Eurozone More Exposed?

Chief OECD economist Jean Philippe Cotis wasn’t only proferring recommendations to the Federal reserve yesterday. He was also not backward in coming forward with his opinions about future growth in the eurozone. Even if Cotis isn’t exactly my favourite economist I feel here he may be a little nearer the truth.

The occasion for M. Cotis’ observations was the official press briefing for an interim OECD assessment of the economic situation in Europe, the United States and Japan.

As the Financial Times puts it:

The eurozone economy is suffering chronically weak demand, is more vulnerable than the US to an oil price shock, and could be at risk from deflation, the Organisation for Economic Co-operation and Development warned yesterday.

In his latest global economic assessment, Jean-Philippe Cotis, the OECD’s chief economist, said signs of a pick-up in European economic activity could not be described as “anything other than a technical recovery at this stage”, although some recent German investment data had been more encouraging. Monetary policy needed to be “highly accommodative”, he said.

But there’s more:

Mr Cotis argued that the eurozone’s “chronic demand deficiency” had been reflected in the trend decline in the “core” inflation rate – excluding energy and food prices – to an historic low. One, optimistic, explanation was that prices had become more flexible, helping to ensure price stability over the long term. A more pessimistic interpretation was that the eurozone “could be in danger of entering into deflation”, Mr Cotis said.

Mr Cotis argued that coping with the oil price shock was likely to be easier for countries such as the US, where the economic expansion was broader based. In the eurozone, the shocks had been milder but “resilience is below that in the US”.

Now this comes hot on the tail of an earlier report in the FT (which strangely still has offered us no details of its source) that ECB research was leading to a lower eestimate of the potential long-term growth rate of the eurozone economy:

According to the FT, it emerged on Monday (5 September) that long-term growth in the Eurozone lies no higher than 2 percent – and possibly even below that. The ECB primarily blames demographic factors for the shift in its growth projections. While European populations have continued to grow older, participation of several groups in the labour force has been disappointing – sparking sluggish productivity growth.

The bank sees its changed forecasts as a call upon governments in the Eurozone to step up structural reforms in their economies, particularly in their labour market, the FT notes. Long-term growth projections in the UK, which is outside the Eurozone, lie at just below 3 percent, while the “potential” growth in the US is even higher – at 3 percent or more.
(Source EU Observer)

I’ve cited the EU Observer version here, since it is actually more explicit than the original FT version I saw. They obviously have had sight of a document I have yet to see. As regular readers will appreciate I regard this as ‘light at the end of the tunnel’ news, since I think this marks the first time I have seen the demographic issues (which have long been around in things like the pensions debate) explicitly recognised as a factor influencing immediate growth problems and listed amongst topics to address in even short term monetary policy. After years of arguing without response, is there a chink of light here?

On the other hand Cotis’s ‘throw money at the situation‘ suggestion, seems well behind the curve, since, in case he hasn’t noticed, they’re already doing that, and in the German case it just isn’t working.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

8 thoughts on “Eurozone More Exposed?

  1. “in the German case it just isn’t working.”

    The Telegraph and the BBC are taking rather more optimistic views on prospects for the German economy:

    “Barely noticed, Germany has overtaken America to become the world’s biggest single exporter, shipping the hardware that powers the rising economies of Asia and eastern Europe. Its trade surplus is now greater than that of China, Japan and India combined, reaching a staggering 16.8 billion euros in June alone. The profits made by German companies are running at over 33 per cent of national income, the highest in 40 years.
    http://www.opinion.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2005/09/05/do0502.xml&sSheet=/opinion/2005/09/05/ixopinion.html

    By this, employment costs have been dramatically cut in Germany and unemployment is starting to fall:
    http://news.bbc.co.uk/1/hi/business/4205086.stm

  2. “The Telegraph and the BBC are taking rather more optimistic views on prospects for the German economy:”

    Well this Bob is the consensus view. Only one problem: it’s wrong. They’re using a model that is in-appropriate. A kick-start and your back in business.

    All the info you present is fine, there is a major export boom, and the German (and Japanese) company is extraordinarily competitive. But where is the rebound in domestic demand? This is the missing piece of evidence. It hasn’t been produced, and it won’t be. (As a sustained trend I mean, of course you can have a quarterly up-tick, especially after it’s been stuck so low, for so long). But the BBC and others aren’t taking note of what the ECB is actually saying (partly because, of course, it isn’t saying it too loudly).

    I think people are concerned, and are not sure what to do. Wim Kok was predicting that the demographic changes would shave 1% from eurozone per annum growth come 2020. What appears to be the case is that 1% per annum has already been shaved of German trend growth, and there is clearly more top come, a lot more. This is only starting.

  3. “and unemployment is starting to fall:”

    The drop in unemployment you know is very very small, and the deficit is going up (I mean you have to imagine the spd would be working hard to try and show something on the meter).

    Even the BBC article you quote seems nearer to what I’m saying:

    As they tighten their belts, Germany’s savings rate has reached a staggering 11% “Consumers think it’s cool to be a scrooge these days,” says Frank Brueckner, who runs a heating and plumbing business near Coburg, Bavaria.It is a vicious circle: consumers stop spending; retailers bemoan empty shops.

    “For once, the current export boom has failed to trigger a higher rate of investment, says Hans-Werner Sinn, president of the Ifo Institute for Economic Research. All that results in poor tax receipts and – combined with eurozone stability rules – starves the federal government of money needed to kickstart the economy.

    Of course I think Sinn and I are on the same wavelength.

    I think the Telegraph piece is just anti-Brown propaganda.

    The FT has this:

    The overall economic impact of a German manufacturing revival is likely to be limited – corporate restructuring and cost-cutting has undermined consumer confidence, depressing private consumption. The Organisation for Economic Co-operation and Development this week lowered its forecast for German gross domestic product growth this year to 1 per cent, compared with the 1.2 per cent expected in May. Holger Schmieding, economist at Bank of America, said summer data were often distorted by the timing of holidays. July’s data “seem to be focused on the car industry and I’m afraid we will see a correction later”.The industrial output figures come a day after a rise in manufacturing orders data, suggesting strong production growth might continue in coming months. Overall, manufacturing or-ders were up 3.7 per cent in July compared with June – but in east Germany orders were up almost 18 per cent. Gwyn Hacche, economist at HSBC, said foreign orders were “the main area of strength” but warned that “the pass-through from exports into jobs and consumer spending” might be muted.

    http://news.ft.com/cms/s/311af136-1fc8-11da-853a-00000e2511c8.html

    Incidentally, and trying not to blow my own trumpet too hard, I was already predicting this, demand negative, dimension of the restructuring last summer:

    http://fistfulofeuros.net/archives/000499.php

  4. it emerged on Monday (5 September) that …
    The ECB primarily blames demographic factors for the shift in its growth projections. While European populations have continued to grow older, participation of several groups in the labour force has been disappointing – sparking sluggish productivity growth.

    So over the weekend they discover a demographic trend ?

    If I read the second part correctly, they blame labour force participation as much as demographics. Any attempt to separate those effects ?

    And how exactly is a low labour force participation linked to sluggish productivity growth ? Normally, I would think the fewer workers for a given output, the higher the productivity ?

  5. As they tighten their belts, Germany’s savings rate has reached a staggering 11% “Consumers think it’s cool to be a scrooge these days,” says

    Die Zeit had an article about German saving and spending:
    http://www.zeit.de/2005/35/Sparfalle

    They argue that it’s not an issue of mood or being ‘cool’.

    Rather, well off Germans now get all they want see little need to spend more and save up to 20% of their income while the jobless and other less-well off have little opportunity to spend more because they don’t have any money left. Increased inequality and saving on jobless payments etc. is making this trend worse, as does the prospect of even more economic structural reforms.

    Shifting more income from high earners to low-earners (by a more progressive taxation, family cash handouts, welfare etc.) would help the situation, as might state investments designed to also enhance job growth. State investments are also notoriously low in Germany at the moment.

  6. But where is the rebound in domestic demand? This is the missing piece of evidence. It hasn’t been produced, and it won’t be

    And your suggestion to improve the situation ?
    Short of shooting all the pensioners, that is

  7. Hi khr sorry I’ve been so slow responding, I’ve been having one of those ‘european’ mini-holidays. :).

    “So over the weekend they discover a demographic trend ?”

    No, I don’t think this is quite what’s being said Karl Heinz. What they are saying is that the fact that the ECB is worried was leaked (became public knowledge) over the weekend. The ECB seem to have revised down the eurozone growth potential, we still haven’t received details of the research, but it seems like they are using some version of the now reasonably popular asymmetric demographic shocks model.

    “they blame labour force participation as much as demographics.”

    obviously we agree that this is also central, indeed raising participation rates among workers over 50 forms part of the response to declining population.

    Clearly also bringing down the unemployment is a top priority for all sorts of reasons, but not least of them because people will never be prepared to accept systematic economic immigration while unemployment is around the 10% mark.

    “Any attempt to separate those effects ?”

    Obviously all the research here is in its very early stages, but again, if you look at the difference between Germany and France you can get a basic rule of thumb guide, since the patterns of participation are broadly similar, and Germany is significantly older than France.

    “Rather, well off Germans now get all they want see little need to spend more and save up to 20% of their income while the jobless and other less-well off have little opportunity to spend more because they don’t have any money left.”

    Well this is the standard Keynesian type propensity to consume argument, and of course in a loose sense it is perfectly valid, as it is in Frnace. But this doesn’t address the fact that there seems to be an age (ie separate from the income related) propensity to spend and save, and this is why the aggregate demand curve is more to the left in Germany than it is in France and the aggregate savings curve more to the right. ie at whatever income people tend to save more and spend less in Germany than they do in France.

    I think at this level the die zeit argument seems to be superficial.

    “Shifting more income from high earners to low-earners (by a more progressive taxation, family cash handouts, welfare etc.) would help the situation, as might state investments designed to also enhance job growth.”

    Well, I guess this would be Lafontaine’s argument, and I just basically don’t agree, as I’m sure has been tediously obvious. I think – among other things – the structural deficit in public finance is going to have to come to an end in the very near future, and then and initiative driven by public spending is going to be exceedingly constrained.

  8. Incidentally:

    “Short of shooting all the pensioners, that is”

    Obviously you threw this comment in as a kind of joke. But I think we need to be careful. At the present time right wing demagogic extremism is pretty much a ‘looney fringe’, but I do worry that if people keep ‘burying’ this issue (unfortunate metaphor perhaps) and not facing up to it, and we get ‘grand coalitions’ which offer hope and can’t deliver, then we could see a resurgence of dangerous extremism, and these kinds of movements don’t tend to be too supportive of the old and infirm when they get their hands on political power.

    I don’t think there is any simple ‘remedy’. I think we are running out of fiscal and monetary options. The changes which can ‘alleviate’ the situation are structural and long term (more children, immigration, increasing the working age, reforms to the education system making it more flexible, and making it easier to work and study from an earlier age) and meantime you need a very reality-focused political discourse. Unfortunately we are still a very long way from that.

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