Tag Archives: europe

Europe’s Thirst for Russian Gas: An Addiction Unlikely To Wane (Part 2)

This post is a continuation of my previous post about Europe’s dependence on Russian natural gas. After reading a recent Economist article, I am convinced that Europe’s addiction to Russian gas will remain strong in both the short and long term. The combination of (1) an already developed infrastructure, (2) a lack of viable alternatives, and (3) a growing European demand for gas reveals that a large enough economic incentive can successfully overshadow political conflict. Having analyzed the infrastructure point last time, I will elaborate on points 2 and 3 in this post.

2.    Poor Alternatives

Even if European leaders were to overlook the infrastructure problem and tap into all the alternative sources of natural gas at their disposal, they would only have enough to cover about half of Europe’s gas demand. In order to see this more clearly I will elaborate on the main alternative sources Europe could use and the problems associated with each one:

  • Gas from other European countries (i.e. Norway, Netherlands, Britain): Although Norway and the Netherlands combined have enough gas to provide about one eighth of Europe’s yearly gas demand, environmental concerns (carbon emissions and earthquakes) and negative public opinion create domestic political barriers.
  • Shale Gas from European countries: Although tapping into local supply provides an effective hedge from international political risk, the problem with local shale gas is, once again, environmental. Many countries, such as France, the Czech Republic, and Bulgaria have banned shale gas extraction.
  • Gas from Africa (i.e. Libya, Algeria): These sources have generally been unreliable due to political unrest and increased local demand. As the article points out: “Italy’s imports from Libya, once a reliable supplier, were down by 11.9% in 2013; supplies from Algeria (where local demand is booming) were down by 40%.
  • Liquefied Natural Gas (LNG): The main problem with LNG is its inelastic supply. Due to the cost of the plants that liquefy the gas and the steadily growing demand from China and Japan, Europe would not be able to attain the LNG for a reasonable price.
  • Shale Gas from America: The lack of U.S. export facilities means that there would be large startup costs to begin importing, and even once the facilities were built, Europe would have to compete with the high prices China will be offering for the shale gas.

An interesting statistic to conclude and drive the point home: if Europe were to employ all of these alternative sources it would not only be short about half of its demand, but it would also spend $50 billion more on gas per year!

3.    Growing European Demand For Gas

The final argument is a short, but important one– European demand for gas is expected to grow for the next ten years: According to AT Kearney, a consultancy, imports are set to climb from 327bcm today to 413bcm in 2020.” A growing demand for gas would mean that gas from alternative sources would be even more expensive, making Russian gas that much more attractive.

In summary, the past two blog posts have developed a detailed argument for why European dependence on Russian gas will remain strong despite political concerns in Ukraine. The already developed infrastructure between Russia and Europe, the unjustifiably high cost of alternative gas sources, and a growing demand for gas has put European leaders in a tough position– a strong and expanding Russia is not in their best interest, but Russia’s cheap gas has chained Europe’s leaders onto the political sidelines until an economically viable alternative is found.

South European Real Estate

Past have decade had been a roller coaster ride for most members of the Eurozone. What had happened in Euro? Starting with Greece’s danger of credit default, this brought about domino effects on several companies. Ireland, Spain, Portugal and Cyprus all experienced financial crisis due to interconnectedness of debt obligation to each other in this single currency confederation.

The countries mentioned above were simply spending way above what they could afford pay back, and when the trust broke, so did their financial health. Greece, Spain and Portugal, especially, were spending enormous amounts of money into investments in real estates.

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At one point in time around 2009, the cement consumption per capita in Spain and Portugal was higher than that of China, which is quite significant considering that China is the fastest growing countries in terms of real estate. Spaniards and Portuguese were busy building vacation homes on the West coast of their country. For these two countries, the real estate bubble emerged and popped as the realization of implausibility of financial health in few countries.

Let us look at few seconds before this bubble popped. This could be a one of the prime examples of ‘castle in the air’ in Spain and Portugal as whatever real estate in the West coast were being evaluated through the roof into the sky. What happened when the bubble did burst though?

In my opinion, none like equities and other financial instruments, real estate has a very special characteristics of its own. When the bubble did pop, and the castle-in-the-sky fell, the castle in the air simply came down, and establish itself as a castle-on-Earth instead. Those real estates that went into massive sales for pennies worth of what they used to be in the market few years ago is making a slow come back. Castle is still a castle indeed whether be in sky or on Earth. These high quality vacation homes are receiving new attention.

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The largest capital inflow change is from the Asia Pacific in the past year with more than doubling.  However, the largest investors are still American funds both public as well as private. Especially with the Eurozone experiencing record low inflation, and European Central Bank’s willingness to maneuver to stimulate further in to the economy, real estate in South Europe may be a viable option for people who have money to invest. ECB actually announced that it may further lower interest rate to guard against dangerously low lingering around 0.7%.

There could still be concerns for investors regarding these assets–low inflation, still not fully recovered eurozone, political variabilities, etc. However, the innate stature value of real estate is decreasing only at its depreciation value. If you are looking for a long term investment opportunities, look into vacation homes in Europe.

 

The Euro’s Failure: Never And Nowhere A Monetary Phenomenon

Would probably wish he had a dollar for every time someone uses his quote – Milton Friedman

Frances Coppola published a piece on the Euro’s failure and the ECB’s irrelevance a few days ago (aptly titled, “The ECB is irrelevant and the Euro is a failure”). I generally think it’s a really good read, but I have a problem with it.

When people criticize the Euro, they often say that either institutional deficiencies (i.e. no fiscal union/central government) or nationalism (sometimes misleadingly called ‘cultural differences’, of which the US, too, has plenty) make it impossible to for the Euro to work. I think that’s treating the symptom, not the cause. Cutting out the Euro is not going to cure Europe’s problems.

Coppola makes these two points (institutions & nationalism) as well, and also criticizes the austerity measures imposed across the continent in an attempt to ‘save’ the Eurozone:

We [Europeans] do not have a single language, we still cannot agree where our boundaries should fall and national interests always trump “European” politics. You can’t overturn tribal and cultural identities that go back thousands of years at the stroke of a few politicians’ pens…

…There is no sense of being “in this together”. On the contrary, there is political and social divergence; a sense of superiority from those countries that – for now – are doing well, and growing anger among the populations of those countries that are introducing painful and damaging austerity measures to create the illusion of economic convergence…

Economic convergence is an impossible dream while there is no political or fiscal union…

The Euro is a failed experiment. We should not waste any more effort trying to make it work. It is time to consign it to the dust of history.

Now, I’m right there with you about the apparent lack of cohesion in Europe. A lot of people have a hard time seeing why they should help out their neighbor if he or she doesn’t happen to have the same passport as they do. I also absolutely agree that the European institutions we have aren’t nearly powerful enough to play the role they’d need to play to make a unified currency work.

But why would you, then, say that the Euro is the problem? It seems to me that the problem isn’t a unified currency per se. Without such strong nationalist feelings and within a better institutional framework, the Euro might well work. It’d be very hard to make a consistent argument against the Euro as such, regardless of the institutional and ‘cultural’ environment it’s in (at least without also making one against the Dollar as such).

I see the failure of the Euro as a symptom of a much deeper problem. It’s a symptom of deeply rooted nationalism across Europe. Without that, we could probably have stronger European institutions, and a fair shot at a unified currency. We also probably wouldn’t have seen as much austerity, but then that was nothing but power politics to being with.

I see the failure of the Euro as an indication that we’re not ‘All Europeans now’. That was a nice idea while it lasted, up until the Eurozone crisis, but apparently not true. Which greatly annoys me, because I like to think of myself as a European (actually, I like to think of myself as a cosmopolitanist, and someone who doesn’t really care about nationality, but it’s even harder to rally people around that).

Where am I going with this? Well, if the Euro’s failure is merely the symptom of a deeper issue, then getting rid of the Euro won’t really solve anything. Sure, there would be economic benefits from not having it right now, given the weak institutions and strong nationalism we’re facing.

But it wouldn’t change anything about the fact that many Europeans don’t actually care much about Europe – they care about Germany, England, France, whatever. People attach a great deal of weight to the absolutely random fact that they were born within a certain set of lines on a map and not another. Personally, I find that absolutely ridiculous.

Alright, I can accept that in the short run, we can’t change the fact that people like to be ridiculous, and thus the Euro may be a bad idea now. In the famous Long Run however, I think we’d do well to address the issue of nationalism. And I’m not sure abandoning the Euro now would set the right precedent here, because that’d signal to generations to come that a unified Europe is doomed to fail. It isn’t. But we need to change the way people think about themselves to make it work, and that’s a big change to have to make.

So if we’re going to talk about dissolving the Euro, please don’t say it’s the unified currency as such that is the problem. This is really about nationalism making something like the Euro impossible right now. We have to keep in mind that we’ll be stuck with that nationalism even after the Euro’s gone. That’s the real problem we’ll have to deal with. Nationalism, it seems to me, is never and nowhere a monetary phenomenon.

(Revised) Growth in Europe

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Euro zone still suffers growing pains. “Industrial output across the euro zone fell in the final month of 2013, disappointing expectations and suggesting that while the economy likely expanded for a third straight quarter between October and December, it did so at a muted pace”. According to Eurostat data, industrial output in Germany fell 0.7% in December; Italy posted a 0.9% monthly fall while French factory output was 0.3% weaker in December than in November. “The data were weaker than expectations for a 0.3% monthly drop and 2.0% annual increase” as per the author.

“There is still some way to go before a sustainable and even recovery is achieved”, as the article argues. But a switched focus on austerity and exports, coupled with zero interest rate and low inflation, imposes questions on the ability of the euro-zone governments to boost domestic demand, making it hard to see how most euro-zone countries can generate the economic growth they need to repair the finances of banks, consumers and governments. However, besides economic performance, a more institutional question arises: How will the euro crisis end? Is the European Union (EU) the solution, or actually, the problem?

EU, as a customs union, is beneficial since it brings more trade creation than trade diversion at aggregate level, as well as the growth of intra-industry trade inside EU. As always, integration takes steps. In 1999, a monetary union was formed. The single currency scheme eliminated the exchange risk and exchange related costs, but it seemed to cause more trouble in the case of sovereign debt crisis, which later developed into the euro crisis. In my opinion, the creation of euro zone was based on a bet that European economies would converge to each other, which, unfortunately, did not happen, and Europe is still far from an “optimal currency area”. Moreover, there is barely a supporting fiscal structure of a treasury that performs spending and tax-raising functions at EU level. The European Central Bank (ECB) seems to be the only responsive actor to do “whatever it takes” to save the euro. But undoubtedly, monetary measures have already reached their limits and the euro crisis requires fiscal cooperation. Thus, the failure of euro is predicted unless the variance of the economic performance in most countries could be less and less.

Dictated changes of economic behaviors bring up new issues. It is commonly contend that power should be pushed down as far as possible unless significant economies of scale and externalities can be realized. However, after the euro crisis, Brussels now takes authority over national budgets and dictates national economic policies such as austerity in Greece and Germany’s low wage level and high trade surplus. Initially, EU was created as an amplifier of national power, to exert a bigger clout in world politics, but now it seems to become a menace to that. Governments elected need to answer for policies they do not fully control, and unsatisfied voters could not bring their anger to Brussels.

The problem here, I think, is the optimal degree of integration. From a customs union to a monetary union, what’s next? What’s the end point? A fiscal union? A United States of Europe? The optimal degree of integration is left deliberately ambiguous in both TEU and TFEU, maybe even for Jean Monnet, EU’s godfather. I think EU is stepping towards a fiscal union now because of the rounds of bailout for Greece leaded by Germany, which effectively prevented the even worse situation. However, is further integration the desired solution for the euro crisis even if it implies a further loss of national sovereignty?

Different countries, as separate political entities, put their own national interests first. Pure economic cooperation inevitably runs into political conflicts. The defective designation of euro zone caused the problem, and the choice is simple—either much deeper macroeconomic integration such as a fiscal/political union, or its collapse. Since each country has its own economic condition and growth strategy, maybe EU works best if remains at customs level.

 

How Economics Can Save the Environment

During his presidency, Ronal Reagan helped introduce a “cap-and-trade” system to curb America’s use of lead-based gasoline.  Experts today believe that Reagan’s cap-and-trade system lead to a much more rapid elimination of lead-based gasoline use in the United States while saving the economy $250 million each year relative to a “command-and-control” system (under which the government explicitly dictates which technologies and energy sources can be used).  George Bush senior led a similar environmental revolution through the use of a cap-and-trade system, effectively reducing SO2 emissions in the 1990s.  Given its historical success, it seems logical for governments to continue using a cap-and-trade system to address today’s environmental issues.

Unfortunately, however, cap-and-trade systems are losing favor.  In the United States, even Republicans have “demonized their own creation,” leading to a reduction in cap-and-trade usage.  As a result, over the last 5 years, the United States has mostly switched to command-and-control systems, leading to less efficient, less swift, and more costly reductions in pollution rates.

Europe has also abandoned its cap-and-trade system.  In April 2013, Europe disbanded its cap-and-trade regulations on carbon emissions entirely.  According to European officials, the economic pullback has resulted in below-equilibrium production levels.  Consequently, firms are naturally emitting fewer pollutants than allowed by cap-and-trade issued quotas, leading to a reduction in quota prices.  With prices so low, quota trading has become inconsequential and essentially irrelevant.  As such, instead of focusing on renewable energy sources (Europe has a goal to obtain 20% of its energy from renewable sources by 2020), many European firms have reverted to the large-scale use of coal.

Interestingly, as prices have gone down, Europe has failed to reign in the supply of quotas made available to firms.  Failing to do so undermines the entire purpose of a cap-and-trade system, as keeping the supply of emission quotas constant fails to reduce emissions over time (and as technology improves, it naturally leads to a reduction in quota prices).  Ultimately, it seems that Europe’s failure to commit to a strong cap-and-trade system is what caused the system’s failure; by not reducing the supply of emissions quotas, Europe could not effectively control the price of emissions.

Fortunately, California is showing that there is still hope for cap-and-trade regulation.  After introducing a cap-and-trade system in 2013, California has decided to expand the program in 2014.  Like Reagan, California has seen success through cap-and-trade regulation, as evidenced by the state’s reduction in carbon emissions.  Auctioning off emission quotas has also helped California raise over $1 billion dollars in revenue, which has helped fund subsidies for renewable energy.  Indeed, California has seen so much success in its cap-and-trade system that as of January 1, 2014, California has partnered with Quebec to create the first international cap-and-trade system.

It is surprising to me that conservatives, typical proponents of the free-market system and the original supporters of cap-and-trade regulation, have abandoned such a historically successful system.  As Reagan and Bush senior made very clear, economics and the free-market system can be environmentalists’ best friends.  That said, I am comforted by California’s use of a cap-and-trade system, and I am hopeful that conservatives will get on board, partnering with one of America’s most liberal state (and Quebec) to bring economics and environmental policy back together.

 

Growth in European

Euro zone still suffers growing pains. “Industrial output across the euro zone fell in the final month of 2013, disappointing expectations and suggesting that while the economy likely expanded for a third straight quarter between October and December, it did so at a muted pace”. According to Eurostat data, industrial output in Germany fell 0.7% in December; Italy posted a 0.9% monthly fall while French factory output was 0.3% weaker in December than in November. “The data were weaker than expectations for a 0.3% monthly drop and 2.0% annual increase” as per the author.

“There is still some way to go before a sustainable and even recovery is achieved”, as the article argues. But a switched focus on austerity and exports, coupled with zero interest rate and low inflation, imposes questions on the ability of the euro-zone governments to boost domestic demand, making it hard to see how most euro-zone countries can generate the economic growth they need to repair the finances of banks, consumers and governments. However, besides economic performance, with a growing far right concern of Euroscepticism, a more institutional question arises: How will the euro crisis end? Is the European Union (EU) the solution, or actually, the problem?

EU, as a customs union, is beneficial since it brings more trade creation than trade diversion at aggregate level, as well as the growth of intra-industry trade inside EU. As always, integration takes steps. In 1999, a monetary union was formed. The single currency scheme eliminated the exchange risk and exchange related costs, but seemed to cause more trouble in the case of sovereign debt crisis, which later developed into the euro crisis. In my opinion, the creation of euro zone was based on a bet that European economies would converge to each other, which, unfortunately, did not happen, and Europe is still far from an “optimal currency area”. Moreover, there is barely a supporting fiscal structure of a treasury that performs spending and tax-raising functions at EU level. The European Central Bank (ECB) seems to be the only responsive actor to do “whatever it takes” to save the euro. But undoubtedly, monetary measures have already reached their limits and the euro crisis requires fiscal cooperation. Thus, the failure of euro is predicted unless troubled countries can change their economic behaviors.

Dictated changes of economic behaviors bring up new issues. It is commonly contend that power should be pushed down as far as possible unless significant economies of scale and externalities can be realized. However, after the euro crisis, Brussels now takes authority over national budgets and dictates national economic policies such as austerity in Greece and Germany’s low wage level and high trade surplus. Initially, EU was created as an amplifier of national power, to exert a bigger clout in world politics, but now it seems to become a menace to that. Governments elected need to answer for policies they do not fully control, and unsatisfied voters could not bring their anger to Brussels.

The problem here, I think, is the optimal degree of integration. From a customs union to a monetary union, what’s next? What’s the end point? A fiscal union? A United States of Europe? The optimal degree of integration is left deliberately ambiguous in both TEU and TFEU, maybe even for Jean Monnet, EU’s godfather. I think EU is stepping towards a fiscal union now with Germany paying for Greece (similar to social transfers), but is further integration the desired solution for the euro crisis even if it implies a further loss of national sovereignty?

Different countries, as separate political entities, put their own national interests first. Pure economic cooperation inevitably runs into political conflicts. The defective designation of euro zone caused the problem, and the choice is simple—either much deeper macroeconomic integration such as a fiscal/political union, or its collapse. Since each country has its own economic condition and growth strategy, maybe EU works best if remains at customs level.

[Revised] Don’t Fear the Reaper (of Unemployment Benefits)

So the GOP met today to discuss strategy for the upcoming House and Senate elections. I encourage you to read the whole piece; it’s full of hidden gems (“policies incentivizing people to work” may be one of my all-time favorite euphemisms). One of the things that people seemed to like was the implementation of “tough love tactics” (that one also immediately made the list). Call me European (no really, that’s okay; I am German, after all), but what are certain people afraid of when it comes to making sure everybody has a baseline income to fall back to? What’s so bad about indefinite unemployment insurance? Is everybody just going to stop working? Will total economic collapse ensue?

While I get that the “paying people to be unemployed won’t help the economy“-argument holds a lot of sway with a lot of people (horrible article, by the way), it’s quite frankly wrong. Let’s take a look at labor force participation rates around the ‘developed’ world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%. Now there’s some role-model labor market policies). The US makes its appearance in the lower middle of the pack, with a solid 63% participation rate. Sure, you scroll past countries such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than some of them eventually just dropping out of the statistics as their benefits expire. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse.

But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European states then. Now I won’t compare the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those that were fortunate enough – like the US – not to have to undergo completely crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

By the way, even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the costliest items on the menu here.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.

Get a move on, Europe (Econ 101 demands it!)

So a little bit more about the usefulness of regional statistics in economics. And about how people are just so unwilling to commit to standard economic reasoning (take that last part as being mildly ironic, please).

Europeans don’t like to move. They like to stay where they are, and that’s despite the fact that they like going on holiday. They just don’t like to stay anywhere else. This is obviously not ideal from an economic point of view, because that means that arbitrage between job markets isn’t taking place. That’s why even in Germany – supposedly doing pretty well, right? – you get highly variable unemployment rates. The country average is 5.2% at this point, yet my home state of North-Rhine Westphalia is still at a solid 8.4% (or was in August, because that’s the latest data I could find on this), and the vast Eastern German wasteland (notice that this is irony, yes? Although it’s a big, empty place, at least by German standards) of Mecklenburg-Western Pomerania was at 10.7%. That’s a huge deviation from the country average, more than 5 percentage points, twice as high! Granted, it’s a rural place, so you might be able to come up with an argument involving family farms and all that. Except that Berlin’s actually doing even worse, at 11.7%. And these are the countries that are above the average, so there’s plenty of room for some states to do significantly better as well. Yet nobody feels like taking advantage of that. This is actually a pretty general phenomenon around the continent.

The US is obviously doing much better here, with a common language, fewer cultural barriers and much cheaper gas so truck rentals are much cheaper a solid frontier attitude no unemployment benefits so people can’t just lazily live off the dole whatever deep cultural reason it is that makes people more okay with moving around over here. However, it seems that even the Americans are starting to get wary of going that extra mile.

And you can see in the data that there are differences between states’ unemployment rates:

Those rates move in tandem, in the absolute percentage point differences tend to be smaller in better times than today (although officially, the recession’s been over for quite a while now… funny how that works). Plus, relative differences are similar over time, and that’s what should make people move – a 100% reduction in the unemployment rate from one state to another should provide a pretty solid incentive to relocate. I mean come on people, do we have to make Econ 101 obligatory? Homo Economicus would now better than to ignore these facts.

You could see of course why friends and family would keep people around even in times of economic distress, both in Europe and the US. And I’m not trying to say that they should all start moving around because their behavior simply doesn’t fit the economic theory (or at least a somewhat version of that). I just never realized how strong these differences were not just between adjacent countries, but even within countries. Or rather, I just never paid attention to the fact that most economic models don’t really pay attention to these regional differences; at least most macro models don’t (I at least haven’t seen one with heterogeneous labor markets within the same country that don’t originate from involuntary labor mobility restrictions). So this might be worth thinking about in the context of modelling, if nothing else.

How to Dismantle a Gross Domestic Product

This post isn’t going to be so much about some great insight (in fact, there’s nothing totally new in here at all). It’s about an observation I made that I never really spent too much time thinking about before, and I figured chances are some others might find this interesting as well. The basic realization I had was this: the US and Europe (or, more accurately for my purposes, the Eurozone) both cover massive areas of land, inhabited by millions of people. Yet for one of them, we get one ‘core’ statistic: US GDP. For the other, we get 17 different national GDP figures, one for each member state. Imagine the news stories if instead of focusing on Greece (Greece, I tell you!), we focused solely on aggregate Eurozone GDP vs. US GDP:

I mean sure, the US gets going much faster and the Eurozone has a double dip recession, which is a fundamental difference. And it’d still make for bleak forecasts and depressing headlines. But it’s not nearly looking as bad as Spain, Italy or Greece do when compared to the US individually:

The difference is even stronger when looking at unemployment (feel free to check FRED, but this post really can’t take any more graphs than these two and the next one). The Eurozone as a whole stacks up a lot better compared to the US than some of its members do on their own. So I’ve been asking myself why it is that we choose to look at the GDP and unemployment figures of single European countries instead of looking at the Eurozone as a whole. Likewise, why is it that we choose to look at aggregate US GDP, instead of dividing that up by state?

It’s not that the US moves totally in tandem, and so policy recommendations wouldn’t differ depending on which measure you use. There are really strong differences in states’ reactions to the financial crisis:

Michigan not looking so great, and even California wasn’t quite back on track in 2012 (these data tend to be available a little later than the aggregate figures for the US as a whole). But look at Texas, only a short period of stagnation (beginning before the crisis), and that’s basically it. And North Dakota just breezes past everybody else, not even noticing the crisis.

If these states had all had separate central banks and fully independent governments, I’d wager their reactions to the crisis would have been vastly different. Yet because the US has a federal government, they all implemented the same policy. They all got the same federal funds rate, the same QE, and the same stimulus bill. Which means that this policy probably wasn’t exactly ideal for any of them.

Europe didn’t really have individual policies either, because there’s only one ECB and austerity measures were enacted across the continent. Which definitely wasn’t ideal for anybody (by a long shot).

I don’t want to discuss here whether the aggregate figures are better or worse than the more detailed state-level figures. I haven’t thought about this enough myself to really render judgement here. At this point, I just find it fascinating to see how big the differences in GDP movements are when looking at either aggregate or lower-level measures. And maybe someone else shares that sentiment.

Don’t Get Too Excited With Spain

This past Thursday, Spain began its halt and its reliance on bailout loans from Europe. After the construction sector had its fall out, Spain was in desperate need to fill up the vaults in its banks. While some critics still believe Spain is in its rock bottom pit, some people the Spanish job market may be turning around. “Spain posted seasonally adjusted job growth for the first time in nearly six years.” Officials and independent analysts say “the job-growth threshold is lower now because of a two year old overhaul of labor laws that made it easier and cheaper to lay off workers.” But now, according to Gayle Allard, a professor at IE Business School in Madrid says “companies are as likely to hire because the lower dismissal costs have diminished the risks associated with taking on new workers.” Companies have been seeing an increase in demand from an increase in requests for new employees and workers seeking jobs. As we see the Spanish banks ending their need of loans from Europe, there is progress in the works for Spain.

Although a lot of people have been inspired by the progress of Spain, many economists are not completely convinced that there will be a complete upswing. Why should we be completely confident that there will be a full turn around just cause the banks aren’t taking loans anymore?  Megan Greene, the chief economist at Maverick Intelligence in London says that “The big game that politicians and bank CEOs are playing is ‘extend and pretend.’ If we pretend that our banks are really healthy, then eventually all the assets underlying things on our balance sheets will regain value, and we won’t actually have to take such big losses.” This is the exact reason why countries like Spain and Greece have been in the dumps for the past several years. They have continued to believe things will work themselves out without any major changes. Spain thinks that not having to take bailout loans from Europe is one of their big moves and that the rest of their issues will work out themselves. “So that’s the game everyone in Europe has been trying to play,” Greene continues to say.

Even the job market doesn’t look like it will have the best outcome as some people have been saying. “More than 90% of the new jobs are temporary, some say, and part-time contracts are also increasing.” So yes, it is easier to hire people just as it was easy to let people go, but that does not mean Spain is making great progress. For there to be a complete turn-around in Europe, all the countries are going to have to figure out a way to come together to fix their economies. I do not believe one country will be able to solve their problems on their own. There is too much chaos still occurring in Europe for a major progression to come about.