Mon Aug 28th, 2006 at 11:58:05 AM EST
Brad Setser has a unique way of looking at the importance of the European economy to global growth:
Europe, engine of global demand growth
That isn't a headline that you see in mainstream economy commentary. The standard story - one that is echoed in communiqué after communiqué - goes something like this.
Global rebalancing - code for a set of changes that will slow demand growth in the US and increase demand growth outside the US to help reduce the US deficit and the rest of the world's surplus - requires policy changes in Asia, the US and Europe. . . .
What does Europe need to do contribute more to global demand growth? Reform its labor and product markets. It hasn't done so. So it won't be able to contribute to global rebalancing.
One problem. The story isn't true. Not right now. Europe may not have reformed. But it sure has contributed to global demand growth over the past year and a half. My evidence? European imports.
Imports are the most direct way Europe contributes to global demand growth. And they are way, way up. . . .
Promoted by Colman
Eurozone imports have increased even faster than those of the US:
China's exports to Europe are growing even faster than those to the US:
It isn't all oil either. China doesn't export oil. And European imports of Chinese goods are growing faster than US imports of Chinese goods.
Could it be that lack of "reform" is actually promoting European growth rather than inhibiting it?
The facts are pretty clear. Europe has delivered a big impetus to global demand over the past 18 months. Despite the absence of the labor market reforms proscribed by the great and good gathering at Jackson Hole.
Or maybe because of the absence of the proscribed labor market reforms - their impact on demand growth has never been all that clear to me. If more job uncertainly leads to more savings (and if labor market liberalization leads to downward pressure on real wages in some sectors ... ), the overall impact on demand growth is ambiguous at best. And I doubt European firms are pushing hard for labor market flexibility because they are desperate to raise wages faster than the rigid unions will allow. The link between labor market reform and demand growth seems pretty thin to me, at least in the short-run.
So, smooth sailing for the Euro economies? Nah!
Housing market froth - thank you Spain and France - seems far more correlated with demand growth than labor market reform. Combine housing market froth and a relatively strong currency also helps pull in imports and, well, you get Europe over the past 18 months to a year. . . .
. . . Europe's mini-boom may be ending. The data is contradictory. Some German business confidence data is encouraging; other German business confidence numbers are not so encouraging (hat tip, Claus Vistesen). The same forces that pulled down the US housing market may eventually hit Spain and France.