5, Paris, 2003.; Philipp M. Hildebrand, “Wo bleibt das Produktivitätswachstum in Europa?”, Speech at the „Vereinigung Basler Ökonomen“, 28 october 2004. 3  Edward C. Prescott, „Why Do Americans Work so Much More than Europeans?“, NBER Working Paper 10316, Cambridge, 2004. 2  BIS Review 27/2005  Beside the labour market reforms, other reforms should not be neglected. Different conditions in other input markets, for example capital markets, have probably contributed to lower potential growth in Europe. Frictions between national EU capital markets and payment systems render financing more costly. This pushes the capital-labour ratio down, resulting in relative undercapitalization and lower labour productivity. The same line of argument of inefficient allocation of capital applies to non-economic restrictions on corporate mergers and acquisitions as well as on profit transfers. If firms are not allowed to transfer profits from investments ex post the same disincentive to invest ex ante leads to undercapitalization. As in labour markets, the same dynamic is relevant here: Exit barriers are entry barriers. Different regulations in the product markets represent another important obstacle to an augmented growth performance in Europe. Modern information and communication technologies (ICT) in essence provide leverage to an economy. Product market restrictions on the scope of the use of the technologies lead to undercapitalization and underinnovation ex ante. The potential of these growth dynamics may be grossly underestimated as the costs of the regulations are not easily visible.
In the United States, the largest productivity gains were not realized in the high-tech sector or from the IT investments itself but from the widespread use of information and communication technologies in traditional sectors like wholesale trade, financial intermediation and construction. The new technologies led to a complete reorganization of the value chain thereby enhancing total factor productivity, albeit with a lag. One cannot entirely exclude that this leverage effect will simply occur with a lag in Europe. After all, productivity growth is one of the least well understood phenomena in economics. While I do not want to exclude a productivity lag effect in favour of Europe, I suspect the story is a more complicated and a more challenging one. Structural conditions must be in place in Europe to allow maximum flexibility so that the full potential of the new technologies can be unleashed throughout the real economy. Conclusions The question of why the EU recovery is so slow implies a cyclical answer. The European track record of the last ten years, however, strongly suggests that there is a crucial structural dimension to the problem of weak European growth. The real challenge for the EU is to boost productivity growth and augment its potential growth rate. In the words of Mervyn King: “Raising productivity growth is the key to improving the prosperity of future generations.”4 It is therefore not particularly meaningful to analyze the growth weakness in Europe in purely cyclical terms.