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Thorvaldur Gylfason Tenth Anniversary Conference of the Viessmann European Research Centre, Wilfrid Laurier University on Challenges for the European Union.

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Presentation on theme: "Thorvaldur Gylfason Tenth Anniversary Conference of the Viessmann European Research Centre, Wilfrid Laurier University on Challenges for the European Union."— Presentation transcript:

1 Thorvaldur Gylfason Tenth Anniversary Conference of the Viessmann European Research Centre, Wilfrid Laurier University on Challenges for the European Union Beyond 2011 Waterloo, Ontario, Canada October 5, 2011

2 1.Small can be beautiful A banking lesson from Barbados 2.Confluence of regulation and stabilization: Canada, US, and Europe Reduced volatility – stabilization with regulation! – does not hurt growth 3.Synchronization of periphery and core in Europe, and some convergence From synchronization to growth Lessons for Canada?

3 Canada had no major bank failures during Great Depression, and did not establish its Deposit Insurance Corporation until 1967 Change in Canadas per capita GDP from year to year 1871-2003 (%) Source: Maddison (2003). Perhaps bank regulation during and after Great Depression also helped stabilize GDP

4 Standard deviation of per capita GDP fell from 6.6% 1871-1945 to 2.3% 1947-2003 Yet per capita GDP growth remained virtually the same (2.1% vs. 2.2%) federal financial supervision In postwar period, active stabilization was the norm plus careful federal rather than decentralized financial supervision universal Canadas banks are universal, offering both commercial and investment banking services Even so, recent financial crisis passed Canada by Firewalls between commercial banking and investment banking were not in place in Canada How about the U.S. next door?

5 Change in US per capita GDP from year to year 1871-2003 (%) Perhaps bank regulation during and after Great Depression also helped stabilize GDP Roosevelt-era firewalls between commercial banking and investment banking (Glass-Steagall Act 1933) Source: Maddison (2003).

6 Standard deviation of per capita GDP fell from 6.4% 1871-1945 to 2.4% 1947-2003 Yet per capita GDP growth remained virtually the same (2.3% vs. 2.1%) until 1980s From the 1960s onward, active stabilization was the norm, as was federal as well as local financial supervision from 1933 until 1980s Automatic stabilizers helped From 1870 to 1914, federal expenditures decreased from 5% of GDP to 2%, rising back to 5% by 1929 From 1945 to date, federal expenditures doubled from 10% of GDP to 20% From 1980s on, banks again became trouble makers, beginning with the S&L crisis 1982-87

7 Paul Volcker, Chairman of the Fed 1979-87, said 8 December 2009 at a conference organized by the Wall Street Journal: I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth – one shred of evidence. I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth – one shred of evidence. He added that in the US the share of financial services in value added had risen from 2% to 6.5%, and then asked: Is that a reflection of your financial innovation, or just a reflection of what youre paid? Is that a reflection of your financial innovation, or just a reflection of what youre paid?

8 Change in German per capita GDP from year to year 1851-2003 (%) Perhaps bank regulation during Great Depression also helped stabilize GDP Regulation came easily to Europe, as did macroeconomic stabilization Perhaps bank regulation during Great Depression also helped stabilize GDP Regulation came easily to Europe, as did macroeconomic stabilization Stefan Zweig (1942) Die Welt von Gestern Europe: Same story

9 European periphery vs. coreCanada vs. US From 88% in 1980 to 82% in 2009 From 88% in 1980 to 82% in 2009 Greece: From 95% in 1980 to 85% in 2009 More recent trends

10 European periphery vs. coreCanada vs. US From 88% in 1980 to 82% in 2009 From 88% in 1980 to 82% in 2009

11 European periphery vs. coreCanada vs. US From 88% in 1980 to 82% in 2009 From 88% in 1980 to 82% in 2009

12 European periphery vs. coreCanada vs. US From 88% in 1980 to 82% in 2009 From 88% in 1980 to 82% in 2009 More convergence in Europe than in North America

13 Correlation of annual per capita growth rates of GNI with euro area Pre-euro period 1961-1999 Post-euro period 2000-2009 Greece 0,630,76 Iceland 0,190,68 Ireland 0,030,72 Portugal 0,680,86 Source: Computations based on World Development Indicators 2011. Even Iceland adjusted, without the euro Meanwhile, growth correlation between Canada and US decreased from 0,73 to 0,66 Meanwhile, growth correlation between Canada and US decreased from 0,73 to 0,66 Peripheral countries adopted the euro hoping for synchronization Another type of convergence

14 Correlation of annual per capita growth rates of GNI with euro area Pre-EEA period 1961-1994 Post-EEA period 1995-2009 Greece 0,63 Iceland 0,190,63 Ireland 0,190,70 Portugal 0,700,83 Source: Computations based on World Development Indicators 2011. Meanwhile, growth correlation between Canada and US decreased from 0,74 to 0,69 Meanwhile, growth correlation between Canada and US decreased from 0,74 to 0,69 Synchronization in Greece came with the euro Fore more, see Bjarnason (2010), The Political Economy of Joining the European Union: Icelands Position at the Beginning of the 21 st Century Fore more, see Bjarnason (2010), The Political Economy of Joining the European Union: Icelands Position at the Beginning of the 21 st Century

15 Since 2000, Greece, Iceland, Ireland, and Portugal have grown more in sync with the euro area, as was hoped and intended Ireland caught up, Portugal converged, Greece lagged behind, Iceland converged from above In Canada, no such synchronization Meanwhile, though, Canada lagged behind US But Canadians live 2,5 years longer, up from 1,5 years in 1980, and, with their European-like Gini index, share their national income more equally Flexible exchange rates do not clearly set Canada apart from Europes periphery Sweden vs. Finland: Same story So, there is more to life than exchange rates The euro is not solely an economic project So, there is more to life than exchange rates The euro is not solely an economic project

16 Since 2000, Greece, Iceland, Ireland, and Portugal have grown more in sync with the euro area, as was hoped and intended Ireland caught up, Portugal converged, Greece lagged behind, Iceland converged from above In Canada, no such synchronization Meanwhile, though, Canada lagged behind US But Canadians live 2,5 years longer, up from 1,5 years in 1980, and, with their European-like Gini index, share their national income more equally Flexible exchange rates do not clearly set Canada apart from Europes periphery Same applies to Sweden vs. Finland In Greece, the cost of starting up a business is 50 times higher than in Canada

17 Since 2000, Greece, Iceland, Ireland, and Portugal have grown more in sync with the euro area, as was hoped and intended Ireland caught up, Portugal converged, Greece lagged behind, Iceland converged from above In Canada, no such synchronization Meanwhile, though, Canada lagged behind US But Canadians live 2,5 years longer, up from 1,5 years in 1980, and, with their European-like Gini index, share their national income more equally Flexible exchange rates do not clearly set Canada apart from Europes periphery Same applies to Sweden vs. Finland In the euro area, the cost of starting up a business is 15 times higher than in Canada


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