Moving the Eurozone beyond the Crisis: The Steady-State Growth Perspective

Abstract

In this paper, we estimate the growth rate of total factor productivity (TFP) in theeurozone based on the Malmquist index approach with the goal of identifying thesteady-state growth path in the region before and after the creation of the commoncurrency. Since the Malmquist index can be broken down into two components oftechnical change and efficiency change, we also provide the estimates of these twocomponents. Our estimation results show that the pace of total factor productivitygrowth in eurozone countries slowed considerably after the introduction of thecommon currency. The average annual growth rate of total factor productivity underthe euro falls significantly short of the average TFP growth rate in the periodpreceding the euro. Moreover, the eurozone was found to be consistently laggingbehind the United States and Japan in productivity growth after 1999. Finally, theaverage growth rate of TFP in the eurozone tends to stay below the OECD averageafter the launch of the euro, whereas the eurozone average was higher than theOECD average in most years before 1999. These results suggest that the eurozone’slong-term growth potential began to suffer long before a sovereign debt crisis wasplaguing the region. Turning to the issue of real economic convergence towards thebest practices inside the eurozone, our estimation results provide no evidence ofgreater convergence in TFP growth under the common currency.