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Posts Tagged ‘European Economies’

Brexit and ‘Yes Minister’?

May 2, 2017 Leave a comment

In light of what has been happening in Europe recently here is a very amusing clip from the BBC series “Yes Minister” in which Sir Humphrey and Jim Hacker discuss Brussels and the notion of the UK trying to pretend that they are European. Also discusses why other European nations joined the common market in the first place.

European Structural Unemployment

July 29, 2014 1 comment

Here is a great graphic from the Wall Street Journal which identifies the structural unemployment, productivity levels and the unemployment rate. Structural unemployment refers to unemployment arising from changes in demand or technology which lead to an oversupply of labour with particular skills or in particular locations. Structural unemployment does not result from an overall deficiency of demand and therefore cannot be cured by reflation, but only by retraining or relocation of the affected work-force, some of which may find work at low wages in unskilled occupations. Structural unemployment is distinct from frictional unemployment, which is essentially a short-term phenomenon.

* Spain and Greece have been highlighted as economies with significant unemployment problems.
* Ireland although has high unemployment does have encouraging productivity levels compared to other EU countries
* Norway seems to have things right – low unemployment and high productivity
* Eastern bloc countries tend to have lower productivity levels.

Structural Unemp Euro

% Change – GDP per person – 1999 – 2014

January 13, 2014 Leave a comment

Useful graphic from The Economist that shows the % change in GDP from 1999 – 2014.
1999 was when the Euro currency was introduced and with Latvia joining the currency bloc at the start of this year that makes 18 members. Spain, Greece, Portugal and Italy have struggled since the GFC especially Italy – negative GDP. Germany’s GDP per person has increased by over 20% since 1999. Benefitting from export revenue in recent times with a weak euro.

GDP by country 1999-2014

CAP reforms unlikely to benefit New Zealand farmers.

July 1, 2013 Leave a comment

A move by the European Union to slash subsidies to farmers isn’t as big a deal as it sounds. The EU has announced cut to the subsidies it pays industrial scale farmers of up to 30% – this is part of the Common Agricultural Policy (CAP) which costs the EU tax payers 50bn a year and is 40% of the whole EU budget. This will be of little benefit to NZ farmers as they will still be denied access through tariffs and quotas on sheep, butter, cheese etc.

Objectives of CAP

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector has been known as the common agricultural policy – CAP. The CAP was established under Article Thirty Nine of the Treaty of Rome, and its objectives – the justification for the CAP – are as follows:

1. Raise and maintain farm incomes, through the establishment of high prices for food. Such prices are often in excess of the free market equilibrium. This necessarily means support buying of surpluses and raising tariffs on cheaper imported food to give domestic preference.
2. To reduce the wide flutuations that often occur in the price of agriculutural products due to uncertain supplies.
3. To increase the mobility of resources in farming and to increase the efficiency of all units. To reduce the number of farms and farmers especially in monoculturalistic agriculture.
4. To stimulate increased production to achieve European self sufficiency to satisfy the consumption of food from our own resources.
5. To protect consumers from violent price changes and to guarantee a wide choice in the shop, without shortages.

CAP Intervention Price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

CAP Int Price
Figure 1: The effect of an intervention price on the income of EU farmers.

The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU.

Spain tries the German method to reduce unemployment

March 19, 2013 Leave a comment

If you look at the labour market in Spain you would think that it resembles the German economy 10 years ago when Gerhard Schroder was its leader. Schroder was responsible for labour reforms that ignited the German economy into one of the strongest in Europe.

Spain is relaxing labour laws and cutting public spending and there are some positive signs here in that labour unit costs are falling as result of greater productivity. However German’s vocational education sector was a significant factor in its improved performance as the education and training system is more job orientated. Furthermore, with austerity measures in place and more to follow – pressure from the EU to introduce yet another sales-tax rise – Spain will find it hard to generate any sort of growth. But if it does grow will it generate any reduction in unemployment? Because of labour reforms some economists now believe that only 1.5% growth is required to bring about net job creation rather than 2.5% as previous.

Spain Unem

Credit Rating Agencies – how countries stack up.

March 8, 2013 Leave a comment

Rating Agencies Feb 2013Here is a list of the latest ratings by the three main rating agencies. Notice that Australia and the three Scandinavian countries have top ratings. The UK lost its top rating from Moody’s but maintained the top rating from the other two. New Zealand comes in further down with a top rating from Moody’s but has lost its top grade from the other two. When you get to B status your are talking high risk or junk status and this is quite evident with the PIGS counties.

If you have watched the movie documnetary ‘Inside Job’ you will remember that these 3 credit rating agencies also rated high risk investments – sub-prime mortgages – as AAA, up to a week before they failed. The same could be said about their rating of investment company Bear Stearns.

Ultimately they could have ‘stopped the party’ but delayed ratings reports and made junk status investments AAA rated. But as they testified in front of congress their advice to clients are opinions ‘just opinions’ – I wonder do they share the opinions of those that lost huge amounts of money, including sovereign investments. Recently they downgraded Greece and Spain in the knowledge that the servicing of the debt would now become more costly for those countries and stifle any sort of recovery in the near future.

World Economy: Car driven by a drunk

February 4, 2013 Leave a comment

Car skidDavid A. Rosenberg an economist with Clusken Sheff in Canada, has likened the world economy to that of a car being driven by a drunk – that is the car is moving back and across the centre line just missing the ditches on the side of the road. Currently he sees the car in the middle of the road although he questions as to whether this is due to the driver becoming more sober or steering towards the ditch on the other side.

Recently the US stock market (Dow Jones Industrial Average) went above 14000 for the first time in more than five years for the following reasons:

1. Better job figures – employers added 157,000 jobs in January and hired more workers in 2012 than had previously been thought. See chart below.
2. Corporate earnings have been stronger than expected,
3. US Federal Reserve has indicated that it will keep interest rates at near zero levels as well as continuing their policy of monthly $85 billion purchases of bonds and mortgage-backed securities, which injected $3 trillion into the banking system last week.

This third point is particularly important. In the New York Times, Rosenbery stated that he didn’t see the US economy in a recession as yet but could quickly go in that direction. “Anemic growth is my baseline scenario.” Also how long can the US Fed keep propping up equity markets and pumping money into the system? The conditions in Europe are not much better – unemployment rose to record levels in December last year and currently stands at 26.8% in Greece and 26.1% in Spain. Add to that the austerity measures which have impacted greatly on overall aggregate demand and the consumer slowdown in Germany, the eurozone area has its problems. So the car might be in the middle of the road right now but it might not take too much for it to deviate from a safe path.

US Econ Indicators Jan 2013

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