Potential growth in Europe : How to measure it and how to boost it ?

- N.1/2008

01/04/2008

Alain HENRIOT

In the beginning of the decade, economic growth in Europe was disappointing, lagging below the U.S. growth (1.3% on average between 2002 and 2005, compared to 2.7% in the U.S.). However, a strong acceleration occurred in 2006 (2.9 %) while the annual average of 2007 reached a robust 2.6% although a deceleration took place in the course of the year. This phase of stronger growth after gloomy years raised again the question of the sustainability of this movement, as it had already been the case at the end of the 1990’s. Was it the signal of higher potential growth, in the wake of structural reforms undertaken in several countries, in particular in Germany? Alternatively, was this acceleration in economic growth momentum the consequences of the traditional business cycle, after several years of subdued economic growth?

Several questions are attached to the generalisation of the use of the conceptof potential growth. Are the measures based on several techniques reliable? Why is the concept of potential growth useful although its measurement remains delicate? What kind of actions can policymakers undertake to boost it?