The latest Eurostat release on inflation shows that the Eurozone, and the EU at large, keep flirting with deflation. This happens mostly because peripheral countries have near-zero inflation rates. Strikingly, no EU country had, in January, annual inflation rates above the 2% ECB target (Finland and the UK stood at 1.9%). Deflation is a problem for debtors, who see the real value of their debt increase. It is a problem for macroeconomic policy (in particular monetary policy). But it is also a problem for rebalancing. The imbalances that built over the period 1999-2007 show up in diverging inflation rates and labour costs. Take the former, from Eurostat data: Read More
Today we learn from Daniel Gros, on Project Syndicate that the emphasis on German surplus is misplaced:
The discussion of the German surplus thus confuses the issues in two ways. First, though the German economy and its surplus loom large in the context of Europe, an adjustment by Germany alone would benefit the eurozone periphery rather little. Second, in the global context, adjustment by Germany alone would benefit many countries only a little, while other surplus countries would benefit disproportionally. Adjustment by all northern European countries would have double the impact of any expansion of demand by Germany alone, owing to the high degree of integration among the “Teutonic” countries.
Fascinating. The bulk of the argument is that Germany is a small player in the global economy, and therefore that its actions have no impact. I have two objections to Gros’ argument. Read More
Germany rejected the US Treasury’s criticism of the country’s export-focused economic policies as “incomprehensible”. Much has been said about that. Let me just add some pieces of evidence, just to gather them all in the same place.
Exhibit #1: Net Lending Evolution
Note#1 : I took net lending because because net income flows from residents to non residents (not captured by the current account) may be an important part of a country’s net position (most notably in Ireland). Note #2: I took away France and Italy from the two groups called “Core” and “Periphery”, because their net position was relatively small as percentage of GDP in 2008, and changed relatively little.
Wolfgang Munchau has an excellent piece on today’s Financial Times, where he challenges the increasingly widespread (and unjustified) optimism about the end of the EMU crisis. The premise of the piece is that for the end of the crisis to be durable, it must pass through adjustment between core and periphery. He cites similar statements made in the latest IMF World Economic Outlook. This is good news per se, because nowadays, with the exception of Germany it became common knowledge that the EMU imbalances are structural and not simply the product of late night parties in the periphery. But what are Munchau’s reasons for pessimism? Read More
Update: just a link to Wolfgang Munchau, who seems to make a similar argument.
Austerity partisans had a couple of rough weeks, with highlights such as the Reinhart and Rogoff blunder, and Mr Barroso’s acknowledgement that the European periphery suffers from austerity fatigue.
In spite of the media trumpeting it all over the place, and proclaiming the end of the austerity war, it is hard to believe that eurozone austerity will be softened. Sure, peripheral countries will obtain some (much needed) breathing space. But this is neither a necessary nor a sufficient condition for a significant policy reversal in the EMU.
Interesting things happened this morning. I assisted to one of the presentations of the OECD interim assessment. There is nothing very new in the assessment, that concerning the eurozone, can be summarized as follows
- The outlook remains negative (while the rest of the OECD countries are doing better)
- There is still room for monetary accommodation
- This monetary accommodation may not benefit the countries that need it more, because the transmission mechanism of monetary policy is still not fully working
- The Cyprus incident shows that there is a desperate (this I added) need of a fully fledged banking union
- EMU countries need to continue on the path of fiscal stabilization, even if automatic stabilizers should be allowed to fully play their role, even at the price of missing nominal targets Read more
Eurostat GDP data are out. The eurozone is in recession, and it is worse than expected (-0.6% in 2012). Austerity is not working, and is recessionary. Wow, who would have said it…
Seriously, so long for the widespread optimism of a few weeks ago. The crisis is not over, we actually are in the middle of it. The way I see it, things will get worse before they get better (if they do get better).
Also interesting, Germany’s export-led growth strategy is panting. The fourth quarter of 2012 was rather bad (worse than in France, for example), and this is due to lower investment on one side, and to weaker trade (exports fell more than imports). Here is an excerpt of today’s press release of the German statistical office, Destatis:
In a quarter-on-quarter comparison (adjusted for price, seasonal and calendar variations), signals from the domestic territory were rather mixed according to provisional calculations: household and government final consumption expenditure went up slightly. In contrast, gross fixed capital formation in construction decreased a bit and gross fixed capital formation in machinery and equipment was down markedly on the third quarter of 2012. The decline of the gross domestic product at the end of 2012 was mainly due to the comparably weak German foreign trade: in the final quarter of 2012, exports of goods went down much more than imports of goods.
Germany stubbornly refuses to accommodate austerity in the periphery with a domestic impulsion. This makes adjustment for the rest more painful, and impacts expectations at home. This is why investment dropped significantly. My take on this is that if Germany had been only moderately more expansionist at home, expectations would not have been dashed (even if slightly increasing, in January the IFO index of German business confidence stagnates at around 104 at the moment, after hitting an all time high of 115.40 in February of 2011). And investment figures would be substantially better.
So, we learned today that austerity does indeed reduce growth, and that it spills to other countries. Two surprises in one day. It will need a hell of an effort to forget all of this before tomorrow!
The run up to the Italian elections in February is a welcome occasion to come back to the issue of austerity. The debate in Italy was fired by the widely discussed Wolfgang Munchau editorial, blaming Mario Monti for not opposing austerity. In the heat of electoral competition, this unsurprisingly stirred harsh discussions on whether Italy has room for reversing the austerity that ravaged the country. Some commentators got slightly carried away, accusing those opposing austerity of “silliness and falsehood”. I wonder whether they include the IMF chief economist in the bunch… Whatever, this is a minor issue; the way I see it, these discussions totally miss the point.
I am preparing a class on the crisis, and for the first time I have put together in a single place the actual numbers that I discussed sparsely in the past. Taken all together, they are even scarier. So scary, that I want to share them.
Not too much of a choice here. The first post of a European Gloomy Economist needed to be on the origin of our troubles. Let us start with a few stylized facts:
- The EMU is not an Optimal Currency Area.
- The single currency inevitably led to capital transfers from core to peripheral countries, and to the corresponding current account deficits of the latter (no need to explain; it is remarkably done here).
- Compression of domestic demand (a not too surprising effect of the Hartz reforms) in Germany created a mass of savings ready to fly into high return countries apparently made safe by the Euro.
- Only Greece had a public finances problem, at the onset of the crisis. On the other hand, all of the peripheral countries had an external imbalance.
- Capitals come, but capitals go. The reversal of capital flows is what is creating liquidity (or solvency) problems.
So what? So, the problem is not a Greek (periphery) problem; or, at least, it is as much a Greek/periphery problem as it is a Germany (core) problem.
What should have we done, then? There will be time in the future to discuss these issues in detail. For the moment, it suffices to mention them: Balance demand (more in the core, less in the periphery, to make examples) to reduce the deflationary impact of austerity measures; insist on medium-to-long-run fiscal adjustment, and not on the illusion of expansionary short-term consolidation; accept/trigger a modest inflation surge in core countries, in order to allow peripheral countries to improve their real exchange rate without going into deflation.
In two words: symmetry and solidarity. Two dirty words in the current debate on the EMU