20 November 2013

Joergen Oerstroem Moeller: Eurozone policies are working

A look at the eurozone's figures and an evaluation its performance:

Growth: The eurozone is not scoring well. Over the period 2001-2014 total growth is forecast at 1.5 per cent; 8.8 per cent for the US and 4.6 per cent for Britain.

Employment: Since its inception in 1999, the eurozone has created 600,000 more jobs than the US.

Unemployment: The unemployment rate in the eurozone is about 12.2 per cent and 7.3 per cent for the US. This is due to an increase of the workforce, not falling employment in the eurozone which, as mentioned earlier, has gone up compared to the US. If we freeze the participation rate - the share of the population seeking employment - to its level in 2001 - the unemployment rate would be about 6 per cent for the eurozone and 12.5 per cent for the US - a completely different picture, actually a reversal of rankings.

Total debt measured as share of GDP is about the same for the eurozone and the US - running at around 260 per cent with Britain at around 285 per cent. There are, however, differences in its composition. In the US government debt and private debt account for a higher share than corporate debt compared to the eurozone, but the differences are not that big.

The main divergence is found when looking at the development of primary government deficits (excluding net interest payments on existing debt and therefore better as a yardstick for a long-term outlook). The eurozone shows a surplus even for weak countries such as Italy and Greece. The deficits in the US and Britain are estimated at 3.1 and 4.1 per cent of GDP respectively.

The real worry is an analysis by the Bank for International Settlements sketching out how much fiscal tightening is necessary to bring the government deficit down to 60 per cent of GDP in 2040, taking age-related spending into account...

The overall performance of the eurozone is quite good except for growth. Still, the eurozone will grow over the four years 2011-2014. It is noteworthy that this has been achieved while running a substantial surplus on the current account (1.9 per cent for 2013 forecast to be unchanged in 2014 even with growth picking up). The US has a deficit of 2.5 per cent also forecast to be unchanged in 2014. Britain sports a deficit of 3.4 per cent falling to 2.7 per cent in 2014.

Inflation, once the ghost everyone wanted to get rid of, is under control in the eurozone at 1.4 per cent forecast to fall to 1.3 per cent in 2014 compared to 2.5 per cent for the US in both years and 3.4 per cent and 2.7 per cent respectively for Britain.

From deficit to surplus

The British experience over the preceding five years shows an export performance worse than for the eurozone and producing a larger deficit on the current account measured as a percentage of GDP than for eurozone countries.

If we disaggregate eurozone figures for current account, the picture is surprising. In 2008 all five weak eurozone countries (PIIGS) had disturbingly high deficits: Italy and Ireland at 3 per cent of GDP, Greece at 16 per cent, and Spain plus Portugal in the middle showing 8 and 12 per cent respectively. By end 2013, all five countries have turned into surplus - without devaluation (Britain having devalued went from a deficit slightly below 2 per cent of GDP in 2008 to an estimated 3.4 per cent in 2013).

It was their luck that they joined the single currency. If not, they would probably have heeded the advice to devalue. That would have given them a couple of years of better figures after which they would have been back to square one - only poorer by changing the terms of trade against themselves.

Belonging to the single currency has forced them to restructure, reform, and retool, which they should have done years ago to modernise and make themselves competitive. This is what they have done now and they have reaped surpluses both on the current account and the primary government balance.

The figures do not lie. They can be interpreted in various ways, but they speak for themselves. The policies adopted by the eurozone work. Growth, employment, inflation, government deficits and debt, and current account - all essential figures bring good news.

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