Are There Common Structural Determinants of Potential Output Growth in Europe?

GDP growth in the Eurozone during the last twenty years continuously decreased. In  addition,  the  global  financial  crisis  and  subsequent  events  seem  to  have,  on  average, shifted the trajectory of the Eurozone’s potential output downward. A key question  is  whether  this  trend  is  a  permanent  result  of  “secular  stagnation”  or  if  economic policies might improve the situation. In this paper, we intend to test the impact  of  several  structural  determinants  of  potential  output  growth  using  a  dynamic panel data methodology for 11 main EMU members for the period 1996-­‐2014. We also take into account the role of fiscal policy stance and debt dynamics to assess whether European fiscal rules, especially in the aftermath of the financial and  sovereign  debt  crises,  contributed  to  the  slowdown  of  potential  growth.  Estimated  results  suggest  that  population,  tertiary  education,  research  and development  expenditure,  trade  and  financial  openness,  and  institutional  quality  contributed significantly to potential output growth in the EMU during the period under examination. By estimating a quadratic relation between debt and potential growth,  we  find  that  negative  effects  dominate  for  values  above  132%;  however,  the  impact  of  public  debt  is  statistically  uncertain  even  for  levels  slightly  below 100%.  Once  debt  dynamics  are  taken  into  account,  we  find  that  excessive  and  prolonged consolidation, measured using the cyclically adjusted primary balance, might have, at best, no effect on potential growth when debt levels do not exceed the threshold level.