20th Mar 2018

Sex and drugs drive EU growth surge

  • The EU economy will post a 2.5 percent growth rate, largely thanks to a new accounting system. (Photo: Jorge Franganillo)

Ask a politician in any EU country what they would give for an extra 2 percent on their nation's economic output without any policy changes, and you are likely to be offered a couple of limbs and a body part.

Yet Eurostat is set to publish figures on Friday (17 October) showing that the bloc's GDP has grown by nearly 2.5 percent.

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However, the apparent surge in economic growth is not the result of increased spending or output and will not make anyone feel richer. Instead it is the product of a new accounting system used by the EU's statistical agency to calculate economic activity which includes sectors ranging from research and development to drug trafficking and prostitution.

October is the first month that EU countries have to report data based on the revised regulation on the European System of National and Regional Accounts, known as ESA 2010.

The main innovation in ESA 2010 is that investments in research and development are classified as assets that will create value in future years, a move which, on its own, is worth an extra 1.9 percent.

"In a modern, more and more digital economy, R&D is an investment for the future even more important than buildings, trucks, or factories," said Eurostat in a briefing paper explaining the new regime.

The new methodology also classifies military spending as an investment in the future, and includes chunks of the grey economy and illegal activities such as drug trafficking, prostitution, and smuggling to be taken into account in the gross domestic product.

The UK's Office of National Statistics estimates that Britons' spending on prostitution and illegal drugs bolsters the UK economy by as much as £11 billion (€13.8 billion).

But the EU institutions cannot be accused of cooking the books since ESA 2010 is based on the most up-to-date accounting system used by the United Nations, which is in the process of being implemented across the world.

The US has been using the new rules since August 2013, with Eurostat estimating that this has inflated the US economic indicators by 3 percent.

The legislation putting the rules in place attracted almost no attention when it was adopted by MEPs and ministers in 2012 but will give the bloc its fastest economic growth rate since 2007.

The eurozone registered zero growth in the first six months of 2014 and has expanded by a mere 1.3 percent since 2010.

Finland and Sweden are expected to see the biggest change from the new system of reporting.

Finland's statistical office says that its GDP will go up by 4.3 percent, while Statistics Sweden expects that its figures will be "adjusted upwards by slightly more than 5 percent of which about 4 percentage points are an adaptation to ESA 2010."

Austria, the Netherlands and the UK are forecast to enjoy a 'growth' rate of between 3 and 4 percent, while Latvia, Lithuania, Hungary, Romania and Poland will benefit by less than 1 percent.

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