A new Occasional Paper details the new methodology adopted by the Bank of Italy for calculating an index of price competitiveness, and applies it to the four largest eurozone economies.
I took the time to copy the numbers of table 3 in an excel file (let’s hope for the best), and to look at what happened since 2009. Here is the evolution of price competitiveness (a decrease means improved competitiveness):
I find this intriguing. We have been sold the story of Spain as the success story for EMU austerity as, contrary to other countries, it restored its external balance through internal devaluation. Well, apparently not. Since 2008 its price competitiveness improved, but less so than in the three other major EMU countries.
The reason must be that the rebalancing was internal to the eurozone, so that the figure does not in fact go against austerity nor internal devaluation. For sure, within eurozone price competitiveness improved for Spain. Well, think again…
This is indeed puzzling, and goes against anedoctical evidence. We’ll have to wait for the new methodology to be scrutinized by other researchers before making too much of this. But as it stands, it tells a different story from what we read all over the places. Spain’s current account improvement can hardly be related to an improvement in its price competitiveness. Likewise, by looking at France’s evolution, it is hard to argue that its current account problems are determined by price dynamics.
Without wanting to draw too much from a couple of time series, I would say that reforms in crisis countries should focus on boosting non-price competitiveness, rather than on reducing costs (in particular labour costs). And the thing is, some of these reforms may actually need increased public spending, for example in infrastructures, or in enhancing public administration’s efficiency. To accompany these reforms there is more to macroeconomic policy than just reducing taxes and at the same time cutting expenditure.
Since 2010 it ha been taken for granted that reforms and austerity should go hand in hand. This is one of the reasons for the policy disaster we lived. We really need to better understand the relationship between supply side policies and macroeconomic management. I see little or no debate on this, and I find it worrisome.
We really had a strange summer. The whole media circus, and to a certain extent markets, clung to a few sparse green shots to decree “the recession over”. Which, according to the latest OECD interim assessment, is technically true: GDP in the EMU is forecasted to increase in 2013 by 0.4 per cent. Can we party, then? Well, no. Read more
Yesterday Eurostat published growth flash estimates for a number of EU countries. As expected, they do not look good. In 2013 Q1 the eurozone has lost 1 per cent of its GDP with respect to the first quarter of 2012 (-0.7 for the EU 27). It is the longest recession since the inception of the single currency, and it brings with it record unemployment at 12.1 per cent.
Not surprising, I said, because in spite of increasing talks about softened austerity, austerity ain’t over. In many countries, government final consumption in real terms (the G in national accounting equations, just to be clear) sharply decreased. And this is, surprise, correlated with subsequent growth:
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!
Well, not him, actually (I wish I could); I need to content myself with his latest post on austerity. Krugman argues that austerity is happening (it is trivial, but he needs repeating over and over again), showing that in the US expenditure as a share of potential GDP is back to its pre-crisis level (while unemployment remains too high, and growth stagnates).
I replicated his figure including some European countries, and with slightly different data. I took OECD series on cyclically adjusted public expenditure, net of interest payment. This is commonly taken as a rough measure of discretionary government expenditure. I also re-based it to 2008, as most stimulus plans were voted and implemented in 2009. Here is what it gives: Read more
I wrote this piece with my friend Jean-Luc Gaffard. It is part of our ongoing thinking on the early steps of the new French administration. But I think it applies beyond France.
The French government faces a double challenge. The short run effects of the euro crisis compound a long-standing problem of competitiveness: from 1997 to 2012, the French market share fell from 5.3% to 3.3% of world exports. France is therefore suffering more than its neighbors, notably Germany, for the current slowdown.
In response to these challenges, François Hollande designed a two-arms strategy. First, he embraced austerity. To reduce public deficit to 3% next year, the French government presented a shocking 36 billion euros budget law for 2013. That will be mostly composed of tax increases. The second arm of the government strategy, a “competitiveness pact”, was, initially, aimed at shifting an important part of the burden of social security (20 billions euros) from firm contributions to the general taxation. Read more