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I Framing the Discussion on Balanced Growth in Europe

The necessity of sustainable growth and continued income convergence in Europe

Ewald Nowotny1

INTRODUCTION

The purpose of this chapter is to investigate the relevance of balanced growth in Central, Eastern and South-Eastern Europe (CESEE), to discuss the characteristics of a sustainable growth model in the region and to stress the impact of pronounced boom-bust cycles on the long-term income convergence process in Europe.

WHY IS BALANCED GROWTH AN IMPORTANT ISSUE?

In the early 2010s we are still in economic and financial crisis, and the storm is not over yet. The crisis that started to emerge in 2008 has taught us that the economic difficulties of many countries in Europe reflect longterm problems inherent in economic and political institutions. There are no quick fixes for these long-term issues, but it is crucial to take the right measures now.

On the one hand, it is important to contribute effectively to business cycle stabilization and to support a smooth recovery in Europe. For instance, the reduction of both public and private sector indebtedness is necessary for regaining the trust of international investors. At the same time, however, a vicious circle of consolidation measures which erode domestic demand and therefore delay the recovery has to be avoided.

On the other hand, from a medium-term perspective, the right measures have to be taken to avoid a renewed build-up of unsustainable economic positions. Achieving sustainable economic growth and thereby rethinking the appropriate growth model is of utmost importance in solving the current economic challenges. This especially holds true for the CESEE countries where the boom-bust cycle has been extraordinarily pronounced and the catching-up of income levels to those in Western Europe has been set back for several years since the outbreak of the crisis.

From my point of view, one of the most relevant questions in this context is the following: how can we implement a sustainable growth model that remains crisis-resilient and promotes the catching-up process in CESEE? I will look into both issues - sustainability and convergence - in more detail in the subsequent sections.

 
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