European Economy

Better off out than in?

Yes says Ambrose Evans-Pritchard in his piece in the Telegraph today arguing that the UK economy might have been dealt a much tougher blow from the fallout from the credit crunch had we been locked into the single currency zone. I have been discussing this with my A2 students this morning. When external shocks occur, the key to stabilising prices, demand and output is to have a flexible supply-side, fiscal policy autonomy and control over monetary policy. The UK has all three to a reasonable degree and I cannot help thinking that the sliding sterling-euro exchange rate is key to all of this.

Ambrose writes: “As Neil Mellor from the Bank of New York Mellon points out, the pound has been perfectly hedged in this cycle. Sterling has fallen hard against the euro, giving a shot in the arm to British manufacturers (yes, they still exist, 13pc of GDP) who rely heavily on Europe’s markets: yet it remains overvalued against the dollar, softening the effect of oil, metal, and commodity inflation. The shock absorber is working. The Bank of England has already cut rates three times.”

It is interesting when you chat to city and industry economists that discussion of the possible entry of the UK into the Euro Zone is completely off the agenda, the prospect does not exist. The debate has moved on for good.

Chart of the Day: Interest rates in the Euro Zone, UK and USA

The US Fed is doing it, the Bank of England is doing it, so why is the European Central Bank sitting on its hands and refusing to budge policy interest rates lower? Do they think that the Euro Zone will be largely immune from the credit squeeze? Are they not concerned about the abnormally high value of the Euro against the US dollar which is putting so much pressure on western European exporters? Euro Zone rates have been on hold for a year now.

Slovakia applies to join the Euro

Slovakia today made a formal application to join the single European currency and bid to become the fourth of Europe’s new member states to progress to the next stage of economic integration by locking themselves into the Euro. A verdict on entry is likely to come as early as May 7th when the EU commission publishes new economic forecasts which will include data on the key convergence criteria for wannabee euro zone members. If all goes well, Slovakia will enter the single currency system on 1st January 2009.

Carbon prices head higher as emissions targets start to bite

There was some important information this week from over 10,000 power generators, steel, cement and aluminum manufacturers.  The effectiveness of carbon trading in creating the right incentives for power users to cut emissions depends on there being a scarcity of carbon permits reflected in a price high enough (and sufficiently predictable in the medium term) for investment in improved fuel efficiency to be commercially viable. A couple of years ago the market price of carbon collapsed when it became clear that the EU had been overly generous in handing out free gifts of carbon permits. The criticisms were valid and the long term future of the carbon trading scheme was called into question.

But the signs for the second phase of this innovative market mechanism look more promising.

UK migrant flows starting to reverse?

Migrant flows starting to reverse

There are signs that the huge inflow of migrant workers predominantly from eastern european countries which has boosted the effective UK labour supply in recent years is starting to go into reverse.

ECB inertia threatens the slow lane

Central banks in the USA and the UK are cutting interest rates as credit crunch 2.0 takes hold. But the European Central Bank is holding firm with official rates at 4 per cent despite mounting evidence that the surging Euro-dollar exchange rate is hitting investment, exports and growth prospects. Why the inertia? And is the ECB so firmly fixated on the altar of price stability that it is prepared to allow the Eurozone economy to tumble into a growth recession thus putting the future of the single currency area under theat?

Europe’s 20-20 vision

Political leaders of the 27 EU nations are meeting to discuss proposals to make deeper binding commitments to CO2 emissions. This BBC news article provides good background for AS students looking at the issue for their AQA unit 3 paper and it is also relevant for A2 students covering environmental policy. I am always slightly suspicious of grand design statements, as always the devil is in the detail.  It might be worth getting your students to take this interactive test available on the BBC web site.

“Aside from cutting emissions by at least one-fifth by 2020 from 1990 levels, EU states have agreed to use 20 percent of renewable energy sources in power production and 10 percent of biofuels from crops in transport by the same date.”

Job Vacancy: Butternut Squash Picker

It may be worth setting your video recorders this evening at 9pm, BB2. As you may well be aware the BBC is running a series of programs under the heading of The White Season, Is white working class Britain becoming invisible? The title of the program tonight being The Poles are Coming:

According to some of the locals, Peterborough is being stretched to breaking point by the influx of Eastern Europeans, attracted to the area by the promise of high wages and decent living conditions in exchange for manual labour. Employers are delighted with their Polish recruits, but some residents want the Poles to go home.

Europe in a globalising world

There is a hefty EEAG Report on the European Economy 2008 published this week and available to download here as a pdf file. Lots of really up to date charts and tables on growth, inflation, jobs, real wages, trade patterns etc within the global economy that teachers might want to draw from the report and use in teaching international economics. Chapter 3 looks especially relevant to a discussion on the economic impact of globalisation on jobs and real wages. The (broadly favourable) analysis offers six reasons why globalisation is good for jobs in advanced economies.

UK ranked as one of Europe’s innovation leaders

Those in Britain who believe that innovation is one of the most important supply-side determinants of economic growth, improved trade performance and rising living standards will be cheered by the latest 2007 Innovation Scoreboard for the twenty-seven nations of the EU. Sweden, Switzerland, Finland, Israel, Denmark, Japan, Germany, the UK and the US are ranked as Europe’s ‘innovation leaders’.

The EU press release says that

‘The UK performs particularly strongly in Innovation & entrepreneurship with a relatively high level on the indicator of Early-stage venture capital. It performs below the EU average in the dimension of Intellectual property with a relatively lower level on the indicators of Triad patents and Community designs. The analysis of innovation efficiency suggests that the UK is above the EU average in transforming innovation inputs into Applications, but below average in transforming such inputs into Intellectual property outputs.’

I produced a revision mind map on innovation a couple of years ago, it is still available on the web site here (in pdf format)