Europe has to enhance productivity and the performance of its labor markets through structural supply-side reforms to boost economic growth, with the task more urgent in some regions and countries than others, Scope Ratings GmbH, Europe’s leading rating agency, reports.
Scope has examined how supply-side factors – productivity, hours worked per employee, employment rates, economic participation rates and demographics – have contributed by region and country to Europe’s diverse record of cumulative growth between 2000 and 2020.
“In explaining the differing economic performances of the euro area periphery, Central and Eastern Europe and core European economies, supply-side factors point to possible policy-making priorities for European governments as they look to bolster weakening economic growth amid ultra-loose monetary policy,” says Alvise Lennkh, Director at Scope.
A good example is the euro area periphery where cumulative growth in Italy, Greece and Portugal is far exceeded by growth in Spain and Cyprus in the 20-year period. Yet none of the countries has shown much improvement in productivity levels: almost non-existent for Italy and Greece and around 10% for Portugal, Spain and Cyprus.
“Instead, improving labor force participation rates have been crucial in driving growth, offsetting a decline in average hours worked and almost zero cumulative growth in employment rates,” Lennkh notes. More recently, rising employment rates driven by the economic recoveries in crisis-hit countries have underpinned growth. “Governments will have to increase the quality of employment by investing in skills, in order to obtain higher productivity gains together with ongoing employment growth.”
In contrast, productivity gains explain much of the robust 20-year cumulative growth in the CEE region. Increases in workforce participation and employment rates also contributed, offsetting a drop in average hours worked, and adverse demographic developments due to ageing populations and the emigration of younger workers.
“Maintaining productivity gains, for example, through upgrading infrastructure and enhancing workers’ skills among other measures, is essential for the region’s continued convergence with core European economies,” Giulia Branz, analyst at Scope, says. “At the same time, it is crucial to retain the labor force and increase labor market inclusiveness to prevent further decreases in the working-age population.”
Scope’s analysis suggests that one challenge for core European economies – including the Nordics and the UK – is to reverse the recent decline in productivity growth that was a key growth driver between 2000 and 2006. Thereafter, labor market developments have contributed about half of the cumulative growth in the region.
Even among these core countries whose overall growth is similar in the period, there are some country-specific peculiarities. France and Germany make an interesting comparison: recent reforms in France are likely to address the country’s history of relatively modest gains in productivity and still-too-low labor-force participation, possibly improving growth prospects, while Germany needs reforms to address the reduction in average hours worked per employee and the decline in its working-age population.
“Faced with stagnating labor-market gains, core European governments will have to boost productivity, raise participation rates and increase the number of hours worked through regulatory and fiscal reform as well as improve the integration of migrant workers,” Branz believes.