Category Archives: A Few Euros More

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More Growth In The Eurozone

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I think I’d better rephrase that: more overall growth, but a very mixed bag. In deriving aggregate numbers for the zone, four big economies really matter: Spain, France, Germany and Italy. Now each of these economies actually has different characteristics, so it is not clear what ‘the general picture’ means here.

Spain is the European economy whose current growth characteristic seem to resemble most those of the USA: above average growth (around 3.5% per annum), high dependency on housing and construction for the ‘extra growth’, high and rapidly growing private indebtedness (around 20% y-o-y) and a large current account deficit. Where Spain doesn’t resemble the US is in productivity, which has been more or less negative in recent years.

France is , as I’ve been suggesting, relatively ebullient despite the lack of all those labour reforms, and seems to be ‘on a roll’ at the moment. Driven by internal consumer demand and exports France managed an annualised 2.8% in the third quarter. Ironically, possibly France represents the big-four Eurozone economy with the most sustainable and balanced growth trajectory right now.

The German economy is growing at an unexpectedly high rate, but this extra-spurt is virtually all explained by the rapid increase in exports (helped of course by the fall in the euro).Investment, fuelled by the demand for all those exports, was also up. Meanhwile internal consumer demand is possibly even falling. (Growth in the third quarter was at an annual rate of 2.4% up from an annualised 0.8% in the second quarter).

And Italy, which as I keep mentioning is definitely now the ‘poor sister’ of the eurozone, with an identity crisis about what kind of economy it actually is, and a rapidly ageing population producing huge fiscal pressure. (On this see Morgan Stanley’s Vicenzo Guzzo yesterday). Italian growth actually bucked the trend in the third quarter and was lower than in the second quarter (dropping from a 2.8% annual rate to a 1.2% one).

All of this leaves me with the feeling: ‘Eurozone’ which eurozone?

Ukraine’s Unfinished Revolution

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Can the new democracy withstand a murder investigation?

So, when Viktor Yushchenko was catapulted to power last December, there was widespread expectation that the government would finally solve the crime. After all, ex-President Kuchma appeared to have been implicated in the murder by audiotapes provided by a former guard.

Alas, it’s been 10 months since Yushchenko took power, and, so far, little progress has been made: The alleged murderers have been arrested, but the men behind those men have yet to be identified.

Are They Really Sure About This?

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According to the EU Observer this morning:

“The new German government plans to use its 2007 presidency of the EU to revive the ratification of the EU constitution, according to a coalition deal struck on Friday (11 November).”

“We pledge to continue the ratification of the European constitutional treaty after the first half of 2006 and to give new impulses to [the ratification] under the German presidency in the first half of 2007,” the deal reads.

I’ll believe it when I see it, but the unreality of all this really dopes make one want to ask questions about the viability of what’s in the rest of the agreement.

Something Is Moving

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The FT reports this morning that France may be about to ease restrictions on certain highly regulated service industries and on business start-ups as part of a package to create jobs in poor suburbs. It is possible that these initiatives might be a test bed for broader economic reform throughout France. French finance minister, Thierry Breton, told the Financial Times:

France had failed its immigrant communities, largely housed in bleak areas of high unemployment where rioters have left one pensioner dead and burned 7,000 cars. “We have put a lot of money into the suburbs over the past 20 years,” Mr Breton said. “But obviously it wasn’t enough. We need to work on how to create more jobs and growth in those areas.”

Among the initiatives being considered is an easing of regulations in the specially designated “zones franches”. Currently companies are encouraged to locate in these areas of high unemployment through a limited range of tax breaks. However, the Finance Ministry is considering a form of “positive economic discrimination” that would exempt companies from certain rules in place elsewhere. These include relaxing professional qualifications on businesses such as hair salons and taxi companies, and increasing the level of state guarantees for business loans.

The French Consumer Is Alive And Well

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Some good news on the economic front to counter all that bad news on the social one. The French economy grew at an annualised rate of 2.8% in the third quarter of 2005 (or by 0.7% over the prebious quarter). Driving this growth: strong spending by French consumers. At this rate the French economy will be growing at a faster rate than the UK one in 2005.

France’s economy expanded at the fastest pace in more than a year in the third quarter, suggesting European growth is accelerating and providing central bankers leeway to raise interest rates. Gross domestic product increased 0.7 percent from the second quarter, when it rose 0.1 percent, the government said today in Paris.

In the euro region, where France accounts for about one- fifth of the economy, growth probably accelerated to about 0.4 percent in the third quarter from 0.3 percent the previous three months, the European Commission said Oct. 13. This quarter, the economy may expand 0.6 percent, it said. French consumers stepped up spending as oil prices retreated from a record and government-subsidized hiring pushed down unemployment from a 5 1/2 year high.

The French Unrest and the Labour Market

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Morgan Stanley’s Eric Chaney has what I consider to be a very sensitive and perceptive analysis of the economic backdrop to the French urban unrest:

Turning to economic causes, many analysts have pointed to mass youth unemployment as the main cause of the political unrest in low-income suburbs. The numbers are striking: the French unemployment rate reached 21.3% in the 15-24 age bracket in 2004, vs. 13.4% for the OECD as a whole. However, the headline unemployment rate is misleading because, at the same time, the participation rate of the 15-24 age group is particularly low in France: 37.5%, vs. 49.9% in the OECD. Practically, this means that 7.8% of the population aged between 15 and 24 is unemployed in France, vs. 6.5% in the OECD. The difference is not that large. What makes France different from other countries is the very low participation rate of young people, not particularly massive unemployment. In other words, the young in France take fewer jobs than their counterparts in other developed countries……”

“That brings us to a more fundamental point: why is it so difficult to create jobs in France? I have discussed this point in a previous note (“Making France Work”, June 21, 2005). In my view, the causes of the job disease fit reasonably well with the “insider-outsider” model developed by labor economists, provided that it is extended to products and services markets. I will elaborate only on labor market issues, starting with the minimum wage, which I believe is the major hurdle to job creation for young and less skilled workers. However, highly regulated product and services markets, which allow various interest groups to keep markets closed to competition and thus reduce employment opportunities, are another important cause of the job disease……….”

“Originally, the minimum wage was introduced as a protection against excessive employers’ bargaining power (“monopsomy” cases). Over the years, it became a protection against competition from cheap labour. Many studies on French data have shown that a rise in the minimum wage is very negative for employment. Although estimates may differ, they converge qualitatively. For instance, Bernard Salanié (Columbia University) and Guy Laroque (CREST) estimated that a 1% rise in the minimum wage could cost 29,000 jobs (“Une décomposition du non-emploi en France”, Economie et Statistique N331, 2000-1). As a consequence, each minimum wage rise, often seen as a “social measure” in French media, would increase the proportion of people living only on social benefits. This point is particularly important for young and low qualified workers, whose parents are often also unqualified: they suffered twice from the generous increases in the minimum wage in terms of fewer job opportunities for them and their parents and, thus, a lower income for their household.

Europe’s Digital Divide

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“A digital divide has appeared among Europeans, with age, income and education determining whether the continent’s citizens use the Internet”, at least this is the conclusion of a new study conducted by Eurostat on behalf of the EU commission.The largest divide by educational level was found in Portugal, and the smallest in Lithuania, only in the Netherlands did more than half of the retired population use the internet. Only in Sweden (70%), Denmark (64%), Finland (54%) and Germany (51%) did more than half of the lower educated use the internet during the first quarter of 2004, while the proportion of the higher educated who used the internet fell below 50% only in Lithuania (38%) and Greece (48%). Now why do I not find all this particularly surprising?

In the EU25, 85% of students (aged 16 or more in school or university) used the internet during the first quarter of 2004, as did 60% of employees, 40% of the unemployed and 13% of the retired, compared to an EU25 average of 47% for individuals aged from 16 to 74. This divide by employment status is also found by educational level: only 25% of those with at most lower secondary education used the internet during the first quarter of 2004, while the proportion rose to 52% for those who had completed secondary education, and 77% for those with a tertiary education.

Getting Old Before Getting Rich

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This is definitely about to become the new ‘meme’ about China. Actually it is reasonably valid. China’s ‘demographic shocks’ which come principally from the great famine produced at the time of the cultural revolution, and then from the subsequent one-child policy, are undoubtedly going to have significant consequences. Today UK Tory front bench spokesman on Trade and Industry David Willetts has a piece on the topic in the FT (subscription only unfortunately):

One reason for China’s stellar growth is that it is at a demographic sweet-spot. The massive reduction in infant mortality achieved by China’s barefoot doctors in the 1960s and 1970s is now yielding a surge of young workers – an extra 10m working-age adults per year. China’s challenge now is just to absorb them into the labour force. Add to that the massive population flow from the countryside and you can see why wages are low and growth is so fast. There are few pensioners and there are not many children either. The rabbit is indeed in the middle of the python.

If you are frustrated by your inability to read more, and are willing to hack it through a more academic paper on the same theme, then can I recommend “Demographic Dividend and prospects for economic development in China” by Wang Feng, of the University of California Irvine and Andrew Mason, of the University of Hawaii. The paper was presented at the recent (August 2005) UN experts meeting on ageing.

Update: New Economist has a fuller version of the Willets piece online.

Bigotry in Central Europe

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Here’s a post form Reflections on European Democracy that I’ve been meaning to link to for a while.

What I am saying is that the rants of people like Kaczyński, Marcinkiewicz, Lepper, and others against communists and gays are nothing new. They form a direct line with the authoritarian independent pre-war republics and with the communist regimes. The Soviets hated “deviance” of any kind, be it Jewish, gay, handicapped or dissident, because their mere existence spoiled the official myth of (socialist) perfection. Pre-war nationalists and their present ideological heirs hate it for the very same reason.