Stefan Karlsson
President of European Central Bank Mario Draghi speaks during a press conference in Frankfurt, Germany, Thursday, July 5, 2012. The European Central Bank has cut its key interest rate by a quarter percentage point to boost a eurozone economy weighed down by the continent's crisis over too much government debt. Regional differences in unemployment further hinder the EU recovery. (Michael Probst/AP)
Regional differences in unemployment further hinder EU recovery
That there are big differences in unemployment within the EU, ranging from 4.1% in Austria to 24.6% in Spain is well known. What is perhaps less known is that dramatic differences in unemployment exists within many countries as well (note that the below numbers was last year's annual averages).
In multilingual countries these differences follow to a large extent linguistical divisions, where the pattern seems to be that speakers of Germanic languages have lower unemployment than others.
Unemployment is for example significantly lower within Finland's Swedish speaking minority than within its Finnish speaking majority, which is reflected by the fact that the overwhelmingly Swedish (90%) Åland region has an unemployment rate of only 2.5% compared to 8% in mainland Finland where Swedish speakers are only 5% of the population.
In Italy, in the majority German speaking South Tyrol region that borders Austria, unemployment is 3.3% compared to 8.5% in the rest of Italy. In Switzerland too, the German speaking parts have significantly lower unemployment (3-4%) than the French and Italian speaking parts (more than 6%).
In Belgium, the Dutch speaking Flanders region has significantly lower unemployment (4.3%) than the French speaking Wallonia region (9.5%). For some reason, the theoretically bilingual but in practice overwhelmingly French speaking Brussels region has even higher unemployment (16.9%) than in Wallonia.
However, even in some monolingual countries significant regional differences exists. In Austria, unemployment is far lower in the Salzburg and Tyrol regions unemployment is only 2.5% compared to 7% in Vienna. In Germany unemploymnet varied between 3.3% in Bavaria to 11-12% in Berlin and some other parts of eastern Germany. In Slovakia unemployment ranged between 5.8% in Bratislavia to 18.7% in eastern Slovakia. And in Spain unemployment ranged between 12% in Pais Vasco in northern Spain to 30.4% in Andalucia in the south.
Mothers at this special Kur-Klinic in Bad Nurheim, Germany receive physical and psychological care, among other things. Michaela and Lothar Tent relax with their baby Maximilian and other daughter Sophia in this September 2009 file photo. But Germans across the country are not having as many babies as may be needed to maintain their economic supremacy in the long run. (Christoph Rau /The Christian Science Monitor)
Baby bust: Germany's not-so-secret weakness
Germany is Europe's biggest economy right now, and during the coming two to three years or so its growth prospects looks better than the other big three European economies (Britain, Italy and France) so it will in the short term not only remain the biggest but they are likely to see its relative superiority increase than see it decrease.
However, in the long term, Germany seems almost certain to be surpassed by Britain and France. The reason for that is that Germans haven't had enough babies, and there are no signs that they are getting better at that. Last, year, only 663,000 babies were born, a new all time low, and abnormally low for a country that currently has 81.8 million people. By comparison, France with 65.4 million people had 827,000 babies and though I have been unable to find 2011 statistics for Britain, 807,000 babies were born there in 2010.
In the short term, this has no effect on economic growth because infants and toddlers aren't employed. But in about 20 to 25 years or so (depending on how long they will study) they will as young adults be part of the labor force and as the large number of Germans born in the 1950s and 1960s retire in the coming decades, this means that Germany will get a much smaller labor force than Britain and France.
And as the number of women in child bearing age in Germany is set to decline significantly in coming years, the birth rate will likely decline further even if German women don't become less inclined to have children. Indeed, even if they become more inclined to have children and the fertility rate (the number of births in relation to the number of women in child bearing age, usually defined as 15-45) increases that will simply prevent a further decline in births unless it is really dramatic. By contrast, Britain and France are set to little or no reduction in the number of women in child bearing age.
Theoretically, Germany could compensate for this by increasing immigration, and that might indeed to some extent happen, but it has traditionally been less welcoming to immigrants than Britain and France and furthermore the Eastern European countries that in recent years been important sources of immigration for Germany are seeing demographic implosions that are even worse than Germany's. It is therefore difficult to see how immigration will prevent Germany's relative decline compared to Britain and France.
German Chancellor Angela Merkel (right) welcomes Iceland Prime Minister Johanna Sigurdardottir for the "Council of the Baltic Sea States" leader summit in Stralsund in this May 2012 file photo. Paul Krugman often uses Iceland as a model of European recovery. But Stefan Karlsson argues that some Baltic states have actually shown greater improvement. (Tobias Schwarz/Reuters)
Economists squabble over how to best assess recovery data
The Council on Foreign Relations have published an article which criticizes Paul Krugman and other Keynesians for using Iceland as a role model because GDP has dropped by less compared to the pre-crisis peak than the Baltic countries.
Their argument is basically that it is wrong to simply take the pre-crisis peak in output as the standard, one should also consider how big the preceding boom was. And since the Baltic countries had far higher growth than Iceland, especially by the way if you adjust for population growth which they didn't, before the slump their long term performance is better.
Are they right to do so? Well, what one should remember is that the purpose of this discussion is to determine whether devaluation and inflation is effective in fighting a recession. In order to do so, one needs an idea of how big the slumps would have been without devaluation, and one indicator of that is how big the imbalances before the slump were. The bigger Baltic boom is an argument for believing that the imbalances were greater there, though it is unclear to what extent
That is a point that Ryan Avent of the Keynesian The Economist magazine seems to have grasped, though he dismisses the higher previous growth as simply reflecting that the relatively poor Baltic countries were benefiting from the catch-up effect that poorer countries often benefit from.. But while that probably was one factor benefiting those countries, their relative poverty also meant significant emigration even before the slump something that in turn meant that their population dropped while Iceland's increased by 13% between 2000 and 2011. Taking population growth in to account both means that their initial boom was much bigger than GDP growth suggests and that the drop in living standards during the slump have been smaller.
Paul Krugman, apart from quoting Avent's argument, have no real arguments except that if one sees the Baltic recovery as impressive one should also see the U.S. economy in 1934 as impressive because growth was 10.9% in 1934.
But the CFR argument didn't simply depend on growth in the recovery, it looked at total growth in the whole period consisting of initial boom, slump and recovery, so Krugman's response was to an argument that wasn't made and he therefore didn't respond to the argument that was made, namely that just as it could be the case that a bigger slump could enable higher growth in the recovery, a bigger boom will mean a bigger slump to the extent the boom rested on larger imbalances.
And both Krugman and Avent fails to notice the fact I pointed to in my previous post on the subject, namely that virtually the entire Icelandic slump came after its 2008 decalcuation and that the mild recovery of the latest year came only years later-after the currency had stabilized. This fact illustrates the theoretical point that except during periods of secondary deflation, like during the 1930s depression , devaluation is in fact not something that boosts economic growth.
General action during the Euro 2012 soccer championship final between Spain and Italy in Kiev, Ukraine, Sunday, July 1, 2012. According to Karlsson, the tournament has hinted at a negative correlation between economic and soccer success. (Mattthias Schrader/AP/File)
Spain wins UEFA Euro 2012. Does good soccer mean a bad economy?
One observation that one can make regarding the current European cup in football (by "football" I mean of course the version where they actually mostly use their foots to move the ball just like name implies, not the American version where they mostly use their hands to move the ball) is that there appears to be a negative correlation between how good countries perform on the football field and how well their economies.
Out of the more than 50 nations of Europe, plus countries that geographically are mostly or entirely in Asia including Turkey, Azerbaijan, Georgia, Armenia and Israel and non-independent parts of Britain like England and Scotland only 16 were allowed to enter. Yet all five of the so-called PIIGS countries managed to qualify themselves, while most relatively strong economies including Norway, Finland, Austria, Slovakia, Luxembourg, Turkey and Israel didn't make it, or as in the case of Poland was only present because it together with Ukraine hosted the event.
And in the group play, only one of the PIIGS, Ireland, failed to be among the eight that made it to the quarter finals.
And of the remaining quarter finalists, England and Czechia represented countries that have slipped into double dip recessions. Only Germany represented a fairly strong economy with France economy coming in between the weak countries and Germany.
In the quarter finals, all remaining PIIGS except for Greece won and made it to the quarter finals. Then in the semi finals, the intra-Iberian penninsula match between Spain and Portugal ended with Spanish victory while Italy defeated Germany. Regardless of whether Spain or Italy had won last night, it it would have been the team from a country with a weak economy.
So while far from perfect (had it been perfect, Germany wouldn't have defeated Greece in the quarter finals), there appears to be a negative empirical correlation between success in football and economic success.
Is this correlation causal? Almost certainly not. Spain, Portugal and Italy's economic problems can hardly to any significant extent be attributed to excess spending on football, especially since it also generates a lot of revenue for them as well Instead this is an example of how correlation doesn't necessarily imply causation.
What one can say however is that particularly in the country that won the final, success on the football field at least provides comfort for that country when they try to fix their economic problems.
President Barack Obama speaks in the East Room of the White House in Washington, Thursday, June 28, 2012, after the Supreme Court ruled on his health care legislation. Obama, who previously pledged not to raise taxes, is now facing criticisms that his health care plan does just that. (Luke Sharrett/Pool/AP)
Oh, the irony: Obama and Romney, and that infamous mandate
In the previous post I pointed out that Mitt Romney only a few years ago passionately defended the legal mandate to purchase health insurance. Obama on the other hand argued against it.
And of course, since it was upheld because it is a form of taxation, Obama again violates his 2008 election pledge not to raise taxes on families earning less than $250,000.
So now we are going to have a presidential race where the person who previously defended and implemented in Massachussetts a policy will argue for its nation wide repeal while his opponent will defend a policy he argued against until after he was elected.
With the Capitol in the background, Republican presidential candidate Mitt Romney speaks about the Supreme Court's health care ruling on Thursday, June 28, 2012, in Washington. Some argue that one of the health reform bill's costs includes a decrease in personal freedoms. But Stefan Karlsson says if Obamacare is unconstitutional, then so is Medicare and Social Security, something that few leading Republicans would openly argue for. (Charles Dharapak/AP)
Health reform cost is complicated, both sides ignore facts
The most unexpected thing about today's ruling in the US Supreme Court about Obama care wasn't so much that it was approved with a narrow 5-4 margin, but that the swing vote was John Roberts and not Anthony Kennedy. Usually it is Kennedy that is the swing vote, while Roberts is considered to be part of the conservative bloc, together with Clarence Thomas, Antonio Scalia and Samuel Alito. But now it would seem then that the Supreme Court has four reliable liberals, three reliable conservatives and two swing voters.
As for the ruling, two things should be noted. First of all, it is clear that the mandate to buy health insurance means a reduction in the freedom of Americans. Secondly, it is however also clear that it is no more so than existing welfare state programs like Medicare and Social Security, where people are in effect through the tax system forced to buy health insurance and pension insurance for when they become older than 65. So if Obamacare is unconstitutional, then there wouldn't have been any reason not to consider Medicare and Social Security as unconstitutional, something that few leading Republicans would openly argue for.
As for the political impact, Mitt Romney is the big loser. Some argue that he is a winner because the health care insurance mandate is unpopular, but I disagree considering that he as recently as 2007 called it "ultimate conservatism" and has yet to renounce his old statements he simply has no credibility arguing against Obamacare.
Members of a protest group scuffle with police during a protest against the government's austerity program in Ljubljana in this May 2012 file photo. Even Slovenia, the richest Eastern European country is far poorer than Germany and most other Western European countries. Apparently Eastern Europe is growing old before it grows rich. (Srdjan Zivulovic/Reuters)
Race against time: Eastern Europe growing old before rich?
Many pundits have argued that China could "grow old before it grows rich". Though the extent of ageing of China's population is exaggerated (despite it's "one child" policy, its actual birth rate has been higher than in Eastern Europe-or Taiwan, South Korea or Japan) that may be true, though the size of its population still means that it will likely become the world's biggest economy.
What seems clear is that Eastern Europe is growing old before it grows rich. In the last post I noted that per capita GDP in Estonia was only €12,000, compared to €32,000 in Germany. But what about the other Eastern European countries? I limited myself to Eastern European countries that are members of the EU simply because the convenient and reliable data source known as Eurostat that I've used here only included them. However, non-EU members like Ukraine (see my discussion of Ukraine's poverty here), Moldova, Serbia or Albania are generally even poorer than those that are part of the EU so including them would only have further supported the conclusion of this post.
I used the 2011 GDP numbers provided by Eurostat and divided them with the latest population figures. For Slovenia, Slovakia and Estonia no exchange rate conversion was needed because they have the euro as currency. For Latvia, Lithuania and Bulgaria I needed to convert them according to the fixed exchange rate that their currencies have to the euro, but that was relatively unproblematic since the exchange rates have been the same all the time. For Czechia, Hungary, Poland and Romania it was more problematic since their currencies have a floating exchange rate, meaning the results will differ somewhat depending on what date you use for the exchange rate. For simplicity I simply used the latest exchange rate for them.
Here then is the results, the 2011 per capita GDP for the 10 ex-communist Eastern European members of the EU:
1) Slovenia €17,400
2) Czechia €14,000
3) Slovakia €12,700
4) Estonia €12,000
5) Latvia €10,000
6) Hungary € 9,800
7) Lithuania € 9,600
8) Poland €9,500
9) Romania €6,800
10) Bulgaria €5,200
As you can see, all but three, namely Slovenia and the two countries that used to be part of Czechoslovakia are even poorer than Estonia and even the richest Eastern European country, Slovenia, is far poorer than Germany and most other Western European countries. The only Western European country poorer than Slovenia is Portugal who had a per capita GDP of €16,100 . However, all the other Eastern European countries are even poorer and-most significantly poorer. And everyone is far below the income level of most Western European countries (€30,000 to €40,000).
With the labor force soon starting to shrink dramatically because of the lagged effect of the collapse of birth rates in the early 1990s, it seems safe to say then that most, if not all, Eastern European countries will grow old before they grow rich.
Demonstrators protest against collective bargaining reforms in front of Spain's labor ministry in Madrid in this June 2011 file photo. Spain has one of the highest youth unemployment rates in the European Union, but Stefan Karlsson warns that in some Eastern bloc countries, a shortage of young labor will create an equally untenable situation. (Andrea Comas/Reuters)
Eastern Europe's coming labor force implosion
Although the collapse of communism in Eastern Europe was overall clearly a good thing, one has to concede that the transition away from it did cause a lot of hardship for many people, especially since it was usually done in an incompetent and corrupt way. As a result of this widespread hardship, many felt that they couldn't afford children and birth rates across Eastern Europe plummeted in the early 1990s.
In Poland for example, the crude birth rate (births per 1000 people) fell from 18.2 in 1985 to only about 10 in the 1990s. Because it has been roughly 20 years since the early 1990s and because people born then would therefore be in their late teens now, we can see this collapse in the change in the number of 15-19 year old.
In Estonia for example, the overall population was roughly unchanged at 1.34 million between 2007 and 2011, but the number of 15-19 year olds fell by nearly 28%, from 102,500 to 74,400 Some people, when analyzing Baltic state demographics has misinterpreted these numbers as signs of mass emigration as 15-19 year olds are usually counted as part of the working age population. Yet in reality most 15-19 year olds are still in school something that both means that they usually still live with their parents and therefore don't make decisions about emigration and it also means that they are effectively not part of the working age population even if official statistics say they formally are. The latter means that though the formal labor force in Estonia and other Baltic and Eastern European countries have already begun to shrink significantly, the number of people that really have jobs or are searching for them hasn't begun to shrink significantly-yet.
If we look at the next age group, 20-24 year olds, it has only shrunk by about 0.5% between 2007 and 2011 and the number of 25-29 year olds actually increased, numbers that first of all refute the hypothesis of mass emigration at least for Estonia and secondly means that in 2011, the labor force hadn't effectively shrunk even though it had formally done so because of the massive drop in the number of 15-19 year olds.
However, 15-19 year olds in 2011 will of course be 20-24 year olds in 2016 and 25-29 year olds in 2021, and as the 2011 15-19 year group gradually move to the 20-24 year group, this means that the real labor force will start to shrink rapidly in the coming decade. This will only get worse as the number of 10-14 year olds in Estonia was even fewer than the number of 15-19 year olds, 61,400 compared to the 74,400 who were 15-19 year olds and the 105,700 who were 20-24 year olds.
The total drop in the number of young workers will therefore over the next decade or so will therefore be more than 40%! The exact magnitude of this demographic collapse probably differ somewhat between different Eastern European countries, but given that Estonia was one of the best run of the Eastern European countries after communism, it is at least as likely that the numbers in most countries will be worse, not better, than in Estonia.
As Estonia and most other Eastern European countries have high unemployment, this needn't put a stop to growth during the coming years. Germany for example have managed to grow somewhat in recent years despite a shrinking working age population by both reducing unemployment and increase the labor force participation rate. However, as the labor force will begun to shrink dramatically, growth in Eastern Europe will be strongly inhibited, especially since their relative poverty (GDP per capita was only €12,000 in Estonia in 2011, compared to €32,000 in Germany) will make it more difficult for them than for Germany to attract the kind of workers they need.
Federal Reserve Board Chairman Ben Bernanke speaks during a Washington news conference in this June 2012 file photo. Bernanke says the Fed is open to purchasing more Treasury bonds to lower long-term interest rates and boost growth, but Stefan Karlsson argues more unorthodox tactics need to be explored. (Haraz N. Ghanbari/AP)
Given political restraints, the Fed has little actual power
A number of people, mostly on the left, but also some right of centre economists or pundits like Scott Sumner, Steve Chapman and Ramesh Ponnuru are dissatisfied that the Fed isn't doing more to inflate. For the moment, I'll ignore the issue of whether it would be desirable if it was feasible (I think long time readers can guess what my view on that subject is), and instead focus on the issue of whether it is feasible.
The short answer is that using its current methods it's not feasible to any significant extent, and only using methods that are impossible because of political restraints would it be feasible. The irrational status of U.S. treasury securities as "safe havens" have in fact pushed down yields so low at the moment, with the 10-year yield being only 1.67%, that further "quantitative easing" or "operation twist" have only very little room to push down yields further. And considering how the several percentage point drop in interest rates so far have had only very little effect, there is little reason to believe that even another full percentage point would have any significant effect. When people are optimistic, a percentage point change can have great effect, but when people are pessimistic as they are now it will only have very little effect.
Some of the above mentioned people have asserted that by merely stating as a formal target that it wants to achieve nominal GDP growth of 4 or 5%, or raising the inflation target to 3 or 4% this will get the job done without any purchases or twists because investors, as well as corporate decision makers and consumers, know better than to fight the Fed and this behavioral change will cause the target to be achieve, sort of like how guards in a labor camp can get inmates to work by threatening to shoot those who don't, a threat that makes everyone work even though no one has been actually shot. If it makes investors, corporate decision makers and consumers more optimistic it could indeed work.
However, this presupposes that everyone actually believes that the Fed has the power to enforce it in case people are unwilling to go along, and as was concluded above, it really doesn't have that power. And as most people probably realize it, the Fed's threat would be as powerless as the threats by a prison guard to shoot inmates when the prisoners are aware that he has run out of ammo.
This doesn't mean that it is impossible to achieve a significant increase in inflation if one is capable and willing to use what one might call unorthodox methods. I myself have previously suggested legalizing counterfeiting, and when thinking about it I can now come up with various other schemes that would achieve a lot more inflation, like large scale purchases of stocks, printing (or electronically generating) massive amounts of money and simply giving it away to people and buying large quantities of for example Spanish and Italian bonds.
Why legalizing counterfeiting is politically impossible should be obvious. Large scale purchases of stocks is politically impossible because it would mean government ownership of the means of production...well, I think that is sufficient explanation of why it wouldn't be accepted by Congress. Simply giving away newly printed or electronically generated money would in effect be the same as a fiscal "stimulus", which won't be accepted in Congress. And buying bonds from Italy, Spain and other troubled European countries, which would first of all directly lower the dollar's exchange rate and secondly ease the market anxiety that causes the "safe haven" demand for U.S. treasuries that makes conventional quantitative easing ineffective, would be viewed as "bailing out Europe" and would therefore also be rejected.
So, unless someone can come up with a more clever scheme that would be effective while not being politically controversial, the Fed lacks the power to generate the kind of extra monetary inflation that the above mentioned people calls for.
A Portugal fan celebrates during the public viewing of the Euro 2012 soccer championship quarterfinal between Portugal and the Czech Republic at the Fan Zone in Warsaw, Poland, Thursday, June 21, 2012. He has something else to celebrate. So far, Portugal has shown strong economic improvement, as compared to its fellow indebted eurozone countries. (Czarek Sokolowski/AP)
Portugal stands out as largest euro success story so far
The perhaps best indicator of whether the more indebted euro area countries are really making progress in reducing its reliance on foreign loans is the change in their current account balances. So far this year, Portugal stands out as the country making the biggest improvements, while neighboring Spain is seeing the smallest improvements. Portugal had during the first four months of 2012 a current account deficit of €1.41 billion, compared to €4.1 billion in the same period in 2011.
This means the deficit is down to roughly 2.5% of GDP, a sharp reduction from the more than 10% of GDP it had as late as 2010. Italy, saw its deficit decline by 46%, from €27.8 billion in January-April 2011 to €15.1 billion in the same period 2012. The Italian deficit is equivalent to roughly 3% of GDP. Greece saw its deficit decline by 40%, from €9.4 billion in January-April 2011 to €5.6 billion in January-April 2012. Its deficit is however still equivalent to more than 8% of GDP, and even if you adjust for the fact that its deficit for seasonal reasons is traditionally bigger in the beginning of the year, we are still talking about a deficit of around 5% of GDP, which is of course far too high.
Spain hasn't released its April numbers yet, but in the first quarter, its deficit fell by just 12%, from €16.85 billion to €14.85 billion. Adjusted for seasonal effects this is equivalent to a deficit of about 3% of GDP. So while we're seeing improvement in all countries, it is insufficient, especially in Greece and Spain, while Portugal has made the biggest progress. What about Ireland? Well, its statistics lag the most of all, as it won't release even first quarter numbers until Friday next week. But Ireland eliminated its deficit already last year.
Previous
Become part of the Monitor community