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  • IMF Releases Positive Economic Outlook Report on Asia and Pacific

    If uncertainty in Western developed economies has taught us anything this last decade, it is that the global economy depends on robust growth in Asia. So the latest projections from the IMF will be seen by many as welcome. Hitting these projections depends on Asia's policymakers staying on course. The IMF report suggests the risks are not as great as they were a year ago, but there are still clear risks: Risks to the outlook have become more balanced. Global growth has strengthened and overall global prospects have improved (especially in advanced economies). But Asia still faces new and old risks (geopolitical uncertainty, exit from unconventional monetary policy in the United States and low inflation in the euro area). The main external risk remains an unexpected or sharp tightening of global liquidity. Rapid movements in global interest rates could lead to further bouts of capital flow and asset price volatility. Pockets of high corporate leverage in some Asian economies could magnify the effects of higher interest rates and lower growth on balance sheets, and weaken domestic demand. Asia is also facing various risks emanating from within the region. Growth in China and Japan could also fall below expectations, with negative spillovers for the rest of the region. In China, a gradual slowdown as a result of reforms would be welcome as it would put growth on a more sustainable path. However, a sharp fall in growth—which remains a low risk—would adversely affect those regional trading partners that are most dependent on Chinese final demand. In Japan, Abenomics could be less effective than envisaged, resulting in lower inflation and weaker growth, with spillovers to economies that have strong trade and foreign direct investment linkages with Japan. Strong intra-regional trade integration, which is shown to have contributed to greater business cycle synchronization and spillovers over the years, could transmit geopolitically related disruptions along regional supply chains. Read the full report 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:
  • Nouriel Roubini's Top Six Risks for Global Markets

    At Project Syndicate , Nouriel Roubini writes that the major risks to global markets have shifted. The leading risks from the last two years, while not quite resolved, are not as predominant. But there is plenty to be concerned about. Namely: For starters, there is the risk of a hard landing in China. The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can. There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets. This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility. Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves. Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust. Indeed, unconventional monetary policies in the US and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets. Fourth, the crises in some fragile emerging markets may worsen. Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth. Moreover many of these emerging markets face political and electoral risks. Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country. The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense. Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict. Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact. Read The Changing Face of Global Risk 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 .
  • An Optimistic Take on Japan's Weaker Than Expected GDP Data

    Japan's economy grew at a disappointing rate to close 2013, expanding at an annualized rate of 1 percent during the fourth quarter. That has some analysts disappointed and worried about the short term prospects for Japan, but not Dalju Aoki . Aoki, economist for UBS, tells the Wall Street Journal's Deborah Kan that he is still optimistic about growth in Japan this year. And he explains what he looks at as helpful economic indicators:
  • Jeff Frankel Cautions Japan's Leaders to Take it Slow

    Jeff Frankel is looking at Japan as that country's top bankers and elected officials appear set to increase the consumption tax rate in an attempt to increase the rate of GDP growth. Frankel argues that Japan's leaders should be mindful of the long game, and not rush through any quick fixes--"Slow and steady win the race." Either way, there will be lessons from Japan for other economies. Frankel: For Japan, I like a proposal of Koichi Hamada (a Yale economics professor who has advised Abe) and others: the planned jump in the consumption tax rate should be replaced with a gradual pre-announced path of increases, of 1% per year, for five years. (The annual increases should probably even continue for more than five years). A steady pre-announced set of small increases is a better path for fiscal policy than one jump, or two. Because it establishes long-run fiscal discipline, it will not crash the bond market, as an outright cancellation of the tax increase might. Yet it does not inflict damaging fiscal contraction in the short run, at a time when the economy is already weak. Indeed, the expectation that tax-included prices will go up in the future can stimulate households today to buy autos, household appliances, and other consumer goods and thereby help speed the recovery. The gradual path also has good implications for monetary policy too. In normal times central banks want to get inflation down. Pre-announced paths for taxes or administered prices can have the undesirable effect of building annual price increases into public perceptions, thus making it more difficult for the central bank to control inflation. But current conditions are very different in this regard. Interest rates and inflation rates in Japan lately have been, if anything, even lower than in the United States. The most important cornerstone of Abenomics this year has been efforts by the Bank of Japan to ease money further, despite already-zero interest rates, and thus end the threat of deflation. Under those circumstances, expectations of inflation are not worrisome. Positive expected inflation would reduce the real interest rate, which is not a bad thing under current conditions. There are useful analogies for policies in other countries. The US could legislate a pre-announced path of slow but steady increases in energy or carbon taxes (accompanied by immediate short-term offsets such as a reduction in the distortionary payroll tax or an end to the damaging spending sequester). The same arguments regarding the time profile apply as to Japan: enhancing long-run fiscal sustainability without imposing more fiscal contraction at a time when the economy has not yet fully recovered from the Great Recession. In addition, the environmental and national security arguments in favor of discouraging fossil fuel consumption work better if the increase in energy prices is phased in over a long period of time, allowing people to plan ahead in making effective decisions about choice of automobiles, installation of home heating systems, construction of power plants, research into new technologies and so forth. Emerging market countries like India and Indonesia are now being threatened with possible financial crises. Part of the problem is large budget deficits, of which a major component has long been food and energy subsidies. Trying to keep domestic prices for food and energy artificially low relative to world market prices has proven ruinously expensive, while yet very ineffective in the supposed goal of helping alleviate poverty. Some leaders in these countries are aware of the need to reduce the subsidies (and the arguments that they can be accompanied by better-targeted anti-poverty innovations such as Mexico’s conditional cash transfers and India’s Unique ID system). A credible pre-announced path of gradual phase-out in food and energy subsidies would provide much-needed immediate reassurance to skittish global investors, without imposing immediate hardship on the poor. At the same time, the ability to plan ahead in anticipation of the price increases would allow more effective responses in decisions by farmers to plant new crops, energy-users to switch to more energy-efficient equipment, and so forth. Read Japan's Consumption Tax: Take it Slow and Steady here .
  • OECD Projects Moderate Recovery in ADvanced Economies

    The OECD is offering up a relatively strong economic assessment for the global economy, and projects growth to continue in advanced economies. Emerging economies, however, are a different story. From the latest Interim Economic Assessment : In several major emerging economies, however, growth has slowed. While growth in China appears to have passed the trough, financial market turbulence - partly triggered by discussion of a tapering of quantitative easing in the United States - has highlighted difficulties facing a number of other emerging economies, especially those with large current account deficits. As emerging economies contributed strongly to economic dynamism in recent years, this slowdown makes for a continuation of sluggish global growth, notwithstanding the pick-up in advanced economies. While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain. It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimise the risk of the recovery being derailed. Meanwhile, both advanced and emerging economies face the challenge of slower trend growth. Therefore, reforms to boost growth, rebalance the global economy and reduce structural impediments to job creation remain vital. Read the full report here .
  • IMF: Global Impact of Top Five Economies

    Earlier we shared some analysis about the impact of programs like quantitative easing on the US. economy. But it isn't just people concerned about the US economy watching the Fed's actions closely. There is global concern about the Fed's moves because the effects of any action will be felt elsewhere. This is known as "spillover effect." The IMF tracks spillover effect in an annual report. The focus is on the top five economies, or the S5--the US, China, EU, Japan, and the UK. The big dogs get good grades in the latest report, but that doesn't mean they are off the hook for making smart decisions moving forward. From the 2013 IMF Spillover Report : The key questions for this year’s spillover report, therefore, are: to what extent have policies of the S5 over the past year—e.g., the Outright Monetary Transactions (OMT) program and steps toward a Banking Union, more quantitative or credit easing, Abenomics, fiscal consolidation—had positive spillovers, and how do they net out with any adverse side effects? Considering both current policies and future plans, are positive spillovers sustainable, or are there adverse spillover risks to worry about? And might different policies in the S5 be preferable from the global standpoint? The report finds that recent S5 policies have mostly had positive near-term spillover effects on their own growth and globally (in particular, avoiding tail risks feared last year that could have cost the global economy several points of GDP). However, policy spillovers may well turn adverse again. This reflects two elements: first, the inherent risks of very accommodative monetary policies, namely the potential build up of vulnerabilities that might unravel messily when monetary stimulus is tapered off—the increased volatility seen in recent weeks highlights the risks here; and second, the significant incompleteness of other policies in place, notably fiscal and structural, which could lead to protracted low growth and sovereign debt stress. Adoption by the S5 of more complete policies would reduce the need to rely on ultraaccommodative monetary policy along with its side-effects, and would materially lower risks of large adverse spillovers (from S5 shocks, some of which could cost the global economy several points of GDP). It would also generate positive ones (with global GDP 3 percent higher than in the baseline in the long run), with the benefits optimized if these policies were adopted by all the S5 together.
  • Liberty Street Economics: Giant Financial Institutions as 'Causal Determinants' of Bank Shocks

    It is a new favorite version of the chicken and egg conundrum. Are supersized financial institutions the victims of financial crises or the determinants? New York Fed assistant vice president Mary Amiti and Columbia professor David Weinstein look to Japanese lending markets for answers. And they seem to have found a "causal link." From Liberty Street Economics : The notion that financial institutions are large relative to the size of economies is not something that plays a prominent role in traditional economic theory. Macroeconomic textbooks tend to treat economies as composed of representative firms that are infinitesimal in size compared to any given market. As a result, positive and negative idiosyncratic shocks to financial institutions cancel out due to the law of large numbers. However, this representation stands in stark contrast with the reality of concentration in financial markets. A striking regularity is that a few banks account for a substantial share of an economy’s loans. We see this clearly for Japan in the chart below, which graphs each bank’s share of total loans to listed companies. In 2010, the three largest institutions—Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group—accounted for 54 percent of total lending. The chart also shows the level of concentration increased dramatically, beginning in 2000. This increase in concentration arose from changes in regulations that allowed the creation of holding companies, enabling a spate of financial institution mergers. While one might think that a highly concentrated financial sector is an oddity of Japanese finance, this high level of concentration is, in fact, the norm in many industrialized countries. For example, in the United States, the three largest institutions—Bank of America, J.P. Morgan, and Citigroup—accounted for 49 percent of all banking assets in 2010. (See Federal Financial Institutions Examination Council (2011) Annual Report 2010, March 31.) While the three largest lenders only accounted for 32 percent of all U.S. commercial and industrial lending, the point remains that Japanese financial concentration is not that different from that of the United States. Read Do Bank Shocks Affect Aggregate Investment? 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 .
  • Stiglitz on Abe-nomics and Hope in Japan

    Things are looking up in Japan, as businesses in the world's third largest economy gain confidence in the economic policies of the Abe government . At The Guardian , Joseph Stiglitz gives Abe credit for tackling big structural challenges that have been holding back growth. And, Stiglitz writes that Japan could become a "ray of light" for advanced economies: Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive programme entailing monetary, fiscal, and structural policies. Abe likens this approach to holding three arrows – taken alone, each can be bent; taken together, none can. The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as president of the Asian Development Bank. During the East Asia crisis of the late 1990s, he saw firsthand the failure of the conventional wisdom pushed by the US treasury and the International Monetary Fund. Not wedded to central bankers' obsolete doctrines, he has made a commitment to reverse Japan's chronic deflation, setting an inflation target of 2%. Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate. Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant. Kuroda's stance has already weakened the yen's exchange rate, making Japanese goods more competitive. This simply reflects the reality of monetary policy interdependence: if the US Federal Reserve's policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Some day, we might achieve closer global monetary-policy co-ordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere. Monetary policy would have been more effective in the US had more attention been devoted to credit blockages – for example, many homeowners' refinancing problems, even at lower interest rates, or small and medium-size enterprises' lack of access to financing. Japan's monetary policy, one hopes, will focus on such critical issues. But Abe has two more arrows in his policy quiver. Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes. First, there is the counterfactual case: how would Japan's economy have performed in the absence of fiscal stimulus? Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990s, it is no surprise that government spending failed to restore growth. Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%. Second, anyone visiting Japan recognises the benefits of its infrastructure investments (America could learn a valuable lesson here). The real challenge will be in designing the third arrow, what Abe refers to as "growth". This includes policies aimed at restructuring the economy, improving productivity, and increasing labour-force participation, especially by women. Read Japan banks on success of Abenomics here .
  • Vox: 'Was the currency war inevitable?'

    Writing at VoxEU , Simon J Evenett --Professor of International Trade, University of St. Gallen in Switzerland-likens a currency war to a "rash" likely to break out depending on how policy makers respond to a global recession. But does that make currency wars inevitable? Evenett writes: Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war. Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries. There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war. Read Root causes of currency wars here .
  • Knowledge@Wharton: 'Did Japan Just Spark a Currency War?'

    When the G20 meets later this week, avoiding a currency war will be one of the top issues for discussion . With Japan lowering the value of the yen, European nations are highly concerned that an artificially high euro (not just against the yen, but also against a relatively weak dollar) is exacerbating economic distress in the Euro Zone. In an interview with Knowledge@Wharton , Wharton School finance professor Franklin Allen explains how the actions of Japan's leaders might affect economies from Brazil to Russia:
  • Bank of Japan's 'Epoch-making' Policy Moves May Not be Bold Enough

    In an effort to fight deflation and get Japan's economy moving, the Bank of Japan announced it is launching two policies: a 2 percent inflation target and an easing policy similar to the Federal Reserve's quantitative easing approach. Japan Prime Minister Shinzo Abe had been pushing for bold policy, and he called the BOJ's announcement "epoch-making." But investors may not agree--at least as of today. Wall Street Journal Asia Markets Editor Jake Lee says people were "expecting even more" from the BOJ:
  • Roubini's Outlook for 2013: "Downside risks to the global economy are gathering force"

    As President Obama launches into his second term, getting the economy moving remains among his top priorities. It is not the challenge he faced four years ago, when we were just months removed from the near global economic meltdown of September 2008. Rather, it may look very similar to last year: slow growth around the globe. But, according to Nouriel Roubini , there will be some "important differences , " that might lead us to prefer slow growth to the alternative. In a piece for Project Syndicate , Roubini raises concern that, "given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries." With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government. Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year. After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large – and potentially unsustainable – stocks of private and public debt remain. Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits. Read The Economic Fundamentals of 2013 here .
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