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  • Ideas@davos: 'Scenarios of the International Monetary System'

    The global economy is tied together by the international monetary system. It is quite a dynamic system, but one that has been through a lot of changes in the last decade. And the all knowing voice in this World Economic Forum video says "the existing system has reached a breaking point." Whether you agree with that conclusion or not, the video makes a compelling argument at least about strains on the system:
  • 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 .
  • 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 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 .
  • Marketplace Whiteboard: 'Why a currency war could hurt you'

    Marketplace 's Paddy Hirsch is back at the Whiteboard . This time he's trying to get us to understand how currency wars affect us all. As usual, he removes the wonk from the discussion. This time using a story of sibling rivalry, honey, and the US-Canada border:
  • WSJ: Why Most Euro Area Citizens Don't Want to Break Up With the Euro

    While the euro has been much maligned in the media, most citizens in euro area nations are reluctant to turn back from the currency. The Wall Street Journal 's Alessandra Galloni reports that many Europeans see the shared currency as a hedge against some corruption, and as important for civic, if not purely economic reasons:
  • 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:
  • German Exports Set to Hit Record High

    There seemed to be no bright lights for European economies in 2012. But perhaps we were not looking closely enough at what was happening in some of the EU's stronger economies, like Germany. While we were watching Angela Merkel and German citizens struggle with how debt crises in Greece and Spain and Italy would affect everyone in the Euro Zone, German exports, apparently, were doing quite well. From Der Spiegel : In the first 11 months of 2012, exports grew 4.3 percent to €1.018 trillion ($1.335 trillion), the Federal Statistics Office said. Stagnant sales to the rest of the European Union contrasted with a 10.4 percent jump in exports to non-EU nations. Separately, the Federation of German Wholesale, Foreign Trade and Services (BGA) said it expects the value of exports to have reached €1.103 trillion in 2012 as a whole, a four percent rise over 2011, when they exceeded the €1 trillion level for the first time. It also forecast slightly stronger export growth of 5 percent in 2013, to €1.16 trillion. Still, exports weakened at the end of 2012, pulled down by slumping demand in Europe, Germany's biggest market. Some key questions emerge from this report: 1) What does this tell us for the overall global impact of a declining Europe? 2) What role does the weakened value of the euro play in increasing sales of German exports in the U.S., Brazil, China? 3) What might the impact of continuing growth of German exports be on other European economies? Read the full article here .
  • WSJ: How the Euro Survived

    There are still a few days of 2012 left, but it seems safe to say that reports of the euro's death, to paraphrase Mark Twain, "have been greatly exaggerated." The currency remains in tact, and all members of the Euro Zone are currently sticking with it. Wall Street Journal Brussels bureau chief Stephen Fidler gives credit to ECB president Mario Draghi for staying true to his word and keeping the euro going.
  • What East Asia Can Learn About Financial Integration From Euro Crisis

    We understand that what happens in Europe affects economies around the globe, so it is not unusual to see an economist in Asia imploring his regional neighbors to pay attention to the Euro crisis. But Jong-Wha Lee , professor of economics at Korea University and special adviser to the president of South Korea, focuses on a different aspect of the crisis than what Europe's declining purchasing power means for Asian exports. He wants Asian policymakers to focus on the long-term lessons of financial integration in Europe. From Project Syndicate : In fact, East Asian countries are unlikely to move toward a regional fixed exchange-rate system or a monetary union with a single currency in the immediate future, owing to the region’s great diversity in terms of economic and political conditions. Perhaps, in a few decades, the region’s countries will develop institutions to promote financial integration, such as a single bank supervisory agency of the type that the European Union is now creating. Nevertheless, Asian policymakers should improve cooperation mechanisms designed to prevent and manage crises. Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of the ASEAN+3 – the 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea. This $120 billion regional reserve pool was launched in 2010 to provide short-term liquidity to members in an emergency. The ASEAN+3 is now strengthening the CMIM by doubling the total fund size to $240 billion. The group also agreed to enhance the CMIM’s flexibility by reducing the minimum portion of crisis lending to be tied to the International Monetary Fund’s lending program from 80% to 70%. The CMIM has yet to be tested in a crisis. In its infancy, it might not be able to provide adequate emergency support in a timely and flexible manner. The $240 billion fund is small, amounting to only about 1.5% of the region’s GDP. European experience suggests that large-scale systemic shocks call for greater financial support. Read Euro Lessons for East Asia here .
  • Why European Policymakers are Paying Close Attention to the 'Fiscal Cliff' in the U.S.

    The OECD's relatively positive economic outlook , released earlier this week, presented Europe's struggles as much more worrying for the potential of the global economy than the fiscal cliff threat in the U.S. But as Dow Jones 's Nick Hastings reports, the two are not totally unrelated. Should policymakers in the U.S. not come to some agreement, then Europe is likely to feel a lot of economic pain:
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