Guardian interactive - PIIGS and Domino Effects
Here is a neat interactive graphic from the Guardian European debt crisis: the possible domino effect
Contagion spreads…
After Greek’s junk status downgrade yesterday, as well as Portugal’s downgrade; S&P today downgraded one of the other PIIGS, Spain as the contagion effect takes hold… Last night’s (Wednesday) Newsnight discussed the potential contagion ( from 27 minutes).
With Spain’s economy making up 8.5% of the EU GDP, this downgrade has bigger consequences than Greece’s.
Could the UK be next?
Greek junk status timeline
This informative interactive graphic from the FT shows the rapid rise in Greek government yields over the past year, resulting in yesterday’s downgrade to junk status.
When S&P warns holders of Greek debt that they only had an “average chance” of between 30% and 50% of getting their money back in the event of a debt restructuring or default, its going to have consequences…
One result of going junk (or sub-investment grade…) is that many financial institutions (including pension funds) are not allowed to hold such investment instruments, which will lead to a big sell-off of these, causing the yields to rise further.
As the fears of contagion spread, Portugal was also downgraded and the Vix index, a measure of “fear” in the US stock market, rose by more than 30 per cent, its biggest one-day jump since the height of the financial crisis in October 2008.
The moves highlighted the potential that the Greek crisis – the result of too large a debt load and expectations that it may default or have to restructure that debt – could spread and have knock-on effects on the global economy.
In this month’s edition of Economax, there is an in-depth article on Greece’s fiscal crisis.
Bonds
Both companies and governments can issue bonds when they need to borrow money. The issue of new government debt is done by the central bank and involves selling debt to capital markets. The bond market is also the place where companies may seek to raise funds by issuing new tranches of debt.
read more...»PIIGS
Excellent interactive graphic from The Economist on the vital statistics of the PIIGS economies.
Lessons for the UK from the Irish Recession
Stephanie Flanders offers this timely and well-judged piece from the Irish Republic about how the former celtic-tiger ecoonmy has adjusted to the painful medicine of fiscal austerity after their deep economic recession. She asks what lessons there might be for the political parties fighting the UK election.
The (sovereign) default option is costly
No rich advanced nation has defaulted on sovereign debts since the end of the second world war but should the default option seem attractive governments should beware the longer term costs and consequences. The Economist this week has a feature on some recent research into the impact of sovereign debt default focusing in particular on the experience of Argentina. Three major effects are identified:
read more...»Revision Download - European Economy 2010
Here is a free revision download for teachers and students who wish to update their understanding of key topics and issues in the European Union…
read more...»Kaletsky on the benefits of a weak pound
Anatole Kaletsky writes from Japan in today’s Times and discusses the benefits that flow from having a weaker exchange rate.
“A weak currency is something to be desired and encouraged during periods of recession, when employment output need additional stimulus. A strong currency, on the other hand, is desirable during boom periods, when economic activity needs to be restrained to prevent inflation. Right now, every big economy in the world, with the possible exception of China, needs extra stimulus — and therefore wants to have a weak currency. But that, of course, is impossible, since for every currency that weakens, another currency must go up.”
The conventional benefits are well explained in the article and there is reference to the Chairman of Komatsu who is now relieved that the UK did not join the Euro several years ago - but whose equipment can now be exported from their UK manufacturing base to the rest of the European Union at an ultra competitive price. UK financial services are also reaping the rewards of a weak sterling / dollar or euro rate since they bill their clients in dollars or euros but have a cost base in sterling (that is if they choose to remain in the UK!)
More here: Rejoice – the pound is down again
Revision Presentation - EU & the Euro Debate
This revised and extended revision presentation examines the debate about Europe’s Single Currency.
Launch revision presentation on EU & The Euro Debate
read more...»Assorted Links: 16 February 2010: Focus on the Euro
Five links to news stories connected to the European Single Currency
1/ The Guardian: Greece’s euro dilemma - what might happen if Greece left the Euro?
2/ Telegraph - UK jobless rate would be 15pc if Britain had joined euro, says CEBR - an interesting counterfactual!
3/ The Times - Greece use of derivatives puts more pressure on euro
4/ Independent - Greece faces tough measures in bid to save ‘Titanic’ economy
5/ Independent - Hamish McRae: Eurozone countries really must start running a surplus – sharpish
Hundreds of jobs lost as Bosch moves from Wales to Hungary
The Bosch Group - a privately owned German multinational manufacturing business has announced the closure of it’s car parts factory in south Wales with the loss of hundreds of jobs. With 900 jobs going at the factory itself, the final scale of extra unemployment will be significantly higher because of the negative multiplier effects for the local and regional economy.
read more...»Norway - your guys take a lot of beating!
Roy Hattersley makes a rare appearance in the economics blog today. He has an interesting piece in The Times on the relative prosperity of Norway - a country that lies outside the European Union but which has negotiated access to the EU single market. With very low unemployment (of less than 3% of the labour force, super high per capita incomes, a sovereign wealth fund worth more than £250bn and continued strong revenues from oil exports, Norway is unlikely to test the waters of EU membership anytime soon. A good piece for students of economic integration in the EU.
FT graphic - Currency fluctuations
An excellent interactive graphic at FT.com can be found here, on the major trends in the currency markets.
read more...»Deflation in the European Economy
Yesterday we learned that France and Germany were making tentative steps out of recession with 0.3% increases in real GDP in both countries during the second quarter (April through to June). Today the latest consumer price data came out for the Euro Zone and they show that the single currency area is now firmly in the grip of price deflation.
The average annual rate of inflation for the sixteen nations that are participating in the single currency was -0.7% in July 20092, down from -0.1% in June. A year earlier the rate was 4.0%.
For the EU as a whole there remains wide variations in the rate of inflation. Deflation is happening in Ireland (-2.6%), Belgium (-1.7%) and Luxembourg (-1.5%), whereas CPI inflation is relatively high in Romania (5.0%), Hungary (4.9%) and Poland (4.5%).
The latest CPI inflation data for the UK was 1.8% in June - a tad below the inflation target of 2.0%.
Inflation in the Euro Zone is likely to remain low in the near-term:
1/ There is a growing margin of spare capacity in the EU economy with most countries fighting recession and operating with a large negative output gap
2/ The recession is having a dampening effect on wage pressures
3/ A stronger Euro against the US dollar is keeping a lid on the cost of rising international commodity prices
4/ Manufacturers and retailers have lost pricing power because of the economic downturn
Are France and Germany emerging from recession?
Are France and Germany, two of Europe’s biggest economies showing signs of emerging from recession? The French and German economies both grew by 0.3% between April and June bringing to an end five consecutive quarters of contraction in real national output. Hugh Pym has a video report here.
The rebound in production is probably due to the impact of large government stimulus programmes and there will be doubts about how durable this recovery will be once the stimulus is drawn back and the deflationary effects of rising unemployment take hold.
Germany is an export-dependent economy and their industrial and capital goods sectors have been hit incredibly hard by the credit crunch and the 10% collapse in global trade in 2009. So her economy will stand to benefit from any upturn in the global economy.
The European Central Bank has followed other central banks in using monetary policy to simulate demand and bolster the finances of the banking system. It has cut its main interest rate to a record low of 1% and is pumping cash into the economy through a programme of quantitative easing to buy up to €60 billion in bonds in response to the recession and slowdown in inflation.
Britain remains mired in recession (our GDP shrunk by 0.8% in the second quarter). But a return to growth in France and Germany will also aid our prospects of recovery, as they are two of our main export markets.
For the sixteen nations participating in the single currency, national output dipped by 0.1% in the second quarter. The European Union as a whole - which includes the UK and a host of hard-hit Eastern European countries - saw a decline of 0.3 per cent in GDP.
More on signs of an economic upturn in France and Germany here from the BBC news site Hugh Pym has this video report on the fragile nature of the UK economy and the problems of people actively searching for work.
Economics Snapshot - Unemployment in the Euro Zone
There are sixteen member nations inside the Euro Zone and a deepening recession allied to falling prices is putting the monetary union under increasing pressure. Steeply rising unemployment is both an economic and social issue and it is also affecting budget deficits as tax revenues tail away.
The latest unemployment data for the Euro Zone finds that
*158,000 people joined unemployment lines across the euro zone in June, bringing the number of jobless to 14.9 million
*There are more people out of work than the populations of Austria and Ireland combined.
* Youth unemployment is a major problem in Europe. The unemployment rate among those under age 25 was 19.5% in June.
*Spain has the highest unemployment rate at 18.1 percent - followed by Latvia and Estonia.
*The lowest unemployment rates were recorded in the Netherlands (3.3%) and Austria (4.4%)
*UK unemployment is 7.5% of the labour force using the standardised LFS measure
*21.526 million men and women in the EU27, of which 14.896 million were in the euro area, were unemployed in June 2009. 5 million of the unemployed are youth workers.
More here on a 10 year high for European unemployment
Ireland in the grip of deflation
The debt ridden Irish economy is plunging into a period of price deflation according to new figures on consumer prices. The Irish economy is more exposed to the dangers of inflation than most because the private sector of the economy has a level of outstanding debt equivalent to around 175 per cent of GDP. The big risk is that a persistent downturn will bring about reductions in wages and prices and increase the real value of unpaid debts.
German Finance Minister urges less reliance on trade
Here is a fascinating short interview with the German Finance Minister who argues that Germany’s heavy dependence on international trade - she is the world’s largest exporter of manufactured goods - has left the country vulnerable to global economic shocks.
read more...»Europe Revision: The Euro
Revision notes on aspects of the EU single currency - is the UK economy better off outside of the Euro?
read more...»Euro Zone unemployment reaches a ten year high
Over 9% of the labour force within the Euro Zone is now out of work according to the newly released unemployment figures for the sixteen countries that are part of the single currency
read more...»European Economy - Free Revision Update for 2009
Here is a free revision update guide for students preparing for A2 Economics exams this summer….
read more...»Pain in Spain
Spanish unemployment has more than doubled in the last year and is now surging above the 4 million mark and heading for 5 million and an average of more than 20% of the labour force. Over 700,000 jobs have been lost in construction alone as the fall out continues from the collapse in the once-booming residential property market. As the FT reports today ““Spain and Ireland together have accounted for 75 per cent of the eurozone’s unemployment increase in the 12 months to February, even though they make up only 14 per cent of gross domestic product,” he said. “That tells you a lot about how bad their performance has been. Spanish employers are pleading for a reform of Spanish labour laws, saying it is too expensive to hire and fire permanent workers.” More here from the Independent.
Germany runs out of export fuel
There is a pertinent and very clear analysis of the problems facing the German economy in the analysis page of my Financial Times today. The essence of the article is that Germany has for decades relied upon exporting as its main source of growth and now that global trade is shrinking at such an alarming rate, the economy is finding it difficult to readjust and find domestic sources of demand. There is a deep underlying reluctance among German policy makers to use extraordinary fiscal policy stimulus as a way of expanding demand and absorbing some of the spare capacity created by the sharp drop in exports. Germans are fearful of a return to high inflation (they remember well the impact of reunification in the early 1990s).
“Germany was a sitting target after the collapse of Lehman Brothers investment bank in mid-September. Its exports were equivalent to more than 47 per cent of GDP last year – compared with less than 20 per cent in Japan and about 13 per cent in the US. Its industrial base is skewed towards producing machinery and equipment – “investment goods” account for more than 40 per cent of its exports – and towards emerging European and Asian economies.”
More here
I wrote last week about the apparent success of their car scrappage scheme in boosting demand for new vehicles - this is a shot in the arm for car manufacturers but we should always beware of the law of unintended consequences - the subsidy for trading in old cars seems to be hitting spending in other areas of the retail sector.
Ireland’s Economic Crisis Deepens - Goodbye AAA
Ireland is in deep economic crisis. Real GDP is shrinking at an annual rate of over 8% and the unemployment rate climbed to 11% in March taking the jobless rate to a level last seen in the mid 1990s. Consumer price inflation is now negative - the prices of goods and services are falling as are asset prices, especially property where the housing market is mired in deep slump. It will come as no surprise that consumer confidence has collapsed and that the Irish government’s own finances are in a real mess - income taxes may have to rise to plug some of the widening gap - the fiscal deficit now means that Ireland will suffer a further credit downgrading in the near future. Retail sales are falling at an annual rate of 20%. The Standard and Poor’s ratings agency downgraded Ireland’s debt from its prime AAA rating to a AA+, with a “negative” outlook a couple of days ago and bond yields on 10 year treasury debt have more than doubled in the last two years and now stand at over 6%. This raises the cost of servicing a ballooning level of public sector debt.
read more...»Currency Wars?
The Financial Times reports today that the Swiss Central Bank has started to intervene in the currency markets to lower the value of the Swiss Franc because they fear that a rapidly appreciating currency will worsen their economic slowdown.
read more...»A new iron curtain descends?
The front page headline in today’s Times looks at a new Iron Curtain splitting the EU’s rich and poor nations. Since the destruction of the Berlin Wall 20 years ago, and accession to the EU of most former members of the Soviet empire, there has been a ‘2-speed Europe’ with GDP growth in the new eastern states running much faster than in the old EU-15. However those ‘tiger’ economies are falling faster and further in the global recession than their western mentors.
read more...»Revision presentation - Irish Economy in Crisis
Things are not looking good for the Irish Economy:
read more...»Revised Presentations on the Euro
Here are two revised PowerPoint presentations on aspects of the Euro used in my A2 macro classes this week.
Aspects of Euro Area participation
European_Union_Euro_Debate.ppt
Macroeconomic developments in the Euro Area
European_Union_Euro_Economy.ppt
Four good short videos on the Euro
All from the BBC - I used them today in an afternoon lesson and they brought out some good discussion points.
Here are four useful and interesting short video clips on aspects of the single currency.
The Euro ten years on
Stephanie Flanders on the first decade of the single currency
Euro blamed for recession
Mark Mardell on why some Europeans are blaming the Euro for recession and falling real wages
Slovakia poised to embrace the Euro
Paul Henley on the latest country (the 16th) to join the Euro Area
The unravelling of the Euro Zone?
Paul Mason asks whether social and economic tensions will undermine membership of the Euro Area
