# CE2004084EN.01089101.xml

| 3.4.2004 | EN | Official Journal of the European Union | CE 84/891 |
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3.4.2004

EN

Official Journal of the European Union

CE 84/891

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(2004/C 84 E/0985)

WRITTEN QUESTION P-0842/04

by Daniela Raschhofer (NI) to the Commission

(9 March 2004)

Subject:   Basis for economic growth

Subject:

The Commission recently presented the first draft of the 2007-2013 financial perspective.

It bases its draft on the assumption of 4,5 % economic growth during that period.

| 1. | What is the basis for the Commission's assumption? |
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1.

What is the basis for the Commission's assumption?

| 2. | How realistic is it? |
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2.

How realistic is it?

Answer given by Mr Solbes Mira on behalf of the Commission

(29 March 2004)

(29 March 2004)

| 1. | The 4 1/2 % nominal growth rate refers to the EU27 (existing and new Member States + Bulgaria and Romania) and is composed of a 2 1/2 % volume increase and a 2 % inflation forecast. The inflation forecast is consistent with the European General Bank's (ECB) medium term stability target. Regarding the volume increase, while the EU27 economy is likely to grow by 2,5 % in real terms over the period 2007-2011, there is a sizeable growth differential between current and new Member States. From 2007 to 2011 EU15 real gross domestic product (GDP) growth is expected to be 2,2 %, AC10 (10 new Member States) real GDP growth will be 4,1 %, with Bulgaria and Romania growing by 5,6 %.
  These 2007-2011 calculations are based on actual data up until 2002 and the short term forecasts (Autumn 2003) of Directorate-General Economic and Financial Affairs (DG ECFIN) until 2004. Thereafter, growth rates of GDP are calculated using DG ECFIN's production function methodology for calculating medium term trends. This implies that for the period 2005-2011, growth is assumed to be at its trend rate. In the framework used for these calculations, growth trends are calculated on the basis of projections on the growth rate of technical progress or Total Factor Productivity (TFP), the investment to output ratio, the employment rate and the growth rate of the population of working age. |
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1.

The 4 1/2 % nominal growth rate refers to the EU27 (existing and new Member States + Bulgaria and Romania) and is composed of a 2 1/2 % volume increase and a 2 % inflation forecast. The inflation forecast is consistent with the European General Bank's (ECB) medium term stability target. Regarding the volume increase, while the EU27 economy is likely to grow by 2,5 % in real terms over the period 2007-2011, there is a sizeable growth differential between current and new Member States. From 2007 to 2011 EU15 real gross domestic product (GDP) growth is expected to be 2,2 %, AC10 (10 new Member States) real GDP growth will be 4,1 %, with Bulgaria and Romania growing by 5,6 %.

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These 2007-2011 calculations are based on actual data up until 2002 and the short term forecasts (Autumn 2003) of Directorate-General Economic and Financial Affairs (DG ECFIN) until 2004. Thereafter, growth rates of GDP are calculated using DG ECFIN's production function methodology for calculating medium term trends. This implies that for the period 2005-2011, growth is assumed to be at its trend rate. In the framework used for these calculations, growth trends are calculated on the basis of projections on the growth rate of technical progress or Total Factor Productivity (TFP), the investment to output ratio, the employment rate and the growth rate of the population of working age.

| 2. | Of course, projections over such a long period of time are subject to both downside and upside risks. For the current Member States there is the downside risk that TFP growth may actually not recover as predicted in the central scenario. TFP growth is currently low as it has been on a declining trend since the 1970s. A continuing improvement in labour market conditions, as observed since the mid 1990s, could also be questioned. For the new Member States, one can ask whether the high investment to GDP ratios will be sustained until 2011 and whether the employment rate will recover at the speed which is assumed in the central scenario.
  Under more pessimistic assumptions the EU economy (27 Member States) would only grow by 2,2 % in real terms (and 4,2 % in nominal terms) over 2007-2011. Growth would be 2,0 % in EU15, 3,6 % in AC10 and 5,0 % in Bulgaria and Romania.
  There are also upside risks. If labour market reform efforts continue then the Lisbon employment targets could be reached more closely in EU15. In a moderately optimistic scenario it is assumed that current unemployment trends will continue for those countries on a declining trend and there will be a trend reversal for countries with currently rising trends. In this case an employment rate of 68,5 % could be reached in 2011 and growth in EU15 could be 0,1 % higher over the period 2007-2011 and reach 2,3 % (AC10=4,1 and EU27=2,6). Since under these assumptions the Lisbon employment target would not have been reached by individual countries a more optimistic scenario assumes that all countries currently below 70 % could reach that target, while countries currently above 70 % would remain there. In this case the employment rate would be 71,1 % in 2011 and average growth in EU15 would rise to 2,7 % (1) (AC10=4,1 % and EU27=2,9 %). |
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2.

Of course, projections over such a long period of time are subject to both downside and upside risks. For the current Member States there is the downside risk that TFP growth may actually not recover as predicted in the central scenario. TFP growth is currently low as it has been on a declining trend since the 1970s. A continuing improvement in labour market conditions, as observed since the mid 1990s, could also be questioned. For the new Member States, one can ask whether the high investment to GDP ratios will be sustained until 2011 and whether the employment rate will recover at the speed which is assumed in the central scenario.

Under more pessimistic assumptions the EU economy (27 Member States) would only grow by 2,2 % in real terms (and 4,2 % in nominal terms) over 2007-2011. Growth would be 2,0 % in EU15, 3,6 % in AC10 and 5,0 % in Bulgaria and Romania.

There are also upside risks. If labour market reform efforts continue then the Lisbon employment targets could be reached more closely in EU15. In a moderately optimistic scenario it is assumed that current unemployment trends will continue for those countries on a declining trend and there will be a trend reversal for countries with currently rising trends. In this case an employment rate of 68,5 % could be reached in 2011 and growth in EU15 could be 0,1 % higher over the period 2007-2011 and reach 2,3 % (AC10=4,1 and EU27=2,6). Since under these assumptions the Lisbon employment target would not have been reached by individual countries a more optimistic scenario assumes that all countries currently below 70 % could reach that target, while countries currently above 70 % would remain there. In this case the employment rate would be 71,1 % in 2011 and average growth in EU15 would rise to 2,7 % (1) (AC10=4,1 % and EU27=2,9 %).

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(1)  It must be mentioned that this scenario is very optimistic, not necessarily because of the employment rate but in these simple calculations two partially offsetting effects are not taken into account. First, a higher percentage of the additional employment could be part time and the skill level of the newly created employment would be lower. Second employment would probably be created with a bias towards service sectors, thus the investment rate is likely to drop temporarily.

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