Archives par catégories : Countries/Regions

France–Germany: Comparing 20 Years of Economic History

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Une_anglaisLike all crises, the present one provides a fertile breeding ground for dogmatic, cookie-cutter statements and clichés that don’t always square with reality. So perhaps the best way to avoid making disastrous decisions on the momentous issues of today is to take a good, hard look at our past. This view was what prompted us to publish the following series of charts, which sum up twenty years of comparative economic history in France and Germany.

Growth, consumption, employment, real estate, debt, demographics, and foreign trade are the themes we have covered here, in the hope of offering the reader greater insight into the forces at work in the euro area’s two leading economies.

 

Global Inflation

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The Gold Selloff as Warning Sign for Impending Deflation

Recent disappointment with a sluggish economy has altered perceptions about the risk of inflation. Since the beginning of March, ten-year inflation expectations in the U.S. bond market have shed 30 basis points, the sharpest decline in the past year. At the same time, plummeting gold prices bear witness to growing doubts about the reflationary policies pursued by central banks. Moreover, current global trends suggest that this sentiment won’t be changing any time soon:

  • With inflation rates well below 2 percent and still receding, most industrialized countries are inching their way toward deflationary territory. High unemployment and low capacity utilization rates exert strong downward pressure on wages and producer prices, a trend accentuated by softer energy prices. 
  • The rising inflation observed in an increasing number of emerging economies is in fact limited to those with little global influence, primarily India, Russia, Brazil, and Argentina. Asia’s exporters of manufactured goods still show low inflation rates that are much closer to those in the advanced countries. 

 All these developments should therefore encourage central banks the world over to go further with monetary easing.

Monetary Policy: Too Much Disparity to Be Effective

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Une (anglais)The reflation policies pursued by the major central banks don’t seem to be paying off. Even with key rates at historic lows everywhere and widespread use of unconventional policy tools, lending activity remains flat and economic growth anemic. Moreover, although strong commodity prices and rising taxes have kept price levels up until recently, the inflation rate is starting to sag—in a serious way. A lack of monetary policy coordination, the inability of central banks to offset the impact of fiscal tightening, and the still-crippling effect of deleveraging on growth are the primary ingredients of this collective failure. They are also a cause for concern. If they persist, we may well be heading for a much longer crisis than is commonly assumed—and for creeping deflation that could lead economic policy-makers to act rashly. But let’s be clear about one thing. The problem is not that central banks shouldn’t be doing what they’re doing; it’s that their combined efforts haven’t gone far enough.

Tenkan!

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“Tenkan, a term in several martial arts for a swift, 180-degree pivoting move, has provided the economist and Asia specialist Jacques Gravereau with an analogy for illustrating the ability of the Japanese people to carry out radical changes in direction collectively, flexibly, and energetically.”

Does the policy shift initiated a few months ago by the Japanese authorities qualify as tenkan? On this one, the jury is still out, but in any event, this experiment already represents a key stage in the crisis affecting the developed countries.

To highlight its importance, we are publishing two papers on this question. The first one, a brief attempt to put Japan’s deflationary episode into perspective, seeks to shed light on why the country was previously in so little of a hurry to deal with this affliction, and why it now feels compelled to take an entirely new tack. Download 1st article.

The second paper is by Frank Benzimra, a specialist on the Japanese economy and financial markets based in Asia for about ten years, who has been kind enough to share his thoughts with us. He begins by explaining how Japan managed to make it through fifteen years of extremely high public debt without lapsing into chaos. He then goes on to discuss the pioneering aspects of Prime Minister Abe’s new policy. In conclusion, he puts forward three possible scenarios for the outcome of “Abenomics,” along with the three investment strategies they imply. Departing from our usual practice, we are publishing this contribution in English. Download Frank Benzimra’s article.

Leveraging France’s Key Strengths

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In pursuit of an Alternative Path

The French economy is undeniably in a bad way. But trying to overcome its shortcomings with the kind of shock therapy inflicted on Southern Europe would be the most dangerous response, both for France and the entire euro area. An alternative approach is therefore required—one that will necessarily involve leveraging more effectively the factors that set the French economy apart. This, then, is the value of taking a closer look at France’s key strengths.

CONTENTS 

France is in a bad way, with a very real risk of lapsing into critical condition 

  • You can’t cure debt with austerity
  • Competitive deflation—a non-option
  • France, Germany: two economies, two models

In pursuit of an alternative path

  • Just what are France’s key strengths?
  • The benefits of favorable demographics for demand, investment, available capital and personal wealth
  • France’s underrated productivity
  • French companies’ international footprint and standing
  • R&D
  • Geographic location, tourism, and agriculture
  • Leveraging the French economy’s strengths more effectively to tackle the crisis

The U.S. Budget: “No, we can’t”

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 Beneath the surface noise of the fiscal drama that has kept Washington on edge for months lies a serious societal choice. The model in vogue in the United States since the Reagan era—low taxes and feeble welfare support—is fast unraveling in a society undergoing major change. With a tax rate some 33 percent below the OECD average and one of the highest debt-to-GDP ratios anywhere, the U.S. government’s coffers are virtually empty—leaving it ill-equipped to meet swelling demand for public programs to address such issues as rising poverty, declining geographic mobility, and a rapidly aging population.

The country has two basic alternatives:

  • Either the Americans stand pat in rejecting the inevitable—a hefty increase in taxation—thus accepting, in essence, greater inequality and the demise of the American Dream;
  • Or, as is more likely, they eventually agree to abandon their previous credo, in which case a secular increase in payroll and income tax will be on the agenda.

But either way, the United States of tomorrow will be a very different beast from the pre-crisis United States.

The U.S. fiscal controversy is far from over. More to the point, it has unquestionably weakened the country’s ability to reverse its debt trajectory any time soon.

The Deleveraging Mirage: A Careful Look at Italy Today

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Europe’s most distressed countries should see their debt peak in a year or two, before descending to more manageable levels by 2020. Or at least that’s what the IMF, the European Commission, and the credit rating agencies all claim. Coming on the heels of the 2012 crisis, this is a heartening forecast—but a pretty surprising one, too. Just what is it based on? We’ve examined these institutions’ various scenarios for Italy and Spain, whose mounting sovereign debt burden loomed large in 2012, and for France, where the sovereign debt outlook raises a whole host of questions. Our assessment is as follows:

  • All these projections are marred by overly-optimistic assumptions about these countries’ structural growth outlook and their ability to sustain highly restrictive fiscal policies. This makes subsequent revisions to the projections a foregone conclusion. 
  • Italy is a case in point: the projected growth rate is so fanciful that the country stands virtually no chance of deleveraging as hoped. More conservative forecasts would preclude the prospect of Italy stabilizing its debt in the next few years. They would show rather that by 2020, its debt-to-GDP ratio should verge on 140 percent.
  • Spain seems to be in a better position to achieve such stabilization in the near term. Not only is its debt-to-GDP ratio 30 percentage points lower than Italy’s, but its potential output is apparently on the way up. Italy’s isn’t.
  • Despite recent setbacks, France still seems to have the means to reverse its debt trajectory. If we assume average real GDP growth of 1.2 percent a year between 2013 and 2020, the country should be able as of 2015 to reduce its debt level just by maintaining a primary budget surplus.

What emerges from this analysis is that Italy is the exception—and unquestionably the most vulnerable of the large eurozone economies. This suggests that we’re in for further bad news once today’s widespread projections come up for revision. Which they probably will after the Italian elections, especially if—as is likely—the new government lacks the leeway needed to convince investors that it can and will do something about the country’s huge debt overhang.

When the Eurozone Policy Mix Becomes a Weapon of Mass Destruction

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Last week’s economic data should have eliminated any lingering doubts about the state of the eurozone. The recession has definitely arrived in the single-currency countries—all of them. Although the third-quarter figures turned out to be slightly less bleak than suggested by surveys this summer, that doesn’t alter the overall picture. In fact, the eurozone will probably pay dearly in the fourth quarter for the unexplained rebound in automotive output that drove the better-than-expected performance, since order backlogs have shrunk dramatically and automakers already plan to mothball significant production capacity in November.