philipp m hildebrand : the eu economic recovery - why is it so slow? speech by dr philipp m hildebrand, member of the governing board of the swiss national bank, at the brussels economic forum, charlemagne, 21 - 22 april 2005. * * * introduction let me begin by thanking the commission and klaus regling in particular for inviting me to join this outstanding panel. as an eu outsider, it is a special privilege to join the brussels economic forum. the question i was asked to address today - why is the eu economic recovery so slow – is crucial for many reasons. let me highlight two. the asymmetric nature of the global growth dynamic during the last decade is a worrying development for the european union. together with japan, europe has failed to make a growth contribution commensurate with its share of the world economy. the u. s. economy has had to step in and assume the role of what some have referred to as a “ global consumer of last resort ”. one of the consequences of this dynamic is a potentially vulnerable world economy beset with historically unprecedented economic imbalances. how these imbalances will adjust over time is a complex question that goes beyond the topic of today ’ s panel. 1 suffice it to say, europe will not be an island of prosperity in the hopefully unlikely event of a financial market crisis triggered by these imbalances. the eu also has an internally motivated incentive to address its economic weaknesses if it aims to preserve many of the core social values which lie at the heart of the european integration project. in light of the prevailing european demographics, welfare reforms are imperative. in the end, however, the core values of the european social model can only be maintained for future generations if europe ’ s growth potential is augmented. i would like to begin by briefly addressing a number of measurement issues that need to be kept in mind when comparing europe ’ s economic performance with that of the united states. i will then address the underlying cause of europe ’ s economic weakness, namely its potential growth rate with a specific focus on the all important measure of productivity growth. finally, i will venture outside of the traditional domain of a central banker ’ s portfolio and offer some tentative conclusions as to where the main eu economic policy challenges will likely lie in the years ahead. gdp growth differences eu – u. s. as you can see in graph 1, real gdp growth in the u. s. has consistently outperformed growth in the european union

companies a sounder basis for their investment planning. this notwithstanding, the situation for a big part of the economy remains difficult. waning global demand will continue to hold back export growth. economic uncertainty, coupled with a difficult earnings situation for many companies, will curb corporate investment. moreover, since october, the seasonally adjusted unemployment figure has risen again slightly. the deterioration in the labour market should constrain both consumer spending and investment in residential construction. it is likely that the swiss economy will stagnate in the fourth quarter. for 2011 as a whole, real gdp growth of 1. 5 – 2. 0 % can be expected. this is only because of the favourable economic development in the first half of the year. for 2012, the snb is expecting economic growth in the order of 0. 5 %. monetary and financial conditions in october and november, inflation turned negative, a development largely driven by the strong appreciation of the swiss franc during the summer. prices for a large number of tradable goods fell markedly. following the introduction of the minimum exchange rate, the snb is expecting temporarily negative inflation rates, but not a sustained decline in the general price level. moreover, surveys also show that medium - term inflation expectations are still positive. as a result of the substantial expansion of liquidity to combat the strength of the swiss franc in august, some short - term interest rates turned negative. they have been close to zero since the previous monetary policy assessment. long - term interest rates also declined further. the yield on ten - year confederation bonds reached a new low. the expansionary effects of monetary policy are also evident in the growth of the money supply and in real interest rates, which have remained at a low level. since the introduction of the minimum exchange rate on 6 september 2011, the swiss franc exchange rate to the euro has been above chf 1. 20. compared to august, the swiss franc has even depreciated more against the us dollar than against the euro. nevertheless, even at the current exchange rate, the swiss franc is still high. in august, the snb had substantially expanded swiss franc liquidity, in order to weaken the heavily overvalued swiss franc. since then, banks ’ sight deposits with the snb have been at historically high levels. the snb will continue to maintain liquidity at exceptionally high bis central bankers ’ speeches levels, but has decided not to set a specific target level for sight deposits