1. The Future of Europe Francesco Giavazzi Bocconi & MIT Milan, October 8, 2007 based on: The Future of Europe, MIT Press, October 2006 by Alberto Alesina and Francesco Giavazzi

2. MBA34 Managerial Excellence – 1° Term The Future of Europe Based on: The Future of Europe, by Alberto Alesina and Francesco Giavazzi, MIT Press, October 2006

3. Since the late 1980’s Europe is losing ground Income per person relative to the U.S. 195019601970198019902006 France 587082868276 Germany 325356597971 Italy 41587279 70 Spain 273249586170 Euro area 425667717573

4. Why has the European miracle stopped sometime in the 1980’s Policies the answer to social demands of the 1960’s. Effects on Meritocracy Inflation Public Finance industrial policy to help incumbents: firms, workers. New firms, consumers never entered the picture Technology an economy able to imitate but not to innovate (like Japan)

5. What explains differences in income per person? Differences in: fraction of the population employed hours worked per person employed hourly productivity

6. Decomposing the growth rate of income per person (growth rates, 1980-95) income per person employment rate hours worked per employee hourly productivity U.S.2.2 0.50.11.4 Germany1.7- 0.1- 0.93.3 France1.6- 0.4- 0.73.1 Italy2.1 0.0- 0.32.5 Spain2.6- 0.1- 0.63.9

7. Annual hours Worked Over Time

8. Weekly hours worked per person vs. marginal tax rates Austria Belgio Canada Rep. Ceca Danimarca Finlandia Francia Germania Grecia Islanda Irlanda Italia Messico Olanda Nuova Zelanda Norvegia Portogallo Rep. Slovacca Spagna Svezia Regno Unito USA 15 20 25 30 Ore settimanali per persona.3.4.5.6.7 Tasso marginale di tassazione

9. Annual hours worked per full time employee vs. share of workers covered by collective wage agreements Australia Austria Belgio Canada Finlandia Francia Germania Giappone Olanda Nuova Zelanda Norvegia Portogallo Spagna Svezia Svizzera Regno Unito USA 1400 1600 1800 2000 2200 Media Ore Annuali tra Impiegati Full Time 20406080100 Copertura da Contrattazione Collettiva

10. Weeks worked per year

11. Things are changing Decomposing the growth rate of income per person (1995-2006) income per person employment rate hours worked per employed hourly productivity U.S.2.40.2- 0.32.6 Germany1.4 0.3- 0.61.8 France1.9 0.6- 0.72.1 Italy1.31.0- 0.20.4 Spain4.24.9- 0.2

12. Job creation: Europe vs. U.S. USEuro area GermanyFranceItalySpain 1980-95 total number of jobs (mil.)25,914,5 jobs (annual growth rate)1,30,90,30,2 hourly productivity1,43,33,12,53,9 1995-06 total number of jobs18,318,0 jobs (annual growth rate)1,3 1,41,01,25,1 hourly productivity2,61,82,10,4- 0,2

13. Should we be worried if others get richer ? 1. happiness depends on relative, not absolute wealth 2. declining demography can be sustained and only by higher growth 3. countries with a cut off growth develop a culture of stagnation and give up innovating 4. political and military power depend on relative economic power

14. What can be done? 1.Liberalization of goods and services markets: then it will also be easier to liberalize the labor market 2.Labor Market: less judges, more generalized unemployed protection networks

15. The lack of competition affects the labor market Source: Giuseppe Nicoletti et al, OCSE, 1999.

16. What can be done? 3. Welfare: taking from someone and giving to others (often to the same ones) is often a waste and it does not reduce inequalities and poverty: you’d better tax people less

17. Expensive but ineffective welfare systems per cent of households at risk of poverty before and after social transfers (2003) beforeafter Sweden2911 Finland2811 Holland2212 Denmark3212 beforeafter Germany2416 France2612 Belgium2916 Italy2219 Spain2219 Greece2421 U.K.2618 Source: Eurostat

18. A welfare that does not help those who really need help subsidies to families ans other help for children (maternity and paternity leave, etc. (% GDP, 2001) Source : Ocse, Social Expenditure Database, 2005

19. Transfers to families (% disposable income) Percent to poorest quintile Germany26,920,2 France30,119,6 Sweden32,225,8 USA7,425,5 UK16,633,7 Spain21,016,0 Italy28,011,7 Greece21,712,6 Turkey1,98,5 Fonte: Peter Whiteford, 2006 A welfare that does not help those who really need help

20. A welfare that pays only pensions distribution of welfare expenditures (Eurostat, 2004) EU 15EU 12Italia Pensions53,7 67,4 - old age45,746,461,3 - invalidity8,07,36,1 Families and children7,87,94,4 Unemployment subsidies6,67,42,0 Housing2,01,20,1 Social exclusion1,5 0,2

21. Italy: Who benefits from the recent increase in minimum pensions ? Share of families in which at least one pension will increase by decile Source: www.lavoce.info

22. What can be done? 4.University & Research: different rules, more incentives, more competition among universities (the legal recognition of the degree should be abolished) 5.Reduce market entry barriers and the cost of doing business 6.An inefficient civil justice is an entry barrier 7.Pensions: move toward a capitalization system

23. What should not be done 1.Think that university and research need more public money 2.Believe the innovation needs public subsides 3.Believe that infrastructures are the priority 4.Be obsessed with the GSP 5.Be obsessed with EU coordination, especially in social policies

24. Could the EU be a solution? The EU has two “souls”: a pro market one (single market polices, protection of competition, harmonization of rules of commerce) a dirigiste one: “Lisbon agenda”, harmonization of social policies, imposition of common social goals to all member countries

25. Could the EU be a solution? Single market, competition, euro: YES Rhetoric of coordination, social policies harmonization, Lisbon agenda: NO

26. So what should the EU do? Do relatively little but do it well: single market, competition, encourage structural reforms Stay out of areas where differences of opinions amongst members are much more important than the benefits of coordination

27. Foreign policy Is there a role for a common EU foreign policy ? This is certainly an area where economies of scale (i.e. size) matter and savings from a common army might be large But: are there common views amongst Europeans?

28. How to win political support?

29. Europeans don’t love markets Would you agree with a market economy? (results of a survey by the University of Maryland) France36%Germany65% Argentina44%Canada65% Russia44%Nigeria65% Turkey46%UK67% Brasile55%Indonesia68% Kenya56%India70% Italy59%Korea70% Mexico59%USA73% Poland62%Philippines74% Spain65%China75%

30. Why ? Incorrect perception that any market oriented reform generate injustice, and inequality This is wrong. Often in justice and inequalty are created by distorted social policies.

31. Getting rid of lobbies Throughout Europe a host of lobbies are overprotected and use the rhetoric of welfare to protect themselves: older insider workers (against young entrants) shopkeepers relatively wealthy pensioners incumbent firms financial institutions protected by entry barriers

32. How to win political support? 1.Big bang, comprehensive reforms rather than gradualism 2.Do the opposite of what Mao preached (“Strike one to educate 100”). Do not give the impression you are attacking one lobby at a time. 3.Stress the point that more market does not mean more injustice; often it works 4.A period of social unrest possibly unavoidable