Ten Economic Challenges Concepts and Key Issues Presentation by Amy Medearis Faculty Orientation for the 2009 Euro Challenge New York, November 25 th 2008 The 2009 Euro Challenge | Ten Economic Challenges

1 The 2009 Euro Challenge The Competition Task 2. Select one economic-related challenge confronting the euro area as a whole (from the list provided), and pick one of the 16 member countries of the euro area to illustrate that challenge. Pick a different challenge and country from last year! Use the Interactive Exercise on the Website! 3. Recommend a policy or policies for addressing the challenge you identified in the country you selected. Be sure to include in your recommendation a discussion of how having a single currency may or may not affect the policy choices for addressing the challenge.

2 The 2009 Euro Challenge 1. Slow Growth

3 The 2009 Euro Challenge Slow Economic Growth: Key Concepts Gross Domestic Product (GDP): growth (%), not level GDP per capita (to compare across countries) Is the slowdown in growth the consequence of normal business cycle ups and downs, or of “fundamentals” (structural issues)? Potential growth. Why is it important for a country’s GDP to grow at a solid and sustainable rate? What can’t countries afford with low growth? How can a country or region promote faster growth? Short-to medium-term policies (e.g., government spending, interest rate cuts) versus longer-term policies (e.g., investment in education, technology, infrastructure) Lisbon Strategy designed to increase growth and jobs

4 The 2009 Euro Challenge 2. High Unemployment

5 The 2009 Euro Challenge High Unemployment: Key Concepts What can cause unemployment to rise or fall? What is the difference between employment and unemployment? Is the unemployment rate higher for certain groups (e.g., youth, women, older workers)? Benefits to the unemployed and incentives to work: welfare state/taxes/unemployment benefits/”non-wage labor costs” Demand and supply of labor and jobs: do workforce skills and education fit businesses’ skills demands? What can be done to reduce unemployment?

6 The 2009 Euro Challenge Basket of goods 3. Inflation

7 The 2009 Euro Challenge Inflation: Key Concepts Why is inflation a bad thing? Why is deflation a bad thing? (watch the ECB Price Stability video!) How do we measure inflation? What is the job of a central bank? (what is the mandate of the ECB?) Commodity prices: Importance of energy, food and other commodity prices Inflation expectations: self-fulfilling? Higher prices → higher wages → still higher prices What policies can or can’t countries pursue to tackle high inflation if they are a member of the euro area?

8 The 2009 Euro Challenge 4. Adapting to technological change (including raising productivity)

9 The 2009 Euro Challenge Adapting to technological change (raising productivity) Key Concepts Use of new technology in the economy (high-tech, ITC) Productivity and economic growth The US has enjoyed stronger productivity growth in recent years than the euro area: what role has adaptation to technological change played in that gap? Adapting to change: Entrepreneurship, R&D spending, innovation Education and skills training: quality of vocational / higher (tertiary) education, brain drain/gain

10 The 2009 Euro Challenge Productivity – a measure of how much each worker produces Marie-Claude Karl-Heinz Marie-Claude designed 5 web sites Karl-Heinz designed 8 web sites Who is more productive? Marie-Claude worked 200 hours Karl-Heinz worked 400 hours Now who is more productive? Web sites designed per hour – Marie-Claude: 0.025, Karl Heinz: Marie-Claude has a higher hourly productivity than Karl-Heinz Level of Productivity versus Productivity Growth

11 The 2009 Euro Challenge 5. Globalization (including immigration)

12 The 2009 Euro Challenge Globalization (including immigration) Key Concepts Globalization: Trade, communication, transport, global integration Benefits of globalization (larger market for export, cheaper goods to import; cultural diversity) versus costs (greater competition from abroad, loss of jobs in industries that can’t compete globally; potential backlash against cultural diversity and outsourcing) Global competitiveness (role of domestic wage and price inflation) Immigration: low- versus high-skill immigrants and how immigrants fit into the labor market; integration of immigrants into the host economy and society

13 The 2009 Euro Challenge 6. Aging (including health care)

14 The 2009 Euro Challenge Aging (including health care) Key Concepts -Old-Age Dependency Ratio (ratio of number of retirees to number of working age people) The OADR in Europe is about 1:4 currently; by 2050, it will be 1:2. What impact will that have (on people, on the economy)? Health care: what does a country spend on health care (as a % of GDP), and how do its health outcomes (life expectancy, infant mortality, etc.) compare with other countries? Tax burden to fund pensions and health care systems, and its impact on the employment and income of working people Inability to finance pensions and government-provided health care as demand for these increases due to demographic shift Unemployment of older people and early retirement

15 The 2009 Euro Challenge 7. Living with a single monetary policy “One size fits all”

16 The 2009 Euro Challenge Living with a single monetary policy Key Concepts “One size fits all”: monetary policy is set for the euro area average What policy tools do countries give up when they join a monetary union? What benefits do they gain? Consequences of having higher inflation or slower GDP growth than the euro area average What policy tools can a country use to tackle these problems? “Convergence”

17 The 2009 Euro Challenge 8. Sustaining the social system (welfare state)

18 The 2009 Euro Challenge Sustaining the social system (welfare state) Key Concepts Elements of the social welfare system: unemployment benefits; pensions (social security); health care Not one but many “social models” in Europe “Sustainability” of the welfare system – how to be able to keep paying for these social programs in the future, when their cost is growing. How to find a politically viable way of trimming social benefits that is fair to all generations? How can Europe adapt its social models? Social systems and the concept of distributing wealth (pros and cons) Can social programs be a disincentive to economic activity (tax burden on companies and households, disincentives to hire workers or to find work)

19 The 2009 Euro Challenge Europe has (at least) four different social “models” employment protection weakstrong unemployment benefits low high Scandinavian: high employment, low inequality English-speaking: high employment, high inequality Rhineland: low employment, low inequality Mediterranean: low employment, high inequality

20 The 2009 Euro Challenge 9. Coping with a housing market slowdown

21 The 2009 Euro Challenge Coping with a housing market slowdown Key Concepts What is a “bubble”? What happens when a housing bubble bursts or deflates? Some Euro Area countries (e.g., Ireland, Spain) are experiencing housing market downturns now. In what ways are they similar to or different from the US housing bubble burst? Impact on economic activity (GDP growth) through construction industry, but also effect on consumer spending through housing- related purchases and “wealth effect” of house prices. What policies can a country undertake to help overcome a housing market downturn?

22 The 2009 Euro Challenge 10. High government deficits and debt

23 The 2009 Euro Challenge High government deficits and debt Key Concepts What’s the difference between a government deficit and debt? Hint: the bathtub analogy What is “long-term sustainability”? Stability and Growth Pact: fiscal rules to keep national governments in Europe from pursuing irresponsible fiscal policies What happens when governments borrow too much? (generally, interest rates rise, currencies depreciate, and inflation expectations rise – not good for the economy!) Different generations value government spending differently (bridges versus parties) Fiscal stimulus: e.g. deficit spending or tax cuts to stimulate domestic consumption. When does it make sense? When does it not make sense? (tradeoffs, short-term benefit versus long-term cost) Fiscal contraction: e.g. raising taxes or cutting spending to reduce the deficit/debt

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