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L'Europe.Est.Foutue

by afew Tue Aug 26th, 2008 at 12:15:28 PM EST

While you can read in the FT that, all things considered, there's been some tub-thumping exaggeration about the parlous state of the eurozone and more broadly EU economy, and that, in fact, well, things are not as bad as they've been painted, here's a stirring and welcome correction from French public radio (France Inter), this morning, borne by the voice of economics editorialist Jean-Marc Vittori. (French-speakers can listen in here).

France InterFrance Inter
Pierre Weill: L'économie ne va pas mieux en Europe qu'aux Etats-Unis, à en croire les dernières prévisions du FMI, le Fond Monétaire International. Alors, quels sont les chiffres, Jean-Marc?Pierre Weill: The economy's no better in Europe than in the USA, according to the latest forecasts from the International Monetary Fund. So what are the figures, Jean-Marc?
Jean-Marc Vittori: Aïe, aïe, aïe! Ce n'est pas bon du tout! Le Fonds Monétaire International rabote ses prévisions comme s'il s'agissait d'une planche de sapin tout tendre.Jean-Marc Vittori: Oh dear oh dear oh dear! Not good at all! The International Monetary Fund is shaving its forecast as if it were planing a tender deal plank.
Il y a un mois, ses experts prévoyaient 1,7% de croissance en Europe cette année. Maintenant, ils n’en sont qu’à 1,4% - en France, ça fait tout de même 100 euros de moins par personne. Et l’an prochain, la production augmenterait de moins de 1%. La zone euro n’ira pas plus vite que les Etats-Unis, qui sont pourtant pris dans la plus forte tempête financière depuis des dizaines d'années.A month ago, IMF experts predicted 1.7% growth in Europe this year. Now they are down to 1.4% - in France, that's all the same 100 euros less per person. And next year, production is reckoned to increase by less than 1%. The eurozone won't move ahead faster than the USA, despite the fact that the US is caught up in the strongest financial storm in decades.
P.W: Alors, pourquoi l'Europe va-t-elle aussi lentement, Jean-Marc?PW: So why does Europe go so slow, Jean-Marc?

Your answer is? (Vittori's is below the fold...)


J-M.V: D'abord, notre fonds de croissance, si je puis dire, est moins bon. Le nombre d'habitants augmente de 0,3% l'an de ce coté-ci de l'Atlantique, c'est trois fois moins que de l'autre coté. Ensuite, il faut bien dire que les banques européennes s'en sont pris plein la figure avec la crise américaine. Elles sont venues tard profiter de la folie du crédit à Wall Street, elles ont donc acheté les produits les plus véreux, et elles ont perdu beaucoup d'argent dessus.JM.V: First, our growth basis, to venture a term, is not as good. The population increases by 0.3% year on this side of the Atlantic, that's three times less than the other side. Then it must be said that European banks took a full-face hit with the American crisis. They came in late to profit from the credit madness on Wall Street, so they bought the most toxic products and lost a lot of money on them.
Mais, ce n'est pas le plus important. Ce qui freine le plus la croissance n'est pas la crise financière, du moins pour l'instant, c'est la flambée du pétrole et des matières premières, c'est elle qui attaque notre pouvoir d'achat et pèse sur la consommation.But this is not the most important. What slows growth most is not the financial crisis, at least for the moment, it's soaring oil and raw materials prices, that's what attacks our purchasing power and weighs on consumption.
PW: Mais enfin, Jean-Marc, les Américains eux aussi, ils paient leur essence et leurs (inaudible) plus cher.PW: But finally, Jean-Marc, the Americans too pay more for their gasoline and their (inaudible).
J-M.V: Vous avez tout à fait raison, Pierre. Il y a autre chose qui freine la croissance en Europe. D'une part, des conditions monétaires tendues. Les taux d'intérêt sont deux fois plus élevés qu'en Amérique, et l'euro a donc beaucoup monté face au dollar. Les exportateurs ont plus de mal à vendre leurs produits à l'étranger, en particulier les industriels français, trop souvent sur les produits de milieu de gamme, sont très exposés à la concurrence par les prix.J-M.V: You are quite right, Pierre. There is another thing that is holding back growth in Europe. On the one hand, tight monetary conditions. Interest rates are twice as high as in America, and so the euro has climbed a lot against the dollar. Exporters find it harder to sell their products abroad, particularly French manufacturors, over-specialised in mid-range goods, are very vulnerable to price competition.
D'autre part, nous avons nous aussi notre crise immobilière. Bien sûr, pour l'instant, les prix ne s'effondrent pas, meme si le marché est exécrable en Espagne, en Angleterre, ou en Irlande, mais la construction de logements neufs se tasse depuis deux ans maintenant, alors qu'elle avait été un moteur très puissant de la croissance.Also, we too have our own real estate crisis. Of course, for now, prices aren't collapsing, even if the market is horrible in Spain, England or Ireland, but new home building has been down for two years now, and that was previously a very powerful driver of growth.
P.W: Alors, Jean-Marc, donne-nous de l'espoir, quelles sont les chances que ça reparte?PW: So, Jean-Marc, give us some hope, what are the chances that things take off again?
J-M.V: Je ne vais pas vous donner beaucoup d'espoir car ces chances sont hélas mitigées D'un coté les matières premières ne flambent plus, et il paraît peu probable de envisager un pétrole à 250 ou 300 dollars le baril dans un an, le billet vert reprend lui aussi des couleurs, tout ça va dans le bons sens pour l'économie européenne. Mais de l'autre coté, les Européens se sont énormément endettés ces dernières années, et ça, ça prend beaucoup de temps à amortir. Le FMI n'a sans doute pas fini de raboter ses planchesJM.V: I won't hold out much hope because the the chances are so-so. On the one hand raw materials are no longer soaring, and it seems unlikely we'll see oil at 250 or 300 dollars a barrel within a year, the greenback is brightening up, all this points the right way for the European economy. But on the other hand, Europeans got very heavily into debt in recent years, and that will take a long time to climb out of. The IMF has doubtless more board-planing to do.

(My transcription, my translation, my errors).

So apart from the fact that picked cherries are neither apples nor oranges (here he says EU, there eurozone, here France...), that he forgets that a higher euro offsets (partly) the rise in oil and raw materials, and that he doesn't mention the frothy growth potential of the financial sector, where else is he wrong?

Did European banks get slammed by toxic waste from US credit "madness"? Are Europeans heavily in debt?

At least he's not calling for labour market reform... Wonder why.

Display:
Europe.Is.Doomed

Obviously.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 26th, 2008 at 12:17:46 PM EST
I think this is an interesting tangent from Krugman:

Synchronized sinking - Paul Krugman - Op-Ed Columnist - New York Times Blog

Synchronized sinking

So much for decoupling. I do, however, have a small gripe with this NYT article. It suggests that the linkages of international markets via exports and imports make a synchronized world business cycle inevitable. Actually, there's a problem with that. You can do international linkages quite easily in a simple Keynesian model, and economists have been doing that since 1952. But when you try to run the numbers, they're never big enough to explain the actual degree of synchronization. (A bit on that here.)

The truth is that the synchronization of the world business cycle is something of a mystery.

Basically, we have no clue why economies don't "decouple" more around the world when a major one (in this case the US) hits trouble.

But, even though we have no theoretical explanations that really pass the smell test, it remains the case that the "world economy" does seem to rise and fall somewhat in tandem. As such it's not realistic to expect the EU economy to be unaffected by events elsewhere.

Also, many European banks had bought/set up US divisions, where they lost lots of money. Some prominent banks in Europe are just the European division of US banks, who are weathering a big storm.

There's something about "at the margin" involved here too. One can maybe say "there is no credit crunch in France" but at the same time, there has been a change in the credit available to the economy and that has an effect at the margin. And the margin can easily take care of 0.5% of growth. Throw in a reduced market for exports in the US (and potentially, in knock on, China) and also the UK and that's probably another 0.5% off French growth.

If you add that back, you get 2.4 - 2.7% which is about as much as we expect from late stage industrial economies these days...

by Metatone (metatone [a|t] gmail (dot) com) on Tue Aug 26th, 2008 at 12:30:12 PM EST
Fair points. I don't think I ever fully believed in "decoupling" anyway. And there are certainly credit restrictions in France (if "crunch" is overstated), and that in its turn is squeezing new home construction.

But Vittori seems to be suggesting European banks got hold of the most toxic waste around, and were almost suffering more than American banks. It depends somewhat, probably, on what circumference is "European": he seems to me to be counting in the UK when it suits him, jumping to the eurozone at other times. Likewise with exports, he picks up on France but forgets Germany.

It's really the question of comparing GDP growth US v Europe again that gets me most, though. When things are OK, we hear the US is zooming ahead. When that's not the case, and some of that extra US growth looks pretty much clearly exposed as slimy froth, we have to hear as a negative point that we have about the same growth rate.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 26th, 2008 at 01:38:39 PM EST
[ Parent ]
It's interesting that he points to population growth but doesn't mention the dirty secret:

If the US has more population growth, that means it needs more GDP growth to sustain the same standard of living. (Krugman commented on this recently, but I can't find it right now.)

If you include UK banks and UBS (Swiss) then the European banks did get some serious toxicity.

[Of course all the usual caveats about GDP growth and hedonic indexing still apply.]

by Metatone (metatone [a|t] gmail (dot) com) on Tue Aug 26th, 2008 at 02:22:33 PM EST
[ Parent ]
I suppose the response to the first point would be: compare per capita GDP. (Though I don't think he's doing that).

On the banks, as I said, it depends on the perimeter you apply. Switzerland and the UK are special cases. He's no doubt counting them in so he can labour that particular bad point for Europe.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 26th, 2008 at 03:25:57 PM EST
[ Parent ]
Isn't one of the reasons for the current economic slowdown the increase in oil prices and other commodities? Does anybody know how much of the slowdown can be attributed to that? After all, this will be inevitably synchronized to some extent, by its very nature.
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Aug 26th, 2008 at 06:27:35 PM EST
[ Parent ]
France Inter is hopeless. The worst "economist" of them all is Jean-Marc Sylvestre. The amount of neo-liberalism crap this guy is constantly pushing is amazing.

A study (in French) of the obvious slant of France Inter.

by balbuz on Tue Aug 26th, 2008 at 01:52:18 PM EST
Vittori Jean-Marc is a stand-in for Sylvestre Jean-Marc who is no doubt sunning himself somewhere swish.

Sylvestre would have added the obligatory point about the need for "reform". Vittori is probably a "leftie"!

The Acrimed article you link to corresponds to what I hear on France Inter.

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Aug 26th, 2008 at 03:35:51 PM EST
[ Parent ]
The ECB has the following numbers for the Eurozone on its web site
  • 1) Population growth .6%, so he was probably speaking about the EU, where .3% sounds reasonable
  • 2) M3 growth (June) 9.5%, this is clearly not a credit crunch of which first signs can be seen in the US
  • 3) CA balance -0.68%, so this is reasonable close to balanced trade. While the US still has to do something about its CA deficit. A rapid increase in savings rate could lead to more trouble in the short term in the US.
  • 4) full public gross deficit -2.2%, this is not good, but it is reasonable to assume that the US deficit is quite a bit bigger. Unfortunately it is very difficult to get similar numbers for the US.
  • 5) full public debt 67.1%, again it is difficult to find numbers with similar meaning for the US, but I expect numbers roughly in the same dimension. States seem to have little debt, but the community debt is as well a trillion dollar market, adding to the ~5.4 trillion federal debt.

Points 3+4+5 tell me, that the US doing better so far is not a good hint, they will doing better in the future. There fiscal capabilities to boost economic growth with public debt is soon exhausted. To keep interests low, the US needs financing by the peg countries, which will make a bail out of F&F inevitable, no matter what it costs.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Tue Aug 26th, 2008 at 04:27:29 PM EST
The US economy will never go down, as they would wag the dog?!
by das monde on Wed Aug 27th, 2008 at 01:17:13 AM EST
[ Parent ]
A rapid increase in savings rate could lead to more trouble in the short term in the US.

A rapid increase in savings rate would indicate an increase in some combination of investment, net exports, or net private wealth creation through government deficit spending.

... but how could it cause problems? ... the increase in aggregate saving cannot occur unless the increase in incomes from which to save occurs first.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 27th, 2008 at 01:58:56 PM EST
[ Parent ]
To the first: Why?

I mean you are right, that an increase in the savings rate has something to do with net exports and investement, as the saving has to be put somewhere. But savings is the trigger, the thing which people decide to do. Investment isn't too strongly dependent on local savings rates. If you want to borrow money for an investment and nobody in your country saves, you may import the money from another country where people do save.

And given that, there is no reason, why the output should not go down, when people start to save more money. There will be less demand for foreign financing of US investment, but when they buy less domestic products, the producers will produce less. If in the US something similar happens as in Germany from 2003 - 2005 I would call it trouble in the short term.

Of course in the long term that is the right thing to do, still.

To the second, this is clearly wrong.
You can increase your savings rate without higher income, when you stop buying stuff you formely bought regularly. This is what must happen in the US. People there (aggregated, just to mention, that nobody complains he didn't) have lived quite a lot beyong their means. The time of recognizing this is close, either somewhat voluntarily now, or forced in a few years.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Aug 27th, 2008 at 03:03:03 PM EST
[ Parent ]
There are not two distinct decisions ... one to spend out of income and a second to save out of income. There is only the one decision ... whether or not to spend out of income. The sum total of disposable income not spent is the sum total of income saved.

The fiction of the independent power of "savings" is very useful for justifying policies in favor of the wealthy, but not very useful for actually following what is going on with an economy.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 27th, 2008 at 04:44:46 PM EST
[ Parent ]
There are not two distinct decisions ...
Where have I claimed this?
Sure there is only one decision. But no private preson makes the decision to make an CA surplus. Your first and this comment don't frame the issue in the same way. If you had set, people decide to spend less, instead of what I said, people save more, then this would be the same. And pointing excatly to the reason, why in the short term a problem occurs: because suddenly people spend less.

I don't see really the point you want to make.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Aug 27th, 2008 at 05:01:12 PM EST
[ Parent ]
Yes, but framing it as "if people should save more ..." supports the neoclassical model in which fundamentals establish the equilibrium level of output and a "saving" decision plays an active role in setting the interest rate.

The next round effect of the decision is the loss of spending, both in terms of a reduction in exogenously financed consumer spending and a reduction in the propensity to consume out of income. So the consequential dimension of the decision is the decision to cut back on spending.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 27th, 2008 at 05:35:43 PM EST
[ Parent ]


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