The Final Countdown

by Thomas Cooley, Ben Griffy, and Peter Rupert

It is now less than 12 hours before we hear the final tally on whether to stay or “Brexit” (British Exit) from the economic coalition known as the European Union. Until recently, it looked likely that the UK would remain a member, but recent polling suggests that the likelihood of either outcome is roughly equal (link). While a British withdrawal from the EU might be easier than a member of the currency union, there is still a lot of uncertainty about what the economic consequences might be. It seems fairly certain that given the instability (economically and politically) in Europe, a withdrawal would not be advised at this point. Here, we discuss what might be the outcomes of such a policy.

Consequences for the UK: Perhaps least clear is the impact upon the UK from an EU exit. Supporters of the referendum broadly base their argument on fears about new immigrants, the merits of which we will not discuss here, rather than economic principles. There are a some economists who have argued that Brexit would improve the UK economy (see here), but we do not find these arguments credible. The most likely consequence of Brexit is a sharp decline in intra-EU trade for the UK. The UK has been among the most active importers and exporters in the EU for some time:Real Imports-13.pngReal Exports-13.png

This second graph is somewhat notable, as the UK has lagged behind many other EU countries during the post-recession period. However, as noted here, the UK has been among the most successful worldwide economies after joining the EU (see “The EU has been good for Britain”). UK economists estimate that GDP could be 1.5 to 3.7 percent lower, with losses in productivity magnifying this loss (link).

In addition, it seems likely that there will be consequences for the UK from the EU directly. The EU could implement sanctions in order to dissuade other economies from leaving, sending the signal that exiting is costly. How large these penalties would be depends upon how strong a signal the leaders of the EU want to send.

Consequences for Europe: As we discussed in a previous post, Brexit would change the dialogue surrounding the European recovery from the Great Recession. Furthermore, the UK is among the most active importers of goods from fellow EU-member states:Import Activity within EU-13_raw.png

And has driven a substantial amount of the recovery during the post-recession period in exports from within the EU:Import Activity within EU-13.png

 

A larger concern is that a British exit from the EU could lead to countries like The Netherlands exiting the Eurozone as well which would set of a run for the exits. A UK exit could be a signal to these periphery economies that the time is right, and lead to larger problems for the EU. Broadly, Brexit could signal the beginning of the end for the EU economic coalition.

Consequences for the US: Continued uncertainty has harmed recoveries in the United States, and the possibility of a crisis in Europe has contributed to tepid growth in the US (see our companion blog, here, for more recent analysis of the US economy). The United States is certainly more insulated from the effects of Brexit, but any feedback could be damaging for both the US and Europe. The EU economies aggregated are the largest trading partners of the United States, with Eurozone economies importing nearly 250 billion Euro in US goods, and exporting nearly 400 billion Euro in European goods to the US (link).

The results start rolling in at 7 pm PST, with the final tally coming at 11 pm PST. The vote will be a strong signal for the fate of the EU, and potentially of the global economy.

Update (7pm PT): The Guardian is offering live tallies of votes, along with good statistics on the demographics of counties: here.

Brexit and the Eurozone Recovery

by Thomas Cooley, Ben Griffy and Peter Rupert

Much discussion continues about a potential “Brexit,” a British exit from the Eurozone due to the belief that the Eurozone does not help the British economy. Leaving aside the merits of the policy for the UK, we are going to describe the implications of such a policy on the specter of recovery in the EU. As we alluded to in a previous post, the recovery is less-pronounced, and perhaps non-existent if we exclude the UK from figures on GDP. Here, we include observations on additional series  that confirm the same conclusion: the UK is integral to our perception of the Eurozone’s recovery, and its removal would lead to different conclusions about the EU’s economic health. As it stands, the Eurozone has shown a modest recovery, primarily driven by the UK, France, and Germany:Real GDP-14.png

For reference, EU15 is a subset of the Eurozone including the largest economies (link); EU28 includes all 28 Eurozone economies (link). Once we remove the UK from the Eurozone, the post-recession recovery looks as follows:Real GDP-13.png

Zooming in specifically on the aggregated figures,

Real GDP-4.png

Rather than over a year of GDP levels in excess of the Eurozone’s 2008Q1 level, the Eurozone would have breached its 2008 levels just this quarter, according to its EU15 numbers. Specifically, GDP would be 2 percentage points lower, and the recovery would be about four quarters slower than current figures. Other indicators of regional economic health, like consumption and gross fixed capital formation show moderate declines as well, though not at the same scale as rGDP:Real Consumption-13.png

Real Gross Fixed Capital Formation-13.png

The series on fixed capital formation in particular points to an unnerving truth for the Eurozone: the UK has been one of two drivers of the recovery, the other being Germany. While other countries have been scaling back their economies, the UK and Germany have been increasing investment.

But the UK is only one domino in the Eurozone. Obviously there has been much ink spilled over Grexit. There has also been talk of Italy returning to the Lira, which we term a “Rexit.”

Much of the recovery in other European countries appears to be driven by increased exporting activities:Real Exports-13.png

Real Imports-13

If Brexit signals that it’s time for other countries to leave the Eurozone (and equally important, drop the Euro), the consequences could be large for intra-Europe trade.There is much talk in Europe of The Netherlands being the next to go if the U.K. leaves As noted by the ECB (link), trade within member states made up 39% of GDP in 2012. With exports driving much of European growth, a decrease or even a slowdown in exports could put at risk the short-term recovery of the region. The UK vote on Brexit takes place on June 23rd, and is certainly worth following.

Unequal Growth But Evidence of Improvement in Europe

by Thomas Cooley, Ben Griffy and Peter Rupert

Eurostat released estimates of first quarter GDP for the Eurozone a little over a week ago (here), showing modest growth of 0.5% for the more inclusive measure of European countries. This is the 12th quarter in a row that the Eurozone has exhibited positive growth after suffering nearly two years of negative growth 2011-2013. The truth is, however, that the Eurozone has only barely recovered to its pre-recession levels. Furthermore, this growth has been driven by core economies, with countries on the periphery still years away from a full recovery.

As usual, disaggregated data is not yet available for all countries from Eurostat. As we see from the most recent set of available data, a number of countries have recovered beyond their 2008 peaks:Real GDP-15.png

Notably, the large economies of the UK, France (and Germany, though we don’t have the data) are pulling measures of Eurozone health (EU15, EU28, EA12) up above their pre-recession highs. While this is notable, the smaller periphery economies are still lagging well behind. Focusing specifically on these economies (Portugal, Ireland, Italy, Greece, and Spain), we still see an inadequate recovery:

Real GDP-5.png

Greece can only be termed a tragedy at this point; with the exception of Ireland, the rest of the periphery economies are still lagging behind their 2008 peaks. Spain and Portugal have both made substantial recoveries over the past year, and are approaching their pre-recession levels. Much of this recovery has come through a rise in net exports, shown in the following two graphs:

Real Exports-5.pngReal Imports-5.png

But has not translated into increases in consumption, as each economy is still substantially below their pre-recession levels:

Real Consumption-5.png

Additionally, there has been much discussion about the UK leaving the Eurozone. Leaving aside the merits of such a decision for the UK, we wanted to demonstrate their importance to the interpretation of the recovery of the Eurozone. When we remove the UK from the Eurozone and recalculate aggregated recovery statistics, there is a stark difference:Real GDP-14.png

The series “EU15” is here recalculated without the inclusion of the UK. As of 2015Q4, the Eurozone would still be lagging behind their pre-recession levels.

Broadly, while the Eurozone has seen a lot of recovery over the previous year, there is still cause for concern. Namely, the recovery has been very uneven: the periphery economies have seen very little of the growth accrued among the large central economies in the EU (UK, France, Germany, etc.). Furthermore, if the UK were to leave the Eurozone, we would not be talking about this as a remarkable recovery; we would still be describing the tentative recovery of a few core countries, while the rest of Europe lags behind.

 

Europe Struggles To Lift Off

by Thomas Cooley, Ben Griffy, and Peter Rupert

Fourth Quarter data for 2015 were released this morning by Eurostat. As usual the details for individual countries are lagging behind but the larger picture is clear: the economic recovery in Europe is progressing more slowly than policymakers had hoped, but there are signs of promise. The EU 19 Countries grew at a combined rate of 0.3% which means that the EU grew at roughly 1.5% for the year just past. This is not a hugely encouraging outcome given the aggressive stimulus of the ECB, and the efforts that have been made to improve the soundness of their banks and unify the banking system. But Europe has been beset by terrorist attacks and a refugee crisis as well as a difficult economic environment elsewhere in the world, so slower than expected growth is perhaps not surprising.

As has been true for some time, the aggregate growth results reflect some very different experiences with the U.K., Germany, and now at last Spain growing well, while many of the other countries are flat-lining.  Even leaving out the tragedy of Greece, the economic fortunes of the European partners have been very mixed. Europe as a whole has barely returned to 2008 levels, with a number of the peripheral economies still nearly 10 percent below their pre-recession output levels.  Is the recent improvement strong enough to warrant optimism?  The EU’s trade with China is significant – slightly larger than the United States’ trade with China. Exports to China were $211 billion in 2014. With China slowing down and the Yuan falling this presents a gloomier outlook for Europe.  In addition, the recent weakness of the European banks is another danger signal.

Real GDP-15 If we focus in on some of the larger economies there is at last cause for optimism about a European recovery: even Spain and Italy have returned to growth in the most recent data, although they remain far below their previous levels.

Real GDP-12

The so-called PIIGS–the periphery economies–are a different story but also an improving one. Ireland, Spain, and possibly Portugal are showing signs of growth.

Real GDP-5

Consumption shows much the same picture, but most countries have not returned to anything like their previous peak levels in most economies.

Real Consumption-12

Investment has been very slow to recover in most of the countries and seems to be a major obstacle to recovery in the weakest economies, with several still 20-40% below the 2010 peak. This seems unlikely to improve rapidly, given the unwillingness of firms to invest in an uncertain economic environment.

Real Gross Fixed Capital Formation-12

Exports were showing strong signs of recovery but they have turned down almost everywhere – a sign of the influence of a slowing China and disastrous downturns in Russia, Brazil, and elsewhere.  What should have been helped by a weaker Euro has been hampered by the recent strengthening of the Euro and looser monetary policy on many fronts.

Real Exports-12

Overall, the tragedy of Greece does not seem to be impeding a gradual European recovery. Although the countries are improving at very different paces, the fact that growth has returned more broadly has damped a lot of the dire speculation about the future of the EU. Global concerns will shape much of the outlook for the Eurozone going forward, but the data suggest that most economies in the EU have returned to growth, with larger economies having exceeded their pre-recession levels of output, while the peripheral economies have begun to show signs of recovery.

Europe Grows Apart

by Thomas Cooley, Ben Griffy, and Peter Rupert

Second Quarter data for 2015 are now trickling out of Eurostat. What we see is encouraging evidence of recovery for the major producing countries but a continent that is moving apart. Prior to the financial crisis and the Great Recession the economies were largely growing together but the performance since the crisis has been strikingly different. Even leaving out the tragedy of Greece, the economic fortunes of the European partners have been very mixed.

If we focus in on some of the larger economies there is at last cause for optimism about a European recovery…even Spain and Italy have returned to growth in the most recent data, although they remain far below their previous levels.

The so-called PIIGS–the periphery economies–are a different story but also an improving one. Ireland, Spain, and possibly Portugal are showing signs of growth.

Consumption shows much the same picture, but most countries have not returned to anything like their previous peak levels.

Investment has been very slow to recover in most of the countries and seems to be a major obstacle to recovery in the weakest economies, with several still 20-40% below the 2010 peak.

Government spending is equally varied across these economies. There is however a notable pattern of austerity throughout the continent (and in the U.S.) judging from the pattern of spending.

Exports are showing strong signs of recovery everywhere–strongest in the periphery countries–helped by a weakened Euro.

Euro-USD Exchange Rate-1_raw

Imports are quite varied across the economies reflecting the strength of the recovery in the various countries.

Overall, the tragedy of Greece does not seem to be impeding a gradual European recovery. Although the countries are improving at very different paces the fact that growth has returned more broadly has damped a lot of the dire speculation about the future of the EU.

Employment

Employment in Europe reflects what we saw for GDP growth. For the stronger economies employment has begun to rebound a bit, although the legacy of the Great Recession is a generation of young workers who never entered the labor force in their prime and are permanently impaired as a result.  In the weak economies unemployment remains high and job growth is weak or non-existent.

Employment (15 to 64)-12 Employment (15 to 64)-6 Employment (15 to 64)-5

A European Rebound?

by Zach Bethune, Thomas Cooley and Peter Rupert

The recent news from Europe has been much more optimistic about a budding recovery for most Europe and the Eurozone. The dramatic decline in the value of the Euro against the dollar and the beginning of  the ECB’s program of quantitative easing has sparked optimism about the prospects for recovery. With complete data for 2014 now in we can begin to see some uptick in European growth. Whether this will prove to be a robust recovery remains to be seen – for now it qualifies only as little green shoots and the problems of Greece will weigh heavily in the months to come.useuro-2015-04-08
Europe is a story of diverging economic fortunes and those diverging fortunes are leading to political unrest in many countries. The growing influence of more extreme parties is one of the results as countries resist the economic orthodoxy that seems to be imposed by Germany and the wealthier countries. The following chart is based on OECD Data – we have been forced to abandon Eurostat as a data source as they seem incapable of updating the national accounts data for their member countries in a timely way. This shows that, since 2010, U.S. GDP has increased by 10% – slower than we might have wished. Ireland, the U.K. and  Germany have increased by 7-8% while others have been much more stagnant…and then there is Greece. Even those economies that have been stagnant, aside from Greece and Italy, show some signs of improvement.

gdp-EU-various-2015-04-10

Consumption show much the same picture but most countries have seen an uptick in late 2014.  Investment is more of a concern as it has been slow to recover. Exports are improving across Europe aided by a sharp fall in the value of the Euro beginning in early 2014.  The improvements in the economies will be further aided by the continued fall in the the first quarter of 2015.

consumption-EU-various-2015-04-10

gfcf-EU-various-2015-04-10

exports-EU-various-2015-04-10

imports-EU-various-2015-04-10

gov-consumption-EU-various-2015-04-10

How robust can this recovery be? Clearly the ECB is determined to stimulate the economy and address the issue of deflation with its program of quantitative easing and the attendant impact on the value of the Euro. The problems of Greece, however, cast a long shadow over the whole Eurozone. Absent a solution that addresses the structural flaws in the Eurozone economy, and given the diverging economic fortunes, any solution to the Greek crisis will be short lived. Were Greece to exit, attention would shift to the other vulnerable economies, most notably Italy and Portugal. It will take more time to assess how effect the ECB can be on its own as the driving force of Eurozone recovery.

The European Economy Continues To Flat Line.

by Thomas Cooley, Austin Jones, and Peter Rupert

The flash estimates of third quarter output in Europe released by Eurostat the EU Statistical Agency last week showed EU  Area GDP grew by .2% in the Euro Zone and .3% in the EU 28.  The Italian economy shrank by .1% and Germany grew by only .1%.  The one sign of strength was the U.K. economy which grew at a relatively robust .7%.

We should note that the graphs that follow are based on the most recent data available but do not include all third quarter data because Eurostat is notoriously inept at making timely data publicly available.

The chart below shows GDP growth for the major economies compared to GDP growth for the U.S.

real.082014-10-26real08piigs2014-10-26real08scan2014-08-14

But, the European picture is very much a tale of two Europes, with Southern Europe showing tremendous weakness and the Northern European Economies and the U.K. showing morobust signs of recovery. This becomes apparent when we look at consumption, capital formation and the labor market.

Only Germany and France show consumption above its prior peak and for many of the periphery countries it remains at least 5-10 % below its prior peak.

cons.082014-10-26

cons08piigs2014-10-26

cons08scan2014-10-26

 

Capital formation ( Fixed Investment) seems to be in decline everywhere except in the UK.  The periphery countries continue to be flat well below pre-crisis levels and even the Scandinavian Countries have turned south.

fcapf.082014-10-26capf08piigs2014-10-26fcapf08scan2014-10-26

 

The employment to population ratio is an interesting indicator of the impact of the Great Recession and recovery.  With the exception of Spain, the larger European economies declined but not as severely as  the U.S..  Germany, a country that undertook significant structural reforms of its labor markets, actually improved in the aftermath of the Great Recession. But again, this is a tale of two Europes. The employment/population ratio in some of the periphery countries declined by 10% or more but some have begun to recover a bit. Unemployment rates particularly among young workers remains almost unimaginably high and is causing lasting damage to these economies.

epr.082014-10-26epr08piigs2014-10-26epr08scan2014-10-26Where is The Policy Response?

Given the dire state of the European Economy where is the policy response? Unfortunately the fragmented nature of the Union means there is no coordinated fiscal stimulus.  Mario  Draghi has promised a program of monetary stimulus in the form of asset purchases but unlike in the U.S. there is no risk-free government asset that is suitable for a program of quantitative easing.  Our friends at www.moneyandbanking.com show the following picture that underscores how different the ECB’s policy has been from the Fed’s.

 

ECBIt is time to do more.

 

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