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  • 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 .
  • Labor Force Participation, Women Workers, and Understanding the Gap Between Unemployment Rates in the U.S. and E.U.

    When the Labor Department releases the latest monthly employment figures tomorrow, the official unemployment rate will remain well below that of Europe . Thomas Klitgaard and Richard Peck of the New York Fed warn us not to assume the employment situation in the U.S. is so much better than in the euro area, just because a comparison of the unemployment rate looks like this: Klitgaard and Peck remind us once again of the importance of labor force participation. While participation in the U.S. has been plummeting, the same has not been true in the euro area: Had labor force participation in the euro area dropped at the same rate as the U.S., Klitgaard and Peck estimate unemployment there would be at about 9.5%--"below where it was at the beginning of the sovereign debt crisis." And they point to a particular segment of the population keeping the overall labor force participation rate up: women over 45. A breakdown of labor force participation by gender in the chart below illustrates the source of the divergence. Rates for men are plotted with dotted lines, and rates for women are plotted with solid lines. Euro area women are the outliers. Their labor force participation rate is about 2 percent above the 2010 level, unlike the rates for American men and women which have all declined and the rate for euro area men which has been relatively flat. Read Comparing U.S. and Euro Area Unemployment Rates here .
  • 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):
  • 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 .
  • Unemployment Rate Sitting at 12.1% in Euro Area

    On Friday, the Labor Department will release employment data for December. We have some unemployment news to tide us over, as Eurostat just put out the November data for the EU. Overall, the unemployment rate across the euro area came in at 12.1%, essentially the same level (give or take 0.1%) it has been at since the second quarter of 2013. So if this is the peak, it is looking a lot like a plateau. Across the full EU28, the unemployment rate was 10.9%. In November 2012, the unemployment across the euro area was 11.8%, and it was 10.8% in the EU28. Unemployment rate remains below 6% in Austria and Germany. Greece and Spain continue to struggle with unemployment above 26%. Here's a look at the breakdown of unemployment by country: Many young workers remain without jobs across the continent: In November 2013, 5.661 million young persons (under 25) were unemployed in the EU28, of whom 3.575 million were in the euro area. Compared with November 2012, youth unemployment decreased by 46 000 in the EU28 and increased by 2 000 in the euro area. In November 2013, the youth unemployment rate5 was 23.6% in the EU28 and 24.2% in the euro area, compared with 23.4% and 23.9% respectively in November 2012. In November 2013, the lowest rates were observed in Germany (7.5%) and Austria (8.6%), and the highest in Spain (57.7%), Greece (54.8% in September 2013) and Croatia (49.7% in the third quarter of 2013). Read the full report here .
  • 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 Trade Surplus Continues to Grow

    Europe's trade surplus grew faster than expected in September. According to Eurostat , the euro area ended the month with a 13.1 billion euro surplus, up from 6.9 billion in August, and up from a 8.6 billion euro surplus in September 2012. The trade balance for the EU28 came in at 0.6 billion euro, compared to a 14.5 billion euro deficit in September 2012. From the report: The EU28 trade surplus increased significantly with Switzerland (+56.2 bn euro in January-August 2013 compared with +23.8 bn in January-August 2012) and more moderately with the USA (+59.9 bn compared with +56.2 bn), Turkey (+19.4 bn compared with +17.9 bn) and Brazil (+5.0 bn compared with +0.4 bn). The EU28 trade deficit fell with China (-85.1 bn compared with -96.1 bn), Russia (-58.6 bn compared with -59.9 bn), Norway (-27.7 bn compared with -36.2 bn) and Japan (-1.4 bn compared with -7.4 bn). Concerning the total trade of Member States, the largest surplus was observed in Germany (+127.8 bn euro in January-August 2013), followed by the Netherlands (+36.0 bn), Ireland (+25.3 bn), Italy (+19.3 bn) and Belgium (+11.4 bn). France (-50.1 bn) registered the largest deficit, followed by the United Kingdom (-44.5 bn) and Greece (-12.9 bn). Read the full release here .
  • 'What's Wrong With Europe?'

    At Vox , Isabella Rota Baldini and Paolo Manasse compare GDP in Europe and the U.S. and ask, "What's wrong with Europe?" In asking the question they point to the considerable disparity between EU member nations, and raise concern that the global economic crisis dealt a major blow to the very necessary "process of convergence." It is useful to compare the trend of per capita real GDP in the US (blue line) and in the Eurozone (yellow line), as shown in Figure 1. The graph shows a decline in real average incomes since 2007-2008 in both areas. The impact of the crisis on the US is larger, the decrease in per capita income is of - $2,459 at constant prices (-6 %), compared a fall of -€1200 euro (-4.7 %) in the Eurozone. However, in 2012 the average US income has recovered to pre-crisis levels, whilst Europe’s is still 2.5 points below. In order to understand why, it is useful to look at the state-level data. Figure 1 shows two bands – blue and yellow – for the US and the Eurozone respectively, whose upper and lower limits describe the per capita income in the richest and poorest state: the District of Columbia and Mississippi in the US; Luxembourg and Estonia in the Eurozone. From the graph it is clear that internal differences are much greater in the Eurozone than in the US. Between 2000 and 2012, real per capita income of the richest US state is five times that of the poorest state. In the Eurozone this ratio is 8.6 to 1. The data on unemployment confirms this pattern – both countries experience a sharp rise during the crisis years; however, aggregate unemployment rate in the US has been declining since 2010, whilst it is still increasing in Europe. In 2012 the gap between the lowest (4.3% in Austria) and the highest (25% in Spain) rate skyrocketed. According to the standard model of economic growth, poor countries should grow faster than rich ones. This is because in such countries capital, compared to labour, is relatively scarce, and thus more productive. Consequently, one would expect poorer countries to save and invest more, as return on capital is higher. This process of convergence has occurred in Europe between 2000 and 2007; however, the speed of convergence has halved in recent years. Read the full article here .
  • Euro Area Unemplyoment Rate Remains at 12.2%

    We will get an official jobs report from the Labor Department this week. But what is the story across the Atlantic? According to Eurostat , the unemployment rate across the euro area was 12.2% in September. Bad news. But the good, or not-so-bad news is that the rate has been either 12.1% or 12.2% for the last half year. Only time will tell whether we are looking at the peak. The unemployment rate across the EU's full 28 member nations is 11.0%. A year ago, unemployment in the euro area was 11.6%, while it was 10.6% across all of the EU. Unemployment rate remains below 6% in Austria, Germany, and Luxembourg, and above 26% in Spain and Greece. Here's a look at the breakdown of unemployment by country: The jobless numbers for young workers across Europe remain staggering: In September 2013, 5.584 million young persons (under 25) were unemployed in the EU28, of whom 3.548 million were in the euro area. Compared with September 2012 youth unemployment decreased by 57 000 in the EU28, but increased by 8 000 in the euro area. In September 2013, the youth unemployment rate5 was 23.5% in the EU28 and 24.1% in the euro area, compared with 23.1% and 23.6% respectively in September 2012. In September 2013, the lowest rates were observed in Germany (7.7%) and Austria (8.7%), and the highest in Greece (57.3% in July 2013), Spain (56.5%) and Croatia (52.8% in the third quarter of 2013). Read the full report here .
  • Wharton's Mauro Guillen on Managing Expectations For Growth in the EU

    A few weeks back we saw this from Eurostat: Growth in GDP for the EU and the euro area. Bravo. Magnifique. μπράβο. Good show (or whatever the Brits are saying these days). Before we get too carried away, we suggest this Knowledge@Wharton interview with Mauro Guillen . Guillen says to expect any continued growth to be slow (unlikely to top 0.5%), and, he says, a jobless recovery much like that in the U.S. seems likely.
  • IMF: 'More Fiscal Integration to Boost Euro Area Resilience'

    In a new paper out this week, IMF researchers call for "deeper fiscal integration" among euro area countries. In reading the paper, it appears IMF researchers view the euro experiment as incomplete. Despite struggles during the global economic crisis and global recession, there is confidence in the euro area, but no so much in its current "architecture." From the paper: Large country-specific shocks. While it was recognized that countries joining the euro area had significant structural differences, the launch of the common currency was expected to create the conditions for further real convergence among member countries. The benefits of the single market were to be reinforced by growing trade, and financial, links—making economies more similar and subject to more common shocks over time (Frankel and Rose, 1998). In that context, these common shocks would be best addressed through a common monetary policy. Instead, country-specific shocks have remained frequent and substantial (Pisani-Ferry, 2012; and Figure 1). Some countries experienced a specific shock through a dramatic decline in their borrowing costs at the launch of the euro, which created the conditions for localized credit booms and busts. The impact of globalization was also felt differently across the euro area, reflecting diverse trade specialization patterns and competitiveness levels (Carvalho, forthcoming). These country-specific shocks have had lasting effects on activity. And divergences in growth rates across countries have remained as sizeable after the creation of the euro as before (Figure 2). Deeper into the paper we start to see some proposed solutions: Long-term options for the euro area. Cooperative approaches to foster fiscal discipline have shown their limits in the first decade of EMU. On that basis, and in light of international experience, two options emerge to foster fiscal discipline in the euro area in the longer term. One could be to aim to restore the credibility of the no bailout clause, including through clear rules for the involvement of private creditors when support facilities are activated. But the transition to such a regime would have to be carefully managed and implemented in a gradual and coordinated fashion, so as to not trigger sharp readjustments in investors’ portfolios and abrupt moves in bond prices. Another option would be to rely extensively on a center-based approach and less on market price signals. This would, however, have to come at the expense of a permanent loss of fiscal sovereignty for euro area members. In practice, the steady state regime might have to embed elements of both options, with market discipline complementing stronger governance. Read a summary of the paper, and download the full paper, here .
  • Markit Economics: Euro Zone Business Activity Picks Up

    Business is picking up across the Euro Zone, according to the latest Purchasing Managers Index release from Markit Economics . An upturn in new business activity, combined with increased activity in both the service and manufacturing sector, drove PMI to its highest level in 27 months. In fact, the survey shows increases pretty much across the board, with one notable exception. Employment continues to lag. Here's a look a the trend: Comments from Chris Williamson , Chief Economist at Markit, in the release: “An upturn in the Eurozone PMI in September rounds off the best quarter for over two years, and adds to growing signs that the region is recovering from the longest recession in its history. “It is particularly encouraging to see the business situation improved across the region. Although the upturn continued to be led by Germany, France saw the first increase in business since early-2012 and elsewhere growth was the strongest since early-2011. “Employment continued to fall, though it is reassuring that the rate of job losses eased to only a very modest pace, suggesting that employment could start rising again soon. “The overall rate of growth signalled by the Eurozone PMI remains modest, however, consistent with gross domestic product rising by a meagre 0.2% in the third quarter. While rising inflows of new business bode well for a further upturn in the fourth quarter, policymakers at the ECB will no doubt view it as too early to change their stance on keeping policy on hold for an extended period.” Read the full release here .
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