Skip to main content

The UK makes the Euro area look good.

A quick chart-of-the-day post motivated by some articles I was reading today about differences in country performances during the global financial crisis. Which economic policies worked best? How bad (or good) membership in the Euro area was to fight back the crisis? These are important questions to understand the effectiveness of different economic policies (monetary, fiscal, exchange rate).

When comparing performance across countries it is quite common to use a variety of indicators: GDP growth, unemployment, productivity,... They all tend to move together but they can sometimes provide a quite different view of the economic performance during a number of years. I decided to look at GDP growth but adjusting is by changes in demographics: GDP divided by working-age population (between 15 and 64 years old, as it is measured by the OECD). What I do is to compare the 2013 number with the 2007 number (which I use as the beginning of the crisis). [Click on the chart for a larger image]
















What I find interesting (and surprising) is the similarities across countries, despite the differences in policies. With the exception of Greece (and possibly Italy) all the other countries are very close to each other. The three countries that originally opted out of the Euro do not look too different from the Euro countries. Yes, Sweden has done great but so has Germany. The UK has grown less than the Euro area (of 18 countries), less than France or the Netherlands and at a rate which is very similar to that of Spain. Same for Denmark. Among the small countries that are still outside of the Euro area some have done quite well, others not so well and, surprisingly, some of these countries manage to do well with a currency pegged to the Euro (Bulgaria and Latvia).

[Note on data: let me stress that I am using GDP divided by working-age population and this makes a difference for some economies. For example, Latvia's GDP in 2013 is still lower than in 2007 but its working-age population has been declining sharply over these years. Dividing by working-age population allows us to remove potential demographic changes during these years.]

So despite the stubbornness of the ECB and the constraints of a common currency, economic performance in the Euro area has not been too different from those of the other European countries that are outside. This might not really be good news. It might simply be the case that the anti-inflation obsession of the Swedish central bank and the fiscal policy austerity of the UK government have helped to make the Euro-area performance look not too bad.

Antonio Fatás

Comments

Post a Comment

Popular posts from this blog

You can lower interest rates but can you raise inflation?

Last week the Bank of England lowered their interest rates. This combined with previous moves by the ECB and the Bank of Japan and the reduced probability that the US Federal Reserve will increase rates soon is a reminder that any normalization of interest rates towards positive territory among advanced economies will have to wait a few more months, or years (or decades?). The message from the Bank of England, which is not far from recent messages by the Bank of Japan or the ECB is that they could cut interest rates again if needed (or be more aggressive with QE purchases). Long-term interest rates across the world decreased even further. The current levels of long-term interest rates have made the yield curve extremely flat. And in several countries (e.g. Switzerland) interest rates at all horizons are falling into negative territory. The fact that long term interest rates is typically seen as the outcome of large purchases of assets by central banks around the world. In fact, many se...
Post a Comment
Read more

The missing lowflation revolution

It will soon be eight years since the US Federal Reserve decided to bring its interest rate down to 0%. Other central banks have spent similar number of years (or much longer in the case of Japan) stuck at the zero lower bound. In these eight years central banks have used all their available tools to increase inflation closer to their target and boost growth with limited success. GDP growth has been weak or anemic, and there is very little hope that economies will ever go back to their pre-crisis trends. Some of these trends have challenged the traditional view of academic economists and policy makers about how an economy works. Some of the facts that very few would have anticipated: - The idea that central banks cannot lift inflation rates closer to their targets over such a long horizon. - The fact that a crisis can be so persistent and that cyclical conditions can have such large permanent effects on potential output. - The slow (or inexistent) natural tendency of the economy to adj...
Post a Comment
Read more

The permanent scars of economic pessimism

Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical. It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance. Why did they change their mind? Is this evidence consistent with the standard economic models that we use to think about cyclical developments? Measuring potential output or the slack in the economy has always been challenging. One can rely on models that capture the factors that drive potential output (such as the capital stock or productivity or demographics) or one can look at more specific indicators of idle capacity, such as capacity utilization or...
Post a Comment
Read more