The recession and financial crisis may lead to a permanent loss in potential economic output and a slower trend rate of growth in the future according to a new study by the European Commission. The fall in potential GDP will be an example of hysteresis effects across the European economy and the cyclical downturn in output and jobs creates long term damage.
At the heart of the hysteresis argument is that the economic slump will lead to
*A steep rise in business failures
*A rise in structural unemployment together with a sizeable number of people leaving the labour market permanently
*Sharp falls in capital investment
*Lower research and development with consequences for innovation
*A freeze on finance available for new business start-ups
*A squeeze on government spending as governments must take steps to reduce their borrowing and debts
“Empirical evidence of the effect of past crises shows… that the economy will not return to its pre-crisis expansion path but will shift to a lower one. In other words, the crisis will entail a permanent loss in the level of potential output.”
For students - how would you illustrate this quote using an economic cycle diagram?
Longer term demographic pressures will add to worries about the potential for economic growth - the welfare state of Europe’s member nations must grapple with the issues arising from rising life expectancy, low fertility rates and a shrinking working-age population.
-------------------------------------------------------------------------------------------------
Copyright Tutor2u All Rights Reserved www.tutor2u.net