The roots of a divided eurozone: rigid labour markets or asymmetric technology-macroeconomic regimes?

Alberto Botta and Ben Tippet

No 30958, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: In this paper, we analyse secular stagnation in the eurozone. We adopt a core-periphery perspective and analyse whether the 2007-2008 financial crisis triggered off diverging dynamics in the growth potential of core and peripheral eurozone countries. We find that secular stagnation affects the whole eurozone but is a much more serious concern in the periphery. Among the components of potential GDP, the NAIRU in particular has diverged since 2008. We find that the increase in the NAIRU is strongly related to demand-side factors such as investment demand and fiscal consolidation, as well as to the technological level of the economy. Labour market institutions seem to play a relatively minor role, which may also change depending on the level of technological development of an economy. In line with these findings, we argue that reforms in the eurozone should focus on levelling out the core-periphery technological gap via industrial policy, and on the creation of homogenous financial and macroeconomic conditions among member countries, rather than on the generalised deregulation of labour markets.

Keywords: NAIRU; secular stagnation; eurozone; core-periphery divergence; labor market; technology; demand regimes; government spending; austerity (search for similar items in EconPapers)
JEL-codes: E12 F45 J64 (search for similar items in EconPapers)
Date: 2020-10-27
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