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  • Growth Picks Up the Pace in Europe

    The rate of growth picked up in Europe at the end of the year. According to data released by Eurostat this morning, GDP across the euro area rose 0.3% in the fourth quarter of 2013. That's following third quarter growth of 0.1%. For the EU overall, the numbers were better. GDP for the EU28 rose by 0.4% in the fourth compared with 0.3% for the third quarter. . The Czech Republic and Romania had standout quarters, with growth rates of 1.6% and 1.7%, respectively, for the quarter. Cyprus, on the other hand, had the biggest drop at -1.0%, and Finland came in at -0.8%. The data for each country is available here .
  • Bloomberg: 'The European Debt Crisis Visualized'

    The European debt crisis is old news. And while the heat may have come down in the last year, it is not over. The interactive team at Bloomberg News has put together a new way of telling the story of the debt crisis. Some students may find the debt crisis easier to understand through this visualization. And we appreciate that this telling of the story goes back almost a century, so there students get the deeper context of Europe's current challenges.
  • Draghi Stands By European Central Bank Reform Policies

    European Central Bank head Mario Draghi deserves some credit for starting the year off with courage. He sat down for a candid interview with German newspaper Der Spiegel, and answered some tough questions. Darghi defended the ECB's approach to crises in Greece and other struggling EU nations. And he took on criticism coming from German politicians and pundits. Here is an excerpt: SPIEGEL: We have a feeling that the number of governments which can no longer hear your tune is growing. The new coalition government in Germany, for example, wants to undo the pension reforms made by the former coalition government comprised of the center-left Social Democrats and the Green Party years ago and introduce a universal minimum wage of €8.50 ($11.67). Are these policies that help the euro? Draghi: It is too early to assess the policies of the new German government. I can only say that the crisis has shown that the monetary union is incomplete and that the weaknesses need to be remedied. Germany helps the euro best by further strengthening its competitiveness and promoting growth. Whatever helps that process is right, everything else is wrong. SPIEGEL: Many economists represent a completely different theory. They regard Germany's competitiveness as the real problem of the euro area and are calling for state curbs on exports. What do you think of that? Draghi: Not much. It's a mechanistic perspective of economic activity, and there's little I can do with it. We won't make the weak stronger by making the strong weaker, as a very wise man once said. That applies to the economy as well. If Germany were less competitive, the euro area as a whole would lose, because less could be produced then. SPIEGEL: In Germany, ECB policy is unpopular because you have now pushed the interest rates for investments down so far that they are often no longer enough to compensate for inflation. In other words, only fools save. Draghi: That's not the fault of the ECB The link between the short-term interest rates set by the ECB and the long-term interest rates paid on investments which are relevant for savers in Germany is not very strong. SPIEGEL: Really? It's a stated goal of your policy to indirectly suppress long-term interest rates. Draghi: No, especially in recent years, we were unable to control long-term interest rates -- because investors were very unsettled by the euro crisis. That's why everyone has been taking money into Germany to buy safe German government bonds. That's why the interest rates in Germany have fallen. We take the concerns of savers very seriously. But how can we respond? We run monetary policy for the entire euro area, not for a single country. If we are able to dispel the uncertainty, many investors will again take their money out of Germany and back to their home countries and interest rates will rise again. Read the full interview here . Hat tip Antonio Fatas .
  • Dutch Downgrade Has Germany Watching Debt Ratings Closely

    Late last month, Standard & Poor's downgraded the Netherlands' credit rating . The news may not have received a lot of attention in the U.S., but it was certainly startling in Europe, especially in neighboring Germany. If the Netherlands, a country that seemed to be doing all the right things post-crisis, and sporting a relatively low debt to GDP ratio, could be downgraded, what does that mean for others? Tilburg University economists Sylvester Eijffinger and Edin Mujagic say that Germany is right to be concerned, and that the rest of the EU needs to be watching the German response closely. From Project Syndicate : The economies of Germany and the Netherlands are closely linked, with the latter highly dependent on its larger neighbor. For decades, Dutch monetary policy was based on matching German interest rates and maintaining a stable exchange rate between the Dutch guilder and the Deutsche Mark. Likewise, both countries emphasize low deficits and public debt, with the Netherlands having long been Germany’s most loyal ally in European fiscal, economic, and monetary matters. Indeed, Germany and the Netherlands were among the main proponents of the European Union’s Stability and Growth Pact. Germany’s public debt is higher than the Netherlands’, especially considering that the Dutch have a natural-gas supply worth well over 20% of GDP and pension-fund savings of some €1 trillion ($1.37 trillion), or roughly 140% of GDP. And, while Germany’s fiscal position is currently much healthier than that of the Netherlands, owing to its exceptional economic performance since the crisis began, faltering output is now threatening to weaken it considerably. S&P cites weakening growth prospects as the reason for its downgrade of the Netherlands. The Dutch economy contracted by 1.2% this year, and is expected to grow by a meager 0.5% next year. But the outlook is not much better for Germany. While the Bundesbank projects a 1.8% annual growth rate for next year, this figure is highly uncertain. And, in the medium term, Germany will face significantly greater challenges from population aging than the Netherlands. Another potentially destabilizing factor is the cost of saving the euro, which could skyrocket if the crisis escalates further. Given that Germany and the Netherlands have provided large guarantees, they risk a substantial increase in public debt. Read Germany's Coming Downgrade here .
  • Lagarde: "A failure to revive investment and employment will not bode well for Europe’s future"

    Speaking in Brussels yesterday, IMF Managing Director Christine Lagarde noted that while the European economy is "on the right track," it is too early to declare things well again. She pointed to unemployment--unemployment among young workers in particular--and uneven growth as the primary challenges for her organization and for Europe's leaders. And she outlined four priorities to jump-starting growth. First priority: Reviving credit ; A second priority: Supporting demand ; A third priority: Reducing debt ; and A fourth priority: Fostering growth-friendly labor and product markets : The goal of reform is to break down barriers to growth. There is no “silver bullet.” This means taking on entrenched positions and vested interests. It means bringing in more competition and flexibility to spark innovation, boost competitiveness, and enable resources to go where they are most productive. But it also means helping labor markets to support growth and adjustment. To be clear, reforms are needed across all of Europe. For example, in countries with large external surpluses, reforms should be targeted to boost investment to ensure that resources are invested where they will maximize returns. In countries with external deficits, prices must be adjusted through improvements in productivity of workers and firms; this would make the tradable sector more competitive and generate more demand. Can this really work? Yes, reforms do pay off. There is growing evidence that significant reforms in product and services sectors can lead to sizeable productivity gains, which eventually creates room for higher wages and more job opportunities. IMF staff has estimated that eliminating just half of the euro area’s gap with the best practices in labor market and pension policies of OECD countries could raise the level of real GDP by almost 1½ percent after 5 years, and by another 1¾ percent through product market reforms that reduce the regulatory burden. Revenue-neutral tax reforms that shift the tax burden away from labor-based taxes to other taxes, including indirect taxes, would raise GDP by ¾ percent over the same time period. And combining all of these reforms would result in a 4 percent boost. These are big gains! Read the full speech here .
  • Stiglitz Offers Up Prescription for EU Woes

    Writing at Project Syndicate , Joseph Stiglitz warns us not to celebrate Europe's exit of a double dip recession, given that there are EU states "with per capita GDP still below pre-2008 levels, unemployment rates above 20%, and youth unemployment at more than 50%." He is calling for "fundamental reform," in the euro zone. He does not chalk up the EU's economic woes to the euro zone itself being a bad idea. Rather, the design was the problem. Stiglitz: Much of the euro’s design reflects the neoliberal economic doctrines that prevailed when the single currency was conceived. It was thought that keeping inflation low was necessary and almost sufficient for growth and stability; that making central banks independent was the only way to ensure confidence in the monetary system; that low debt and deficits would ensure economic convergence among member countries; and that a single market, with money and people flowing freely, would ensure efficiency and stability. Each of these doctrines has proved to be wrong. The independent US and European central banks performed much more poorly in the run-up to the crisis than less independent banks in some leading emerging markets, because their focus on inflation distracted attention from the far more important problem of financial fragility. Likewise, Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. The crisis caused the deficits and high debt, not the other way around, and the fiscal constraints that Europe has agreed will neither facilitate rapid recovery from this crisis nor prevent the next one. Finally, the free flow of people, like the free flow of money, seemed to make sense; factors of production would go to where their returns were highest. But migration from crisis-hit countries, partly to avoid repaying legacy debts (some of which were forced on these countries by the European Central Bank, which insisted that private losses be socialized), has been hollowing out the weaker economies. It can also result in a misallocation of labor. Internal devaluation – lowering domestic wages and prices – is no substitute for exchange-rate flexibility. Indeed, there is increasing worry about deflation, which increases leverage and the burden of debt levels that are already too high. If internal devaluation were a good substitute, the gold standard would not have been a problem in the Great Depression, and Argentina could have managed to keep the peso’s peg to the dollar when its debt crisis erupted a decade ago. Read An Agenda to Save the Euro here .
  • EU GDP Drops Again

    We have some disappointing numbers out of Eurostat this morning. GDP across the Euro Area declined 0.2% in the first quarter. The year over year drop was 1.0%. France, the euro zone's second largest economy, saw its GDP drop for the second quarter in a row. The data for each country is available here .
  • EU Leaders Looking East for Trade Pacts

    Patrick Messerlin , professor of economics at the Institut d' Etudes Politiques de Paris, thinks European leaders are right to look to Asia to build new trade agreements. Trade liberalization, Messerlin says, are the right prescription for Europe's stunted economic growth. But new trade agreements must be with the right partners. And you might be surprised as to which Asian economies Messerlin argues make the right partners for the EU. From Vox : The first question focuses on the ‘growth’ dimension of trade policy. Preferential trade agreements will only be able to boost domestic growth if the economies of the EU’s preferential trade agreements partners fulfil three main conditions. They should be big enough to generate economies of scale and scope capable of having a substantial impact on the EU’s relative prices – changes in relative prices are the source of welfare gains. They should also be well regulated because modern economies are intensive in norms and dominated by services, the efficiency of which depend largely on the quality of the regulatory schemes in place. Finally, they should have a wide network of good-quality preferential trade agreements, capable of offering EU firms opportunities to access the economies already covered by those preferential trade agreements (the ‘hub’ quality) without waiting for longish negotiations with the EU. As Table 1 shows, Japan and Taiwan – apart from the US – are the only economies in the world that meet these three conditions since the EU already has a free trade agreement with South Korea. China (possibly India in the long run, but not Brazil or Russia) may offer better growth opportunities when it comes to size. But, it still scores poorly on regulatory quality, while Japan and Taiwan score better than many EU member states. When it comes to the ‘hub’ criterion, Japan has a wide network of preferential trade agreements in east Asia (a region that EU negotiators are very slow to negotiate with) while Taiwan has massive operations in China which have been recently strengthened by a key preferential trade agreement, making Taiwan a privileged hub with respect to China. The capacity of Japan and Taiwan to meet all three conditions indicates the need for a resolute EU pivot to east Asia – an outcome echoed by general equilibrium calculations (Kawasaki 2011). Read The much-needed EU pivot to east Asia here .
  • The Price of Germany's High Savings Rate

    In a piece for Project Syndicate , Michael Pettis , professor of finance at Peking University, reminds us that the act of rebalancing in Europe requires the work of both debtor and creditor economies. Most global financial crises, Pettis notes, "were the result of strains created by the recycling of capital from countries with high savings to those with low savings." A country’s overall consumption rate is, of course, the flip side of its savings rate. Apart from demographics, which change slowly, three factors largely explain differences in national consumption rates. First and foremost is the share of national income that households retain. In countries like the United States, where households keep a large share of what they produce, consumption rates tend to be high relative to GDP. In countries like China and Germany, however, where businesses and the government retain a disproportionate share, household consumption rates may be correspondingly low. The second factor is income inequality. As people become richer, their consumption grows more slowly than their wealth. As inequality rises, consumption rates generally drop and savings rates generally rise. Finally, there is households’ willingness to borrow to increase consumption, which is usually driven by perceptions about trends in household wealth. In Spain, for example, as the value of stocks, bonds, and real estate soared prior to 2008, Spaniards took advantage of their growing wealth to borrow to increase consumption. But this is not the whole story. Consumption rates can also be driven by foreign policies that affect these three factors. For example, an agreement in the late 1990’s among the German government, corporations, and labor unions, which was aimed at generating domestic employment by restraining the wage share of GDP, automatically forced up the country’s savings rate. Germany’s large trade deficits in the decade before 2000 subsequently swung to large surpluses, which were balanced by corresponding deficits in countries like Spain. Pettis uses Germany and Spain as examples here. While the situation in Europe may be more pronounced at the moment, Pettis's point is a larger, more global one, about the nature of the relationship between high-saving and low-saving economies. Read The Saver's Dilemma here .
  • Wolfson Economics Prize Winning Plan for a Eurozone Exit

    We have seen a lot of speculation over Greece leaving the eurozone. But we are not clear on how a country would go about such an exit. Roger Bootle , of the Biritish financial consultancy firm Capital Economics, has a plan in mind. In fact, he and his colleagues won a tidy sum for their plan, as it won the Wolfson Economics Prize . Bootle explains what he thinks is the best way for an EU state to leave the eurozone--and spark economic growth in the process--to The Economist 's Paul Wallace :
  • Unemployment's Steady Climb in Europe

    Unemployment in Europe continues to climb. The unemployment rate in the euro area reached 11.1% in May--up from 11.0% in April. That's not a huge jump statistically, but it is significantly higher than the 9.5% unemployment rate in May of 2011. Take a look at this trend chart from Eurostat : Some of the raw figures are especially negative. The youth unemployment rate across the EU is now 22.7%. It is especially high in struggling economies Spain and Greece, where more than half of workers under 25 are unemployed. From the report: In May 2012, 5.517 million young persons (under 25) were unemployed in the EU27 , of whom 3.412 million were in the euro area . Compared with May 2011, youth unemployment rose by 282 000 in the EU27 and by 254 000 in the euro area . In May 2012, the youth unemployment rate was 22.7% in the EU27 and 22.6% in the euro area . In May 2011 it was 21.0% and 20.5% respectively. The lowest rates were observed in Germany (7.9%), Austria (8.3%) and the Netherlands (9.2%), and the highest in Greece (52.1% in March 2012) and Spain (52.1%). In May 2012, the unemployment rate was 8.2% in the USA and it was 4.4% in Japan . Here's a look at the breakdown of unemployment by country: Read the full report here .
  • Labor Costs, Competitiveness and Struggling European Economies

    With all the concerns about a Greek exit from the euro zone, INSEAD 's Antonio Fatas warns us not to follow the conventional wisdom when it comes to labor costs and Southern Europs. Yes, Italy, Spain, and Greece have high labor costs. The costs look very high compared to Germany, but not so much when compared to other countries in Europe like France and the Netherlands. So, Fatas argues, it is Germany that is the outlier. Fatas: It is correct that Greece, Spain and Ireland saw higher increases in unit labor costs during the 10 years of the Euro. But the difference is small compared to France or the Netherlands. For example, comparing Spain and the Netherlands the difference is about 5 percentage points over a decade. This is not a large number given how volatile exchange rates are. Estimates of unit labor costs are very imprecise and maybe they are not capturing the true loss in competitiveness of these economies. So why don’t we look at the outcome? What about the current account balance? Countries like Spain or Greece run large current account deficits during these years. Isn’t this a proof that they had lost competitiveness? Possibly, but there are other potential explanations for a current account deficit, such as an increase in spending fueled by a real estate bubble. It is not clear how to tell the two stories apart but here is a piece of evidence that I find useful. What happened to exports in Spain during all these years? If the story of lack of competitiveness is true one might expect that exports did not behave well during this decade as unit labor costs grew too fast. But the data reveals the opposite pattern. Compared to France or the UK (just to pick an outsider), Spanish exports grew faster during the last 10 years. Read Competitiveness and the European Crisis here . (H/t Mark Thoma )
  • Roubini: Europe 'has an austerity strategy but no growth strategy'

    Nouriel Roubini is afraid Europe may be headed toward a very rude awakening to what he calls a "short vacation." At Project Syndicate , he credits Mario Draghi and the European Central Bank with taking important measures that staved off major problems like a liquidity run on Europe's banks. But the positive impact of those moves may have been temporary, and now, Roubini argues, the short-term approach by Europe's policymakers could have medium and long term negative impact on growth and economic stability. To make matters worse, the eurozone depends on oil imports even more than the United States does, and oil prices are rising, even as the political and policy environment is deteriorating. France may elect a president who opposes the fiscal compact and whose policies may scare the bond markets. Elections in Greece – where the recession is turning into a depression – may give 40-50% of the popular vote to parties that favor immediate default and exit from the eurozone. Irish voters may reject the fiscal compact in a referendum. And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting. Even structural reforms that will eventually increase productivity growth can be recessionary in the short run. Increasing labor-market flexibility by reducing the costs of shedding workers will lead – in the short run – to more layoffs in the public and private sector, exacerbating the fall in incomes and demand. Finally, after a good start, the ECB has now placed on hold the additional monetary stimulus that the eurozone needs. Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock. The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming. Read Europe's Short Vacation here .
  • European Unemployment Continues Upward Trajectory

    Unemployment in Europe ticked up last month. The unemployment rate reached 10.8% in February--up from 10.7% in January. It is not a big jump, but it is not the direction eurozone leaders are looking for. Take a look at this trend chart from Eurostat : From the report: Eurostat estimates that 24.550 million men and women in the EU27 , of whom 17.134 million were in the euro area , were unemployed in February 2012. Compared with January 2012, the number of persons unemployed increased by 167 000 in the EU27 and by 162 000 in the euro area . Compared with February 2011, unemployment rose by 1.874 million in the EU27 and by 1.476 million in the euro area . Only four member states have been able to keep unemployment below 7%. Unfortunately, double figure rates are far more common, and the unemployment rate rose in most member states: Compared with a year ago, the unemployment rate fell in eight Member States, increased in eighteen and remained stable in Romania . The largest falls were observed in Lithuania (17.5% to 14.3% between the fourth quarters of 2010 and 2011), Latvia (17.0% to 14.6% between the fourth quarters of 2010 and 2011) and Estonia (13.9% to 11.7% between the fourth quarters of 2010 and 2011). The highest increases were registered in Greece (14.3% to 21.0% between December 2010 and December 2011), Spain (20.6% to 23.6%) and Cyprus (6.7% to 9.7%). Here's a look at the breakdown: Read the full report here .
  • March McKinsey Global Survey Shows Increased Optimism Globally

    Executives of global companies are feeling a lot better about the state of the economy now than they did three months ago. The latest McKinsey Global Institute Global Survey paints a relatively optimistic picture, with economic expectations moving upwards in all regions. And while expectations in the Eurozone lag behind those elsewhere, even there executives are much more optimistic than they were in December. Take a look at the survey trends: From the report: Executives’ optimism also extends to the global economy. Indeed, 42 percent say conditions are better now compared with six months ago, and 48 percent expect better conditions six months from now—up from 26 percent in December. Respondents in India report the most positive outlook on the world’s prospects, and the share in the eurozone expecting improvement climbed 17 percentage points since the previous survey. The eurozone remains, unsurprisingly, a locus of uncertainty: 60 percent expect either a minimal contraction or recession there in six months, while only 23 percent expect at least minimal growth. When asked about potential eurozone outcomes, fewer expect either short-term or long-term integration than in December, though nearly half expect rescue packages to maintain the status quo. A larger share in Europe expect integration than do their peers in other regions. Executives expect uncertainty in other areas, which hints that the recent optimism may still be tenuous. One area of concern is around resources: 58 percent say oil prices will be higher in six months, and a growing share (19 percent, up from 11 percent in December) cite high commodity prices as a barrier to growth. More executives also cite geopolitical instability as a barrier to growth than did three months ago; at 31 percent, it’s the barrier cited most often in North America. Read the report here .