Does Disappointing European Productivity Growth Reflect a Slowing Trend? Weighing the Evidence and Assessing the Future

Abstract

In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. This paper focuses on the European experience, where we highlight that trend TFP growth has been slowing since the 1960s. Part of that slowdown reflected the relatively benign effects of convergence-TFP levels were catching up to U.S. levels. However, since the mid-1990s, European economies have typically been diverging from the U.S. level of TFP. The pre-recession timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. In our view, European economies have still not managed to adapt fully to a knowledge based economy, in terms of the necessary flexibility, skills, management, and such. In other words, the productivity challenges are much the same as they were prior to the Great Recession.