Aggregate growth, 1950–2005

Since the Second World War, western Europe has experienced an unprecedented period of growth, but its performance relative to Asia and the United States has seemed less impressive in recent decades than in the early post-war period. eastern Europe did much less well, as communism was unable to sustain similar improvements over the long run and the initial years of transition to market economies proved difficult; but the region has seen rapid growth in recent years. Against this background, variations in the performance of individual countries also catch the eye: for example, the “Celtic Tiger” phase of growth in Ireland and the long period of relative economic decline in the UK. The objective of this chapter is to describe Europe’s post-war growth performance, understand its main causes and, in the process, also explore what economists, historians, and policy makers can learn about modern economic growth from European successes and failures.
Our analysis is informed by two conceptual approaches. The first of these focuses on the microfoundations of growth in terms of incentives to invest and innovate, and draws on endogenous growth theory. The key ideas are captured in Figure 12.1 which is adapted from Carlin and Soskice 2006. Here the downward-sloping (Solow) line represents the well-known inverse steady-state relationship between technological progress (x) and the capital intensity of the economy (k) for a given savings rate in the neoclassical growth model.