Recovery or Relapse? Prospect for the European economy

Recovery or Relapse? Prospect

for the European economy Martin Wolf, Associate Editor and Chief

Economics Commentator, Financial Times

The Art of the Deal

Cercle Montesquieu, the Financial Times and Paul Hastings

6th November 2014 Paris

Recovery or relapse?

2

Recovery or relapse: outline

• Europe in context

• Crisis in the eurozone

• Growth prospects

• Conclusion

3

1. Europe in context

• All high-income countries have been crisis-hit

• But the eurozone has found it particularly hard to

escape

• It now confront significant deflation risk

4

1. Europe in context

5

THE LEGACY OF THE CRISIS

90

95

100

105

110

Q12008

Q32008

Q12009

Q32009

Q12010

Q32010

Q12011

Q32011

Q12012

Q32012

Q12013

Q32013

Q12014

REAL GDP (Q1 2008 = 100)

France Germany Italy UK US

1. Europe in context

6

EUROPEAN CENTRAL BANK DITHERED

0

1

2

3

4

5

6

7

8

CENTRAL BANK INTERVENTION RATES (per cent)

Fed BoE Buba/ECB BoJ

1. Europe in context

7

CENTRAL BANK BALANCE-SHEET EXPANSION

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Q12000

Q12001

Q12002

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

Q12014

CENTRAL BANK ASSETS OVER GDP

Federal Reserve BoE BoJ ECB

1. Europe in context

8

INFLATION DECLINING IN THE EUROZONE

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

HEADLINE CONSUMER PRICE INFLATION

US Japan UK Eurozone

1. Europe in context

9

EUROZONE BECOMES JAPAN

0

1

2

3

4

5

610-YEAR BOND YIELDS

Germany UK France US Japan

2. Crisis in the eurozone

• The crisis in the eurozone has now turned into chronic

weakness.

• What now?

– The “discipline union” will not work on its own

– A banking union is necessary, but insufficient

– Fiscal union is potentially dangerous

– An “adjustment union” is the priority:

• Robust overall demand;

• Hitting the inflation target; and

• Higher inflation in core countries.

10

2. Crisis in the eurozone

11

-4.0%

-2.0%

0.0%

2.0%

4.0%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

EUROZONE IMBALANCES ON CURRENT ACCOUNT (as per cent of Eurozone GDP)

Germany Other creditors Vulnerable countries

France Others Eurozone

IMBALANCES AND REBALANCING

2. Crisis in the eurozone

12

90

92

94

96

98

100

102

104

106

108

110

Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014

GDP AND DEMAND IN THE CRISIS

Eurozone domestic demand Eurozone GDP

US domestic demand US GDP

THE BAD AND THE UGLY

2. Crisis in the eurozone

13

ECB CAME TO THE RESCUE

-2

0

2

4

6

8

10

12

SPREADS OVER BUNDS

Ireland Italy Spain

2. Crisis in the eurozone

14

FALL AND RISE OF COMPETITIVENESS

95.0

105.0

115.0

125.0

135.0

145.0

155.0

WHOLE ECONOMY UNIT LABOUR COSTS (relative to Germany)

France Portugal Ireland Italy Greece Spain

2. Crisis in the eurozone

15

ADJUSTMENT WITH ULTRA-LOW INFLATION

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 7/1/13 1/1/14 7/1/14

CORE CONSUMER PRICE INFLATION

Germany Italy UK Portugal Ireland Greece Spain

2. Crisis in the eurozone

• The eurozone crisis is the result of a bad monetary

marriage

• The marriage has been kept together because divorce

would be painful

• But it is still not a happy marriage

• The problems of the marriage are partly being shifted onto

outsiders

• Further crises are possible since indebtedness is growing

16

3. Growth prospects

• The big issue is productivity

• This has been slowing over time

• That is particularly true in Italy

17

3. Growth prospects

18

PERSISTENT EUROZONE STAGNATION

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

US UK Japan Eurozone Germany France Italy Spain

CHANGING FORECASTS FOR 2015 (Source: Consensus Forecasts)

Jan-14 Oct-14

4. Risks and opportunities

19

THE SLIDE IN PRODUCTIVITY GROWTH

0.0%

2.0%

4.0%

6.0%

8.0%

1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

MOVING AVERAGE GROWTH OF GDP PER HOUR (Previous 10-years, per cent) (Source: Conference Board)

France Germany Italy United Kingdom United States

4. Conclusion

• The crisis has hit all important western economies

• The US has done far better than the Europeans in

getting out of the crisis

• The UK is achieving strong growth, but productivity is

the big worry

• The eurozone is stagnant. The big remaining

problem is lack of demand

• Structural reform and fiscal tightening will not deliver

the needed demand

20