Archive for the ‘eurozone’ Category
Friday, May 21st, 2010
This seems a surprising prospect at the moment, but according to Telegraph.co.uk this morning, Andrew Roberts, head of European rates strategy at RBS, said: “Great Depression II” could now be approaching; adding: “It now has the potential to speed toward its conclusion; a European $1 trillion package which does little and political panic tells you we are about to reach the end of the road. The world should be discussing deflation, not inflation.”
This apocalyptic view has been put forward as stock markets have fallen all over the world in the past couple of weeks. It seems that investors have been taking fright at the degree of ‘fiscal tightening’ taking place around the world. Also, there is the chance of a further liquidity crisis as some hedge funds are liquidating their positions in order to preserve capital.
Markets have also been responding to the euro crisis and the Greek debt debacle, and wondering whether the eurozone can actually survive in its present form. The recent collapse of the euro and its implications for trade, feature in an article today written by Grant Lewis, Head of Economic Research, at Daiwa Capital Markets Europe Limited. His article, entitled, “The weaker euro – who benefits” is reproduced below.
With the euro down almost 20% against the dollar since the Greek crisis blew up at the end of last year, European politicians seemingly doing their utmost to undermine the currency, and reports that fund managers are deserting the currency, a weaker euro looks here to stay. For many exporters based in the euro area, that will provide a welcome shot in the arm. But which economies will benefit the most from a weaker euro?
 Extra-euro area exports Sources: ECB, Eurostat and Daiwa Capital Markets Europe Ltd.
The chart above provides a rough guide to the relative importance of exports to the non-euro world for each participating member state. A few things stand out:
• Two small island economies – Ireland and Malta – stand to benefit greatly from a weaker euro (although, given the importance of the UK in their trade and the recent weakness of sterling, the chart probably exaggerates the boost from recent market events.)
• A middle ‘core’ group, which includes Germany, the Netherlands and Belgium, should also get a noticeable boost to economic growth from exports.
• But those countries at the eye of the fiscal storm in the euro area – Greece, Portugal and Spain – are the three countries that will benefit the least from a weaker currency. Italy, which has suffered from anaemic growth over recent years, and France, which has also repeatedly run current account deficits over each of the past five years, can also expect to receive little benefit from a softer euro.
Of course, a weak euro is not unambiguously good news for the euro area economy. For example, the resulting increase in import prices will hit real household incomes, which are already under pressure from pay cuts in public sectors, further dampening consumption growth. And it will do nothing to resolve the existing large imbalances within the euro area itself. Indeed, overall, we think that events in the forex market will simply exacerbate existing trends. The Germanic core will get a further boost to their ruthlessly efficient export sectors. But the crisis-hit and woefully uncompetitive Club Med countries, which were already faced with the poorest growth prospects, will get little or no benefit to demand.
Tags: credit crisis, depression, eurozone, trade
Posted in Deflation, Exchange Rates, eurozone, recession | No Comments »
Monday, May 10th, 2010
These are the words of Ollie Rehn, the EU Economic Affairs Commissioner over the weekend after EU finance ministers were involved in eleven hours of talks. The result of the emergency meeting which was brought together to deal with the fiasco in Greece, will have far-reaching implications throughout the eurozone.
The agreement means that the 16 countries in the euro bloc, will be able to draw upon 500 billion euros which is about £430bn. This is made up of 440bn euros in loan guarantees and 60bn euros of additional funding from the European Commission. Added to this the IMF has agreed to make 250bn euros available.
Also, the European Central Bank says that it will make purchases of both government and private debt in the eurozone. This is not the same as the quantitative easing taken up by the Bank of England because the ECB is not allowed by law to buy government bonds direct. They will, therefore have to buy second-hand bonds from banks. The ECB also says that that will try to “ensure depth and liquidity in those market segments which are dysfunctional”, whilst at the same time taking other measures to absorb liquidity elsewhere, so that their basic stance on monetary policy is not changed.
After the previous global credit crisis we are again faced with the issue of moral hazard. Previously it seemed that many banks were regarded as being too big to be allowed to fail with governments moving in to bail them out. Now it would appear that any country in the eurozone will not be allowed to fail, irrespective of the irresponsible way they may have been governed.
Initially, this morning the euro has rallied against the dollar and stock markets have also moved upwards, although this is all a question of confidence, and confidence is a very fragile thing.
Tags: EU, European Union, eurozone, moral hazard
Posted in European Union, eurozone | No Comments »
Wednesday, May 5th, 2010
“It is absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole.” So said Ollie Rehn, the EU economic and monetary affairs commissioner at a news conference in Brussels.
From forest fire to deadly disease: Dominique Strauss-Kahn, head of the International Monetary Fund, said in an interview with the newspaper La Parisien: “We have to succeed in avoiding contagion … we should remain vigilant.”
However, the EU has just published its Spring Forecast and there is no sign of fresh life in the Greek economy. In fact, the EU expects a 3% fall in Greek GDP this year, and predicts negative growth for 2011 as well. “What’s a Grecian urn?” asked Eric Morecambe. “About 3 drachmas a week” was the answer. Well, it looks as though our Eric was something of a prophet.
 Will Greece slide off the map? On the broader front, the Commission expects the eurozone countries as a whole to grow by 0.9% this year. Overall they expect Germany and France to grow by about 1.25%, with the UK expected to grow from 1.25% during 2010 to 2.0% in 2011. GDP is expected to contract this year in Cyprus, Ireland, Latvia and Lithuania, as well as Greece, but the other economies are expected to return to growth in 2011. Only Poland within the EU has succeeded in avoiding a recession altogether, and is expected to grow by 2.75% this year and 3.25% next year. No wonder so many temporary Polish immigrants to the UK decided to turn around and go home.
According to the Commission the factors explaining the divergences between EU economies include trade openness, exposure to the financial-sector disturbances and the existence of sizeable internal and external imbalances. They say that member states will grow at different rates, reflecting the individual challenges that each faces. Interestingly enough they note that: “Mounting concerns about fiscal sustainability, especially in some euro-area Member States, which cause increased turbulence in government-bond markets, and differences in competitiveness positions are among the most important challenges in this regard.”
Will Greece be forced out of the euro? Will the eurozone collapse trying to save Greece? The answer is probably ‘no’ on both counts. But it is much more fun being on the outside looking in than being on the inside looking out.
Tags: EU, European Union, eurozone, GDP, Greece
Posted in European Union, GDP, eurozone | No Comments »
Thursday, March 18th, 2010
At the end of last week, Francesco Paolo Mongelli, Professor at the University of Frankfurt, published a brief article entitled “Some benefits and costs from participating in a monetary union.”
In his conclusion he says that: “There is a broad range of benefits and costs in sharing a currency. Contrary to conventional wisdom, the macroeconomic costs of losing influence over macroeconomic stabilisation by relinquishing direct control over monetary policy and the exchange rate are more contained than previously feared. Moreover, the euro has spurred macroeconomic stability and financial integration. The latter will increasingly foster financial-based risk sharing. There is also evidence of a wide range of microeconomic gains in terms of improved microeconomic efficiency, and of broadly positive external effects.
 What are the costs and benefits of monetary union? “An underlying temporary asymmetry is not receiving enough attention. Some costs are incurred at the start of monetary unification, such as the changeover cost and the investment to set up a sound institutional framework. Instead, some benefits accrue gradually as the new currency gains acceptance, its circulation widens, as economic and financial integration deepen, and as economic governance consolidates. In other words, time plays an important role.
“Despite evidence of further integration over the last decades, Eurozone countries are still quite heterogeneous and are likely to remain so for the foreseeable future. It is unlikely that differences in legal systems, financial structures, and various other domestic characteristics, institutions, and preferences will rapidly fade out. Is that a problem? Various commentators have argued that heterogeneity should not be overstated. Moreover, financial based risk sharing will increasingly contribute to smoothing asymmetric shocks.
“We have also learned that the costs of slow dynamic adjustment are far above all other costs. It is also still poorly researched and poorly explained to the general public. In essence, this is a cost from not undertaking structural reforms and liberalisations. For many countries, reforms were postponed for too long and would have been even more complex to undertake without the euro: i.e., assuming that peer-pressure and market discipline help. In other words, opportunities should be seized.
“Recent events are showing that what has been achieved by the EMU cannot be taken for granted, but needs instead to be nurtured. The EMU needs new economic governance with broad ownership and an assessment of how systemic risks have now changed and are still changing. In particular, fiscal governance must be revisited in various ways. Hence, perseverance also plays an important role for the success of the EMU.
To reach the full article click here.
Tags: asymmetric shocks, European Monetary Union, macroeconomic costs, microeconomic gains, structural reforms
Posted in European Union, Microeconomics, Monetary Union, eurozone, macroeconomic policy | No Comments »
Friday, February 12th, 2010
The euro zone is in crisis. It seems that not only does Greece have the largest budget deficit in the EU in proportion to the size of its economy, but previous Greek governments have been ‘economical with the truth’ when presenting official statistics. The Greek budget deficit is around 13% of GDP, and the country has agreed to reduce this by four percentage points next year and bring it down to 3% by 2012.
In fact, the original Maastricht rules require member government’s budget deficits to be limited to 3% of GDP and national debt to be no more than 60% of GDP. However, all this was agreed before the biggest worldwide recession since the 1930s. The current problem is that Greece has to borrow large amounts of money to finance its debts at the same time as it is putting an austerity programme into place. Given that the reliability of Greek debt has been severely downgraded in the market, this means that they can only borrow at very high interest rates.
On top of this, if the EU does not come to their aid and the country defaults on its debts, the contagion will spread to the rest of the ‘PIGS’, as they have been dubbed. That is Portugal, Ireland and Spain as well as Greece.
How did the PIGS get into the mess they are currently in? Basically these countries went full throttle in recent years sustaining a boom based on credit, itself based on the low interest rates set by the European Central Bank. This fuelled large increases in wages in these countries at a time when there were low levels of inflation recorded in France and Germany. These high wages are also now damaging these countries’ export potential. There has been, therefore, a lack of balance in the economies of eurozone members. The subsequent ‘crash’ has now brought the chickens home to roost.
Why should the other EU members help out Greece? Well, actually Greece hasn’t asked for any help. Technically it would be illegal under EU rules for Germany or France to dip their hand into their pockets to bail out another country. This is why yesterday the EU’s Heads of Government promised that states within the eurozone will take “coordinated action, if needed, to safeguard financial stability in the euro area as a whole.” At the same time pointing out that: “The Greek government has not requested any financial support.”
So, far all they have given is a promise but when the Finance Ministers meet next week, more substance may be added to it. Already, there has been strong reaction in Germany. The Bild newspaper carried the headline yesterday: “No money for the bankrupt Greeks.” Other commentators were calling for the Mark to be brought back to replace the euro. The Germans are particularly concerned given that the latest figures show that the German economy showed zero growth in the last quarter of 2009, following a growth of 0.7% in the previous quarter.
Given their current economic situation the Germans will not be happy contributing to a bailout. On the other hand, could this crisis result in the break up of the eurozone. Experience tends to suggest that the two things the EU is good at are talking and compromising. Something will doubtless be worked out. One good thing is that with the UK being outside the eurozone, we will probably not be involved in any bailout.
Tags: ECB, European Union, eurozone
Posted in European Union, eurozone | No Comments »
Monday, February 8th, 2010
Latest figures from Paris this morning show that the OECD unemployment rate stabilised at 8.8% in December 2009. This was unchanged from the previous month but was up by 1.8 percentage points from the same month a year earlier.
Given that unemployment is a lagging indicator, and normally continues rising after a recession has come to an end, it is good to see that stability is fairly widespread at the moment.
In fact, the latest figures for January 2010 show that unemployment has fallen in both Canada and the US. In the US, the unemployment rate declined to 9.7% from a rate of 10.0% in December 2009, and in Canada the rate fell by 0.1 percentage point to 8.3% in January.
 Time to get those job applications in the post.
Of course, the UK is also showing very promising signs of a recovery in unemployment even though we only officially came out of recession in the final quarter of last year, and that with a growth rate of only 0.1%. Although, the latest figures show that UK unemployment was stable at 7.8%, there were absolute falls in the numbers unemployed in both the Labour Force Survey and the claimant count measures of unemployment.
In other major economies, the unemployment rate was unchanged in France at 10.0% and Germany also saw no change with a rate of 7.5%. However, in the euro area as a whole, unemployment actually rose by 0.1 percentage points to 10.0% in December 2009. Given the problems with Greece and its budget deficit, plus similar problems in Ireland, Spain and Portugal it may be some while before the recovery evens out across the euro area.
Tags: euro area, growth, OECD, unemployment
Posted in OECD, eurozone, unemployment | No Comments »
Monday, November 9th, 2009
The unemployment rate in the OECD area remained at 8.6% in September, the same as it was in the previous month. Overall, unemployment was 2.3 percentage points higher than it was a year earlier.
When we look at the Euro area, unemployment was 9.7% in September which was 0.1 percentage point higher than August. Meanwhile the latest figures for the UK show a rate of 7.9% in the quarter to August.
Most countries saw an increase in unemployment in September with France hitting 10.0%, Germany 7.6%. The latest figure for October shows that Canada reached 8.6% and the US saw an increase of 0.4 percentage points in October, to take unemployment up to 10.2%. This is 3.6 percentage points up on the previous year and means that the US has now gone through the psychological barrier of 10% unemployment.
 The disparity of unemployment rates in the advanced economies makes for interesting analysis. In some parts of the world unemployment is falling. For example Australia saw a small drop to 5.7% in September, whilst Japan saw a drop of 0.2 percentage points to 5.3%.
Some countries are doing particularly badly with Spanish unemployment rising from 18.8% in August to hit 19.3% in September. It makes it difficult to see how a single monetary policy in the eurozone can cater for countries such as Austria with an unemployment rate of 4.8% towards one end of the scale and Spain with almost one-in-five of the workforce out of work at the other.
Tags: eurozone, monetary policy, unemployment. OECD
Posted in OECD, eurozone, unemployment | No Comments »
Thursday, September 3rd, 2009
The good news according to the Organisation for Economic Co-operation and Development (OECD) is that the global economy is now expected to recover earlier than previously forecast. The bad news is that the UK is not going to be part of it.
In fact the OECD now believes that the UK economy will shrink by 4.7% in 2009, which is now worse than their previous forecast of 4.3%. Our own Treasury has predicted a contraction of only 3.5%. By contrast, the OECD believes that the eurozone will grow by 0.3% in the third quarter of this year, whilst the US will grow by 1.6%. Their forecast for the UK is a fall in the third quarter of 1.0% and zero growth in the final quarter.
The OECD notes a raft of favourable news which has influenced their more bullish forecast. They point to: falls in the cost of money market funding, although they still hold concerns about the banking system in general; stabilisation in the US and UK housing markets as far as prices and turnover are concerned; lowering of inventories this year is beginning to stabilise and we may see an increase here which will help raise economic growth; and, global trade has reached a low and is ready to accelerate.
 China is growing strongly again, but the UK economy will shrink further according to the OECD.
There is also positive news from emerging-market economies, with GDP in China estimated to have risen by over 14% in the second quarter allied to a strong rebound in other Asian emerging-market economies.
Is all this complete guesswork? Are things going to be worse than Treasury forecasts? Is it possible that our own dear government could have got things wrong? We will soon know.
Tags: China, eurozone, gdp growth, OECD
Posted in China, US economy, economic growth, eurozone | No Comments »
Friday, August 14th, 2009
Both France and Germany grew by 0.3% in the second quarter, much to the surprise of economic forecasters. This rebound followed a whole year of negative GDP. This compares with a fall in GDP of 0.3% in the US and a drop of 0.8% in the UK.
Given that GDP in Germany had fallen by 3.5% in the first quarter of 2009 and that of France had shrunk by 1.3% why have they both improved so quickly and why are they performing better than the UK.
Perhaps the main answer is that financial services are a major bastion of the UK economy and this has been the sector which has been at the centre of the credit crisis. By contrast, this sector is less important in both France and Germany as a percentage of economic output.
Germany has been particularly helped by a sharp rise in exports of 7% in the second quarter which is the fastest rate of growth for three years. Growth was also boosted by household and government expenditure. On top of this, imports have declined far more sharply than exports and thus had a positive effect on GDP growth.
In France, the economy minister, Christine Lagarde said that consumer spending and strong exports had helped pull France out of recession. In fact foreign trade contributed 0.9% to GDP in the quarter.
Within the EU Greece and Portugal also saw their economies grow by 0.3% but overall the Euro area saw a fall in GDP of 0.1% and the EU27 recorded a decline of 0.3%. This tiny fall in the Euro area compares sharply with a drop of 2.5% in the previous quarter.
The newly joined countries of eastern Europe continued to be hard hit, with Lithuania experiencing a 12.3% fall in the second quarter.
Tags: consumer spending, EU, eurozone, exports, GDP, recession
Posted in European Union, economic growth, eurozone, recession | No Comments »
Thursday, July 16th, 2009
Inflation in the sixteen countries making up the Euro area was -0.1% in June, which was down from 0.0% in May. Twelve months ago the inflation rate stood at 4.0%. In the wider EU27 annual inflation was 0.6% in June 2009, which was down from 0.8% in May. Twelve months earlier the figure was 4.3%.
There is still a large variation in rates between EU states. For example, in June, the lowest inflation rates were in Ireland (-2.2%) and Portugal (-1.1%) with the highest being Romania (5.9%), Poland (4.2%) and Lithuania (3.9%). The latest figure for the UK released this week is 1.8%.
The main components with the highest annual rates of inflation in June were alcohol and tobacco, miscellaneous goods and services and hotels and restaurants. The lowest rates were in transport, communications and housing. Hotels and restaurants saw an annual increase of inflation of 1.9% in the Euro area, but the French have already taken measures to boost their restaurant trade this month. They have reduced VAT on restaurant bills from an eye-watering 19.6% down to 5.5%. Unfortunately, for some of us, this reduction is only on the food and not on any alcohol consumed with the meal.
Eurostat has also released figures showing that industrial production grew by 0.5% in the Euro area in May compared to April, and by 0.1% in the EU27. This compares with a fall in production in both areas in April of 1.4% and 0.8% respectively. Looking at the past year as a whole, comparing May 2009 with May 2008, industrial production has declined by 17.0% in the Euro area and by 15.9% in the EU27.
Tags: EU, euro area, industrial production, Inflation
Posted in European Union, Inflation, eurozone, industrial production | No Comments »
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