichte in der letzten Globalisierungsphase eingetreten. Er berichtet über die fehlende politischen Begleitung, die zunehmende Globalisierungskritik in den Industrieländern und die Forderung nach Renationalisierung der Politik. Die falsche Verherrlichung der Vergangenheit und egoistischen Reaktionen verschärfen allerdings die Probleme und gefährden die Wohlfahrt. Kriterien einer verantwortungsbewussten Globalisierung werden entwickelt. Globale Herausforderungen verlangen internationale Regeln, sie dürfen jedoch nicht in zentralistische Maßnahmen münden die als Fremdbestimmung empfunden werden. Europäische Ziele und Rahmenbedingungen sollen so gewählt werden, dass sie den nationalen Spielraum erweitern und Bottom-Up-Initiativen fördern. Dieser "Empowermentansatz" sollte in die strategische Neuausrichtung Europas einfließen und könnte den Beginn einer europäischen Globalisierungsstrategie darstellen, die Standards nach oben angleicht und die bisherigen Verlierer befähigt, an den Vorteilen der Globalisierung teilzuhaben.Series: Department of Economics Working Paper Serie

Globale Krise und Herausforderung für Österreich

Die Weltwirtschaft ist 2009 zum ersten Mal seit Mitte des vorigen Jahrhunderts nicht gewachsen. Die Wirtschaftsleistung dürfte um 2% zurückgegangen sein, in den Industrieländern um 3,5%. Dies war die Folge der Finanzkrise, sie hat zu einem Einbruch des Welthandels mit Folgen auf alle realwirtschaftlichen Aktivitäten geführt. Wir beschreiben die starken Veränderungen in den Rahmenbedingungen, wie sie schon vor der Krise weltweit und für Österreich im Besonderen eingetreten sind. Dann geben wir einen Überblick über Verlauf und Ursachen der Finanzkrise, die Reaktion der Wirtschaftspolitik und die zusätzlichen Herausforderungen durch die Krise.Finanzkrise, Konjunkturzyklus, Stabilisierungspolitik, Krisenfestigkeit

Fostering a Dynamic and Stable Neighborhood for Europe

Europe is less dynamic than other areas in the world. The European Union will lose its position as the largest economic region, with the share in world output decreasing to less than 15% in 2050. This article designs a strategy based on which Europe can increase its internal dynamics, connect with its dynamic neighborhood and stabilize its eastern and southern regions. These regions are currently searching for development paths different from those in the US and China. The envisaged strategy learns from past errors, counteracts "my country first calls", balances uneven trade and investment pacts, and prevents land and resource grabbing. A new partnership strategy with neighbors in Eurasia, the Middle East and Africa will enable Europe to overcome its growth fatigue. It could help to reshape globalization and convert the current "ring of fire" into a "ring of friends". Then, together with its neighbors, Europe could still be an important economic region in 2050, on par with China and larger than the US plus its neighbors

European Identity Politics

Social and political sciences use the term ‘identity’ in describing a wide range of phenomena, whether these be personal explanations of self-understanding, descriptions of common interests or the shared experiences of a larger group. It has been used in the recent analyses of countries or larger communities, but also in the historical studies of very different societies in developing or industrialized countries. To make the concept more operational and open to empirical research, we dichotomize it into an inclusive versus an exclusive type. This enables us to carve out the different policy conclusions associated with each type. We then apply the concepts for analysing the emergence of European identity over the past decades, as well as its limits and recent headwinds. We present survey data on national and supranational identity and country differences concerning trust in national and European institutions. As a counter-strategy to populism and the exclusive type of identity, political observers, from scientists to members of the media, are split into suggesting either a "cordon sanitaire" to discourage voting for such ideas versus an embracement strategy by including their representatives into government, thereby controlling them or revealing their incompetence. This paper, in contrast, ventures a proactive strategy of four steps to localize the root causes of the success of populism, offering an inclusive vision for the long run, policy instruments for economic improvements and a new narrative