Transcript Europe – the lost continent

Europe – the lost
continent?
Howard Davies
Director, LSE
ICEF
HSE Cultural Centre
29 November 2010
The continuing Eurozone crisis is a cloud
hanging over Europe:
- How far is the economic gloom justified?
- Has Europe faded into economic and
political insignificance?
- If so, should Russia care?
After the recession, global
growth is resuming
Global GDP growth, annual % change, 2003 - 2015
10
8
6
4
2
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-2
-4
World
Advanced economies
Note: Estimates start after 2009.
Source: IMF WEO Database, October 2010.
Emerging and developing economies
2015
China is once again the star
performer
UK, US and BRICs’ GDP growth, annual % change, 2003 - 2015
20
15
10
5
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-5
-10
Brazil
China
India
Russia
Note: Estimates start after 2009.
Source: IMF WEO Database, October 2010.
United Kingdom
United States
Emerging market consumption
now surpasses US levels
US and EM consumption as % of global consumer spending, 1990 - 2008
Source: JPMorgan.
The World’s Economic Centre of
Gravity is moving eastwards
Projection of the World’s Economic and Geographic Centre of Gravity
Source: Grether JM, Mathys N (2008): Is the World’s Economic Center of Gravity
Already in Asia?
The European prospect has also
improved, but not everywhere
Source: FT Interactive: Europe’s economic weather map.
So in Europe
• overall growth is sluggish and
• the eurozone is under great pressure.
The European Union: 500 million
people – 27 countries
EU population, million people, 1986 – 2010
600.0
500.0
400.0
EU27
EU25
300.0
EU15
EU12
200.0
100.0
0.0
1986
Source: Eurostat.
1995
2004
2007
The Euro: A single currency for
Europeans
EU countries using the euro
EU countries not using the euro
Source: http://europa.eu/
The EU economy is close in size
to that of the US
GDP, current prices (Billion US dollars), 2009
EU (16,415 Billion USD)
US (14,119 Billion USD)
Source: IMF World Economic Outlook, October 2010.
How rich is the EU compared to
the US, Russia, China, and India?
GDP per capita, current prices (US dollars), 2009
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Source: IMF World Economic Outlook, October 2010.
US
EU
Russia
China
India
The EU-15 still has a substantial per
capita GDP gap with the United States
GDP per capita, $ PPP thousand, 2009
Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.
Europe has already created many new jobs
above population growth in the past decade
Additional jobs, million, 1995 – 2008
Note: Numbers may not sum due to rounding.
Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.
And largely defended export market
shares despite the rise of the BRICs
Market share of total world exports¹, %, 1999 and 2008
1 Excluding intra-EU-27 trade.
2 Brazil, Russia, India and China.
Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.
But there is nonetheless a serious
problem
The euro was expected to bring convergence in
economic performance, but
- productivity growth by region has been very
different, and
- the competitiveness of periphery countries has
lagged.
- fiscal deficits have ballooned in those countries,
and
- the markets have become concerned at the
prospect of default.
Southern Europe continues to lag
behind in productivity growth
Productivity, $ PPP per hour worked, 2009
Note: Nothern Europe: Denmark, Finland, Ireland, Sweden, UK. Continental Europe: Austria, Belgium, France, Germany,
Luxembourg, Netherlands. Southern Europe: Greece, Italy, Portugal, Spain.
Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.
There has been a remarkable
divergence in competitiveness
Real exchange rate* and relative export performance, cumulative
change between 1999 and 2008
*Real exchange rates are based on unit labour costs.
Source: Bruegel Policy Brief, March 2010.
Costs of borrowing in the Eurozone
have been growing apart
10-year bond yields, %, 1 Jan 2010 – 12 Nov 2010
Source: JF Kirkegaard: Turmoil in European Bond Markets, but the Sky Is Not Falling. Peterson
Institute for International Economics. 15 November 2010.
The EU response has been hesitant:
- An ad hoc rescue package for Greece, with
the IMF,
- A ‘temporary financial stability facility’ which
was not intended for use,
- Another ad hoc package for Ireland,
- Leaving question-marks over Portugal, Spain
and even Italy.
It is now clear that to survive in the longer term,
the Eurozone needs:
- A fiscal pact that works,
- A permanent ‘European Monetary Fund’,
- A financial sector bail-out mechanism.
But these plans require treaty change, which is
politically complex.
Three possibilities
• Muddling through:
Austerity in the Club Med
Solidarity from the
Germans
• Greek (and Irish)
defaults:
Haircuts within the
Eurozone
• Two currencies:
The euro and the medi
Does this matter to Russia?
• The EU is Russia’s largest
trading partner
• It acts as a political counterweight to the US
The EU is Russia’s largest
trading partner by far
Russian exports, top 5 destinations, % of total, 2009
Source: WTO statistics, 20 October 2010.
EU is losing weight in global
economic governance
G8
Source: www.g20.org.
G20
Europe’s leadership remains
confused
While Russia’s leadership is
clear…
But as we gently decline,
we enjoy ourselves…
Out of top 40 best countries to
live in the world, 27 are EU
Countries by rank, according to the World’s Best Countries Ranking 2010
Source: Newsweek. The World’s Best Countries 2010.
In conclusion
• The World’s Economic Centre of Gravity is
moving East.
• The European economic model is more robust
than many think, but
• The Southern European problem will have to be
resolved, both in the short and longer term,
• EU needs stronger institutions if it is to survive.
• Europe’s leadership is currently inadequate for
the challenges.
Europe – the lost
continent?
Howard Davies
Director, LSE
ICEF
HSE Cultural Centre
29 November 2010