World-System (1960-2000+) How Does the Steady-State Economy of the European Union Work?

 



The time plot above shows the Late 20th and Early 21st Century State Space plots for the European Union (EU) Region. The EU itself was not formed until the Maastricht Treaty (1992). 

The 1980's were a turning point for both the Environmental-Unemployment (CO2-LU) and the Unemployment-GDP (LU-Q) Controllers. CO2 Emissions peak and declined until stabilized around 1995. At the same time around 1995, Unemployment peaked and was stabilized after 2000. The shock that hit the EU Countries in 1980 was Neoliberalism.

The effect of EU formation was to stabilize the (CO2-LU) controller (stabilize environmental damage and Unemployment) and increase GDP in the (LU-Q) Controller. The effect of the Maastricht Treaty (1992) was also to put the EU on a path toward a Steady-State Economy.

Commentators are confusing the approach of the Steady-State Economy with Economic Stagnation.

How the Steady-State Economy would work in practice has not been well defined. Economic analysis has been focused on the Equilibrium Conditions. There is no one required way a  Steady-State Economy should operate in practice but the EUL20 BAU model provides one example.

In the EUL20 Shock Decomposition in the Notes below, the Two Controllers (EU2 and EU3) work together to create and maintain the steady state, the Environment, Unemployment and GDP being the three variables monitored to keep the system in balance. In words, CO2 emission can be increased to provide more employment and GDP can be increased to reduce unemployment. There is a trade-off between environmental damage, employment and GDP growth that allows the steady state to be maintained.

Also notice that growth rates for EU1 have to be stabilized before the controllers can work to maintain a steady state.**

You can experiment yourself with the EUL20 BAU model on the EU Google Site (here).

Notes

** Most BAU economies can be turned into a Steady-State Economy by reducing growth rates. Reducing growth rates shifts some BAU economies into collapse mode. The options then are stabilizing Geopolitical Alignments or modifications of the historical controllers. Cyclical modes of development are also possible (here).

EUL20 Measurement Model



Three components in the EU_L20 state space explain 99.6% of the variation in the indicator variables: EU1 = (Overall Growth), EU2 = (CO2 - LU) an Environmental-Unemployment Controller and EU3 = (LU - Q) an (Unemployment - GDP) controller.


EUL20 BAU System Matrix


The EU_L20 System Matrix is stable, meaning that the system will eventually reach a steady state.

EUL20 BAU Shock Decomposition


The Shock Decomposition displays the effect of a one standard deviation shock to each of the state space components. The column of the graph is the component (EU1, EU2, EU3) and the rows are the effects on each other component.

A positive shock to Overall Growth takes about five years to be absorbed by the system (EU1). The initial effect is to decrease both the (CO2 - LU) Controller  and the (LU - Q) Controller.  The effects on the Environmental-Unemployment controller are never fully recovered although the effects on the Unemployment-GDP controller are recovered after about a decade.

A positive shock to the Environment-Unemployment Controller (EU2) reduce growth (EU1), are recovered in about five years (EU2) and increase Unemployment which stabilizes after about 5 years.

A positive shock to the Unemployment-GDP Controller (LU - Q) reduces growth, increases the Environmental-Unemployment controller and is recovered in about 5 years,

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