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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
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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
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