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  • Raghuram Rajan on Global Impact Uncoventional Monetary Policies

    The monetary policies of central banks in the world's largest economies have a significant impact not only on the residents of those nations, but on people and businesses around the world. This is especially true of the Federal Reserve's monetary policy moves. With the Fed looking to scale back its quantitative easing program, the Brookings Institution invited India's top central banker, Raghuram Rajan , to speak about the impact of the Fed's unconventional monetary policies on emerging economies. Here are two excerpts from that speech, in which Rajan discusses his concern that central bankers in emerging and developed economies are not adapting quickly enough to a changing global economy: Read more about Rajan's visit to Brookings here .
  • IMF's Blanchard: Focus of Global Recovery Should Now Be On Supply Side

    The global economy has a supply side problem. That is, the global marketplace needs more buyers. IMF director of research Olivier Blanchard notes that while he and his team are projecting 3.6 percent growth this year, and 3.9 percent growth next year, it all depends on a "broader" recovery. First, potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of some labor market institutions, to increasing competition and productivity in a number of non-tradable sectors, to rethinking the size of the government, to reexamining the role of public investment. Second, although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable byproduct of more balanced growth. In others, there is clearly scope for some structural reforms to improve the outcome. Finally, as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely rising inequality. Though inequality has always been perceived to be a central issue, until recently it was not seen as having major implications for macroeconomic developments. This belief is increasingly called into question. How inequality affects both the macroeconomy, and the design of macroeconomic policy, will likely be increasingly important items on our agenda for a long time to come. Read the full post here . And watch Blanchard discuss the global recovery below:
  • Benefits of EU Membership for Poorer Nations

    Yesterday, European economists Nauro Campos , Fabrizio Coricelli , and Luigi Moretti posted some of their findings on the benefits of EU membership to rich nations. Today, they share some of their findings--again at Vox --on the benefits to poorer nations. They focus on two periods of enlargement: the 1980s and 2004. And they find that there are clear benefits to every nation except one. This column presents new estimates of the economic (monetary) benefits from EU membership. The main finding is that of substantial and positive pay-offs, with approximately 12% gain in per capita GDP. Despite substantial differences across countries, there are clear indications that the benefits of EU membership have significantly outweighed the costs (except for Greece). An important question is to identify factors that allow countries to better exploit EU entry. Campos et al. (2014) began investigating this issue and their preliminary findings highlight the role of financial development (i.e., more financially developed countries growing significantly faster after EU membership) and, somewhat less surprisingly, trade openness. Read How much do countries benefit from membership in the European Union? here .
  • Benefits of EU Membership for Rich Nations

    With the relatively healthy EU member states on the hook for helping lift the economies of less healthy member states, many Finns and Germans, for example, are asking, "what's in EU membership for us?" European economists Nauro Campos , Fabrizio Coricelli , and Luigi Moretti have been looking at the benefits of EU membership, and they find that joining the club came with many economic benefits. But interestingly, those benefits varied based on when a nation joined. From Vox : Figures 1 and 2 show SCM results for the 1973 and 1995 EU enlargements.2 The dark line is for actual per capita GDP (or labour productivity), and the red line for the estimated synthetic counterfactual. A measure of the magnitude of the economic benefits from EU membership is given by the difference between the actual per capita GDP for each country (or labour productivity) and that of its SCM artificial control group. We find substantial benefits for the 1973, and modest benefits for the 1995 enlargement. For the first ten years post-accession, per capita incomes for the former would be approximately 12% lower, while that for the latter would be about 4% lower (without EU membership). Alternatively, if we consider all years since accession, the respective figures would be about 34% for the former, and 5% for the latter. We find that per capita incomes in the UK and Denmark would have been 25% lower (if they had not joined the EU in 1973), but that the benefits for Ireland are even larger. Our estimates suggest that per capita income in Ireland would have been about 50% lower if it had not joined the EU in 1973. This column presents new estimates of the economic benefits from EU membership focusing on the 1973 and 1995 enlargements. The main conclusion is that of substantial and positive pay-offs with benefits from EU membership clearly above direct costs, and with larger gains for the 1973 than for the 1995 enlargement.6 Moreover, the difference between the estimated benefits for 1973 and 1995 enlargements is considerable and, thus, should not be attributed solely to differences in per capita incomes at the time of joining. We conjecture that institutions may provide a more promising explanation of these differences if one believes that Austrian, Finnish, and Swedish institutions were better developed or aligned with the EU when these countries joined the European Union. Read The eye, the needle and the camel: Rich countries can benefit from EU membership here .
  • Jeffrey Frankel on Europe's Need to Ease

    Europe needs to do something, according to Jeffrey Frankel . Specifically, the European Central Bank needs to do something about low inflation, which could soon become deflation in some EU economies. So Frankel is advocating for easing monetary policy. Does that mean quantitative easing? Not so much. Frankel: QE would present a problem for the ECB that the Fed and other central banks do not face. The eurozone has no centrally issued and traded Eurobond that the central bank could buy. (And the time to create such a bond has not yet come.) That would mean that the ECB would have to buy bonds of member countries, which in turn means taking implicit positions on the creditworthiness of their individual finances. Germans tend to feel that ECB purchases of bonds issued by Greece and other periphery countries constitute monetary financing of profligate governments and violate the laws under which the ECB was established. The German Constitutional Court believes that OMTs would exceed the ECBs mandate, though last month it temporarily handed the hot potato to the European Court of Justice. The legal obstacle is not merely an inconvenience but also represents a valid economic concern with the moral hazard that ECB bailouts present for members’ fiscal policies in the long term. That moral hazard was among the origins of the Greek crisis in the first place. Fortunately, interest rates on the debt of Greece and other periphery countries have come down a lot over the last two years. Since he took the helm at the ECB, Mario Draghi has brilliantly walked the fine line required for “doing what it takes” to keep the eurozone together. (After all, there would be little point in preserving pristine principles in the eurozone if the result were that it broke up. And fiscal austerity by itself was never going to put the periphery countries back on sustainable debt paths.) At the moment, there is no need to support periphery bonds, especially if it would flirt with unconstitutionality. What, then, should the ECB buy, if it is to expand the monetary base? It should not buy Euro securities, but rather US treasury securities. In other words, it should go back to intervening in the foreign exchange market. Here are several reasons why. First, it solves the problem of what to buy without raising legal obstacles. Operations in the foreign exchange market are well within the remit of the ECB. Second, they also do not pose moral hazard issues (unless one thinks of the long-term moral hazard that the “exorbitant privilege” of printing the world’s international currency creates for US fiscal policy). Third, ECB purchases of dollars would help push the foreign exchange value of the euro down against the dollar. Such foreign exchange operations among G-7 central banks have fallen into disuse in recent years, in part because of the theory that they don’t affect exchange rates except when they change money supplies. There is some evidence that even sterilized intervention can be effective, including for the euro. But in any case we are talking here about an ECB purchase of dollars that would change the euro money supply. The increased supply of euros would naturally lower their foreign exchange value. Read the full post here .
  • The Dangers of Ultra Low Inflation

    Annual headline inflation is very low in Europe. Not so low that we have to shift to talking about deflation. At least not yet. But very low inflation can present problems as well. And you can be sure central bankers and policy makers in developed economies around the globe are watching Europe and the European Central Bank closely. the IMF 's Reza Moghadam outlines the challenges of "ultra low inflation" here:
  • Unemployment Picture in Europe Stable but Bleak

    The number of unemployed men and women across Europe, as estimated by Eurostat , increased by about 17,000 in January. The unemployment rate is now at 10.8% across the EU 28 (compared to 10.7% in December) and 12.0 % in the euro area (11.9% in December). Austria and Germany are the only members states to be at 5.0% unemployment or less. The unemployment rate in Greece and Spain remains above 25%. And while there was some improvement for workers under 25, jobs remain particularly hard to come by for young workers. From the report: In January 2014, 5.556 million young persons (under 25) were unemployed in the EU28, of whom 3.539 million were in the euro area. Compared with January 2013, youth unemployment decreased by 171 000 in the EU28 and by 87 000 in the euro area. In January 2014, the youth unemployment rate5 was 23.4% in the EU28 and 24.0% in the euro area, compared with 23.7% and 24.1% respectively in January 2013. In January 2014, the lowest rates were observed in Germany (7.6%), Austria (10.5%) and the Netherlands (11.1%), and the highest in Greece (59.0% in November 2013), Spain (54.6%) and Croatia (49.8% in the fourth quarter of 2013). Read the full report here .
  • Lagarde: Three Reform Steps for Spain (and Europe)

    Christine Lagarde was in Bilbao, Spain this morning to discuss the state of the economy in Europe in general, and Spain in particular. The IMF managing director noted that there are encouraging signs of growth across the EU. But the big challenge remains the high unemployment rates in member nations. Spain, of course, is the poster child for the jobs problem. Lagarde: I am here reminded by President Rajoy who said: “Spain is out of recession but not out of the crisis….The task now is to achieve a vigorous recovery that allows us to create jobs." I fully agree—creating jobs must be the overriding focus for Spain. What does this mean in practical terms? It means there can be no let-up in the reform momentum. The strong reform momentum must be maintained. And we can see three key areas where further progress will be crucial. The first area is labor market reforms—which need to be deepened so that they can work for all. Both firms and their workers need to be assured that they can reach appropriate agreements on working conditions and wages. This is essential for jobs to be protected and created. Workers need to be directly supported as well—through enhanced skills training and job-search assistance for the unemployed. And by further cutting the tax costs of employing people, especially the low-paid, the unemployed would face fewer barriers in finding work. The second area concerns debt—which needs to be lowered. For firms, this means helping insolvent but viable ones restructure their debts, so they can stay in business and continue to invest and hire people. For the government, it means continuing to reduce the fiscal deficit in a gradual, growth-friendly way—especially by relying more on indirect taxes. The third and final area is the business environment—which needs to be strengthened. Making it easier for businesses to start up and grow will lift their capacity to create employment. Making domestic firms more competitive will also boost their employment and productivity. The government’s plans to liberalize professional services and promote free trade among Spain’s regions go very much in this direction. Read the full speech here .
  • Bank of America Chief Economist on Deflation Concerns

    With annual rates of inflation hovering near just 1% in the U.S., Europe, and Japan, the concern about deflation and its effect on the global market is up. Bank of America Chief Economist Mickey Levy sees the three cases as somewhat different, and warns us not to treat them as part of a clear global trend. More importantly, he argues that we should be careful to distinguish between "bad deflation" and "healthy price declines." Here is an excerpt from his op-ed at Vox : Deflation stemming from insufficient demand and growth-constraining economic policies can drain confidence and become negatively reinforcing, as Japan has shown. In such situations, aggressive macroeconomic policy stimulus designed to jar expectations and boost demand is appropriate. Europe’s downward price and wage pressures are necessary adjustments to its earlier excesses, and relying excessively on aggressive monetary policy to stimulate demand is not a lasting economic remedy. Europe is not destined to fall into a Japanese-style prolonged malaise, but it must continue to pursue reforms that lift productive capacity and confidence. The US situation is very different. The economic expansion is gaining momentum (temporarily sidetracked by unseasonal winter storms), unemployment is falling steadily, personal income is growing faster than inflation, and household net worth is at an all-time high. Expectations of deflation are not apparent in either household or business behaviour. Concerns about lingering labour-market underperformance are warranted; angst about deflation is not. Prices of some goods and services in the US have been falling, benefitting from technological innovation, improved product design, or heightened competition and distribution efficiencies through the internet. Examples abound: flat-screen TVs, computers, automobiles, reduced fees on financial transactions, online consumer and business purchases, etc. These lower prices and quality improvements explain the vast majority of the recent deceleration in inflation – the PCE deflator for goods continues to decline and is flat for nondurables, while it has been rising at a fairly steady pace of 2% for services. These innovation-based price reductions improve standards of living and free up disposable income to spend on other goods and services. They boost aggregate demand and enhance economic performance. And they contribute positively to longer-run potential growth. It is unclear why US policymakers and commentators fear disinflation that stems from innovation-based price reductions amid accelerating aggregate demand. European policymakers face tougher choices. Read Clarifying the debate about deflation concerns here .
  • Strobe Talbott: Jean Monnet and Economic Integration in Europe, Past and Present

    Though never elected to political office, Jean Monnet was one of Europe's most important politicians of the last 100 years. As a young businessman, he set to work on strengthening economic ties between European economies, and strengthening a European economy well before the birth of the European Union. In a new essay, Brookings Institution president Strobe Talbott calls Monnet the "master architect" for the "European Project," and he argues that Monnet's thinking is very much relevant today. He died 35 years ago, long before the euro went into circulation. Still, he would have understood the purpose that monetary union is meant to serve: binding up the wounds of the most bloodstained continent in modern history and turning it into a zone of peace, prosperity, democracy, and global clout, animated by common values and governed by common policies and institutions. That is the European Project. As its master architect, Monnet would also have understood the mistakes, dilemmas, and dangers that threaten the project now. The method that guided him throughout his long life put a premium on the careful sequencing of innovations in economic policy so as to make irreversible the overall process of political integration. Unlike Monnet, however, the leaders responsible for the adoption of the euro in the 1990s failed to ensure that the necessary political conditions and institutions were in place, thus making the current troubles of the European Union all but inevitable. The relevance today of this historical figure is all the more striking in the light of his idiosyncratic career. Monnet spent much of his life as a private citizen. He never held elective office or a ministerial post. He was an effective advocate, who used his carefully cultivated mellifluous speaking voice and forensic skills to good effect in interviews and declarations. But it was primarily from behind the scenes that he influenced generations of major actors on the world stage: in his youth, Georges Clemenceau, Arthur Balfour, Neville Chamberlain, Winston Churchill, and Franklin Roosevelt; in his middle years, Dean Acheson, Konrad Adenauer, and John F. Kennedy; in old age, Willy Brandt, Helmut Schmidt, and Shimon Peres. At crucial moments and on vital issues, these leaders and others took his counsel and adopted his ideas as their own. In a sense, Monnet is once again exerting his influence, this time from beyond the grave. The crisis in the eurozone has focused minds in key capitals on cobbling together institutional measures of the sort that he believed were necessary for monetary union. As a result, his vision of a united Europe may well survive and, over time, succeed. You can read the full essay here . And watch Talbott discuss Monnet and the economic integration of Europe in this interview:
  • 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.
  • Unemployment in Euro Zone Remains Flat

    The number of unemployed men and women across Europe, as estimated by Eurostat , was at 26.2 million in December. That works out to an unemployment rate across the EU28 of 10.7%. Technically that is an improvement from November, when the rate was 10.8%. But it signals that employment has been flat for a few months now. In the euro area, the unemployment rate was 12.0%, down from 12.1% in November. In December 2012, the unemployment across the euro area was 11.9%, and it was 10.8% in the EU28. From the report: Among the Member States, the lowest unemployment rates were recorded in Austria (4.9%), Germany (5.1%) and Luxembourg (6.2%), and the highest in Greece (27.8% in October 2013) and Spain (25.8%). Compared with a year ago, the unemployment rate increased in fourteen Member States, fell in thirteen and remained stable in Sweden. The highest increases were registered in Cyprus (13.9% to 17.5%), Greece (26.1% to 27.8% between October 2012 and October 2013), the Netherlands (5.8% to 7.0%) and Italy (11.5% to 12.7%) The largest decreases were observed in Ireland (14.0% to 12.1%), Latvia (14.0% to 12.1% between the third quarters of 2012 and 2013), Portugal (17.3% to 15.4%), Hungary (11.0% to 9.3% between November 2012 and November 2013) and Lithuania (13.0% to 11.4%). Read the full report here .
  • Draghi on Eurozone's 'Path from Crisis to Stability'

    Well, isn't this a change. At this year's annual World Economic Forum in Davos, European Central Bank President Mario Draghi spoke about reduced risks and "dramatic recovery" in Europe's economies. In this interview with Philipp Hildebrand , Draghi talked about how Europe has moved to more stable footing, and addresses the risks ahead (including deflation):
  • Why Germans Rent

    The Germans have been putting themselves forward as the model for smart economic behavior in Europe over the last few years (in fairness, others have looked to them as the model as well). So it is interesting to note that they are not big on home ownership. At Quartz , Matthew Phillips has an interesting article on why Germans love to rent and are reluctant to buy. And though those data are old, we know Germany’s homeownership rate remains quite low. It was 43% in 2013. This may seem strange. Isn’t home ownership a crucial cog to any healthy economy? Well, as Germany shows—and Gershwin wrote—it ain’t necessarily so. In Spain, around 80% of people live in owner-occupied housing. (Yay!) But unemployment is nearly 27%, thanks to the burst of a giant housing bubble. (Ooof.) Only 43% own their home in Germany, where unemployment is 5.2%. Of course, none of this actually explains why Germans tend to rent so much. Turns out, Germany’s rental-heavy real-estate market goes all the way back to a bit of extremely unpleasant business in the late 1930s and 1940s. Read Most Germans don’t buy their homes, they rent. Here’s why. here .
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