Transcript The Current Economic Situation in the Euro Area

The 2009 Euro Challenge | The Current Economic Situation
The Current Economic
Situation in the Euro Area
Presentation by Nigel Nagarajan
Faculty Orientation – 2009 Euro Challenge
Federal Reserve Bank of Boston, December 8th
2008
The 2009 Euro Challenge
Start with the question
1.“Describe the current economic
situation in the euro area (the economic
region consisting of the 16 EU member
countries who have adopted the euro).”
Key words: current, economic situation,
euro area
1
What do we mean by “current”?
Key words: current
Huh?: This means the “short-term economic
outlook”
We can help you: numbers from the
European Commission economic forecast
Extra credit: provide context – how does the
current situation compare with the recent past?
2
What do we mean by “economic situation”?
Key words: economic situation
Huh?: We want you to discuss three economic indicators:
• GDP growth: the speed at which the economy is growing
(new goods and services produced). NB we want GDP
growth not total GDP.
• Inflation: the overall increase in prices in the economy.
• Unemployment: the percentage of the civilian labor force
that is unemployed.
We can help you: Look on the forum for hints and tips
3
What do we mean by “euro area”?
Key words: euro area
Huh?: Know the difference between the euro
area and the EU!
We can help you: No need to discuss
individual countries here!
Extra credit: provide context – how does the
euro area compare with the US?
4
What has been driving growth in recent years?
In recent years US had mainly
domestically generated growth.
Strong house price appreciation
helped to stimulate consumer
demand
More reliant on externally
generated growth (i.e.
exporting to other countries,
e.g. US, UK, China)
5
What about this “decoupling” idea I keep hearing about?
• Decoupling is the idea that, even if the US slows down, other
regions (e.g. Europe, Asia) can still grow at healthy rates
• But there are strong inter-linkages (trade, investment, financial
flows) that make different regions increasingly interdependent
• The US has been the main “locomotive” for the world economy
until recently. The rest of the world has relied on US growth
• Europe’s resilience to a US slowdown was overestimated
(most euro area countries have less flexible markets than US)
• The old saying rings true: “When the US sneezes, Europe
catches a cold”. Now they both have pneumonia!
6
Europe and the financial crisis
• European banks have exposure to US sub-prime mortgages
(“toxic assets”) and did not properly understand the risks
associated with them
• Some EU countries have had their own housing bubbles
which are now deflating, i.e. Ireland, Spain
• Higher oil and food prices eroded the purchasing power of
European consumers just as in US
• Strong trade, investment and financial links transmit the US
shock across the Atlantic to Europe (where markets are not
as flexible)
• EU policy response – a fragmented, national response gives
way to more coordinated, comprehensive approach
7
Real GDP growth in the euro area
Source: European Commission economic forecast (January 2009)
8
Inflation in the euro area
Source: European Commission economic forecast (January 2009)
9
Unemployment in the euro area
Source: European Commission economic forecast (January 2009)
10