Recovery in Europe?
by Joseph Joyce (is a Professor of Economics at Wellesley College and the Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs. His book, The IMF and Global Financial Crises: Phoenix Rising?, was published in 2012 by Cambridge University Press.)
Recovery in Europe?
Greece has returned to the bond market, issuing $4.2 billion of five-year bonds at an interest rate of 4.95%. The government’s ability to borrow again is a “reward” for posting a surplus on its primary budget (although the accounting that produced the surplus has been questioned). This has been viewed as a sign, albeit fragile, of recovery. Portugal has also sold bonds and hopes to exit its bailout program this spring. But what does recovery mean for these countries, and is it sustainable?
Growth” for these countries reflects a rise from a brutally harsh downturn. Greece has an unemployment rate of 26.7%, with much higher rates for its youth. Portugal’s unemployment rate of 15.3% was achieved in part by emigration.
A look forward indicates that the debt that drove these countries to borrow from their European neighbors and the IMF will fall in the next five years but continue at elevated levels. The latest Fiscal Monitor of the International Monetary Fund forecasts gross government debt to GDP ratios for these countries, as well as for the Eurozone:
Even if the debt/GDP ratios above the Reinhart-Rogoff 90% threshold do not pose a threat to growth, it is noticeable that the Eurozone’s debt does not fall below it until 2018, while debt/GDP in Greece and Portugal will be in triple digits for many years.
These debt levels become more worrisome in light of fears of deflation in the Eurozone. Greek consumer prices have been falling, and inflation in the Eurozone is below its 2% target level. European Central Bank head Mario Draghi has downplayed these concerns, pointing to rising prices in other Eurozone countries. But IMF economists Reza Moghadem, Ranjit Teja and Pelin Berkman point out that even low inflation can also pose problems. Deflation and less than expected rates of inflation increase the burden of existing debt. Greece’s debt will become more of a burden if it rises in real terms. Low inflation also makes wage adjustment harder to achieve.
The ECB would (presumably) respond if the prospect of deflation became more likely. But would it be able to stave off falling prices through its version of quantitative easing? There are concerns that large-scale purchases of assets by the ECB might not be as effective as anticipated. Interest rates have already fallen and are unlikely to fall further. Moreover, the decline in borrowing costs for Greece and other sovereign borrowers may have already have factored in ECB intervention.
Draghi’s pledge in 2012 to do “whatever it takes” to protect the euro undoubtedly lowered concerns about a collapse of the Eurozone. But, as I have argued before, the confidence within the Eurozone inspired by the ECB’s powers could vanish, particularly if there were doubts about the ECB’s ability to actually accomplish whatever it takes to avoid deflation. Lower borrowing costs based on faith in the ECB will ease conditions in the Eurozone crisis countries. But they need to be backed up by improving economic fundamentals before they are seen as justified. Until then, purchasing sovereign debt is a high-risk proposition, no matter what the interest rates signal.
cross posted with Capital Ebb and Flows
“Recovery in Europe?”
Yes, but what type of recovery is it?
In the E.U., the mix of GDP is different than the U.S.. There’s more public consumption and less private consumption, some countries have trade surpluses (which add to GDP), and the entire E.U. economy has been on the verge of collapse from its bureaucratic weight.
Of course, the E.U. has thousands of years of accumulated wealth, unlike the U.S., which was a wilderness a few hundred years ago.
Yet, the E.U., although the top direct competitor of the U.S., lags the U.S. badly in the Information and Biotech revolutions. The E.U. has likely benefited tremendously as a “free rider” from new U.S. industries.
When the government pays a worker $50,000 to redistribute income, that’s $50,000 of GDP.
And, when the government pays a worker $50,000 to produce $20,000 of real value to society, that counts as $50,000 of GDP.
Yet, E.U. per capita GDP is still over $10,000 a year less than the U.S..
PT,
This is a composite of partial and old info. You also urge to consider complexity and the next breath give us broad EU averages…and also a not real story (hypothetical monies) of your view of how things work somewhere in the EU….?
right, but that is total EU. GDP per capita is higher in the north than, in the US. The Euro is a large part of that.
Dan, if you disagree with my statements, which are based on extensive data, why don’t you prove them wrong? What exactly do you want me to respond to in the article? A lot of it seems to be speculation about the future.
The Europeans measure the E.U. economy similar to the U.S. national income accounts. Of course, there are differences between E.U. countries, and also differences between U.S. states.
For example, you can find charts of real per capita gross product for each state, from 2000 to 2013, by just moving the mouse over each link:
http://angrybearblog.strategydemo.com/2014/04/recovery-in-europe.html#more-23490
PT “What exactly do you want me to respond to in the article?”
But that is the point…you ramble off with things not part of the post. Can you actually respond to the post with specifics related to the post?
Sorry, wrong link:
http://www.economagic.com/beagsp.htm