25/07/2011: Comprative analysis of Euro Area and Euro Big 4

There’s a lively debate going on in parts of Europe about the longer-term fall out from last week’s ‘Deal for Greece +”. Most notably – in Germany (see here). In light of this, it is worth looking into some facts about economic performance of the Euro area Big 4 economies: is Germany right about protecting its fiscal conservativism from collectivization of risks envisioned by the ‘Deal’?

Let us plough through some data and IMF forecasts for the following set of countries & country-groups: France, Germany, Italy and Spain (the Big 4) against the Euro area as a whole, plus Advanced Economies and Major Advanced Economies (G7). Please note that the IMF forecasts are not exactly in agreement with my view of where some of these economies are heading, but for the reasons of comparative simplicity and transparency, I will rely on IMF data here.

In the end, what I am after here is some (crude – so be warned) metric of risks – disaggregated across countries and groups.

Starting from the top: chart below shows annual growth rates in GDP expressed in constant prices.

Economies, 2000-2007 growth rates averaged 2.61%, while the crisis years growth fell on average 0.06% annually. The projected growth for post-crisis period 2011-2016 IMF forecasts growth of 2.46%. In all of these periods, Advanced Economies group leads the league table of our sample countries/regions.

Area managed to achieve average annual growth of 2.16% in pre-crisis period, but suffered 0.63% annual average contraction during the crisis. Post-crisis, Euro area economies are expected to grow 1.76% which is the third slowest rate of growth in our sample.

G7 economies grew 2.27% on average annually in pre-crisis period and faced a relatively mild average crisis-period contraction of output of 0.36%. These economies are expected to grow at 2.29% per annum on average in 2011-2016.

France recorded average annual growth of 2.12% in 2000-2007 and subsequently posted relatively mild contraction of 0.32% (annual average) in 2008-2010. The country is expected to grow its economy at an average annual rate of 1.94%.

German economy grew on average at an annual rate of 1.58% during the pre-crisis years – posting second slowest growth in the sample. During the crisis, the economy contracted 0.15% per annum on average (second best performance in the sample), while it is expected to grow at 1.84% average rate in 2011-2016 – not a blistering growth forecast, but above Euro area as a whole.

Italy posted slowest average annual growth in the sample during the pre-crisis period (1.46%), the deepest average annual contraction in the sample during the crisis (-1.75%) and is expected to continue slowest growth performance with 1.32% average annual growth rate in 2011-2016.

Spain recorded the fastest real growth in the sample for the pre-crisis period (3.62% average annual rate), followed by the second magnitude of contraction (-1.0% per annum on average) in the crisis period. Spanish economy is expected to grow at 1.62% on average in 2011-2016 – second slowest in the sample.

In terms of GDP per capita (chart below):

Germany was the first in our sample to reach pre-crisis peak level of GDP per capita between 2009 and 2010, followed by the Advanced Economies and the Euro area. G7 group of countries recovered from the crisis in terms of GDP per capita by the end of 2010, while France’s recovery will take it into 2011. Spain is expected to recover from the declines in GDP per capita around 2011-2012, while Italy will take the longest to reach pre-crisis peak – some time between 2012 and 2013.

In terms of investment as a share of GDP (chart below):

Advanced economies investment averaged 21.05% in the period prior to the crisis, falling to 19.08% during the crisis before recovering somewhat to 20.08% in the period 2011-2016. No data is available for the Euro area and G7 countries.

France invested 20.2% of its GDP on average during 2000-2007 period, recording a marginal decline to 20.11% in the crisis years and is expected to recover to 20.60% of GDP in 2011-2016.

Germany was the weakest country in the sample in terms of investment with investment ratio to GDP of 18.24% in the pre-crisis years, followed by 17.50% during the crisis and by expected 17.81% in the post-crisis period.

Italian economy investment as a share of GDP was 21.01% in pre-2008 period, followed by 20.11% during the crisis. IMF expects Italian investment to rise to 20.54% of GDP in the post-crisis period.

Spain’s investment to GDP ratio was 28.30% in 2000-2007 period, followed by 25.5% in 2008-2010 and 22.98% projected for 2011-2016.

So in terms of investment as a share of GDP, Germany is clearly a laggard here, which is of course explained by two core factors: (1) aging population and (2) already extensive stock of capital.

Unemployment rates are shown in the chart below:

During pre-crisis period, Spain psoted the highest rate of unemployment, averaging 10.54%, followed by Germany (8.93%) and France (same as Germany). Euro area as a whole averaged 8.45% unemployment rate during the pre-crisis period, followed by Italy at 8.11%. This poor performance by European part of out sample is contrasted by the pre-crisis unemployment of 6.11% for the group of Advanced Economies and 6.05% for G7 group.

During the crisis, Spanish unemployment rose to 16.47%, followed by France (9.02%) and Euro area (9.0%). G7 economies posted 7.35% average rate of unemployment while Advanced economies came in at 7.34%. Germany shows the best unemployment rate for the period at 7.22%.

Post-crisis, IMF forecasts for Spain to remain worst performing country in our sample with 16.91% average unemployment rate, followed by Euro area at 9.03% and France at 8.57%. In contrast, Italy’s unemployment is projected to settle at 7.87% average, with Advanced economies coming in at 6.77% and G7 economies at 6.54%.

So what about employment – in other words, jobs creation:

The chart clearly shows that Germany, G7 group and France are the weaker performers in the sample in terms of longer-term trends in jobs creation. Now, see the following chart on population changes. Of course the problem here is that while German population is shrinking (so jobs creation is not exactly high on their agenda, especially with low unemployment), for France (with expanding population) slow jobs creation is a major draw back (hence high unemployment as well).

By 2015, based on IMF projections, German population will shrink by 1.284 million relative to 2000, while Italian population will grow by 4.638 million, French by 5.352 million and Spanish population will expand by 6.304 million.

In terms of fiscal performance, consider the following two charts plotting general government revenue as % of GDP and the general government expenditure as % of GDP:

The following chart shows general government deficits:

Based on three charts above, consider the fiscal adjustments required to deliver on the deficit targets to 2016:

Of all countries in the sample, France represents the steepest required fiscal adjustment in terms of deficit reductions, totaling 4.475% of GDP between 2011 and 2016, followed by the G7 group of countries with 4.063% and Advanced economies at 3.567%. Euro area projected adjustments are 2.519%, while German projected adjustment is 2.326%. The weakest – fiscally – performing countries – Italy and Spain – have the lowest fiscal adjustments planned at 1.439% and 1.679% respectively.

Mapping these adjustments alongside the absolute measure of fiscal performance (Gross Debt) and taking into account the economies growth potential, chart below shows two groups of countries. The first group (no shading) is the group of economies facing the moderate adjustment on deficits side, against stronger targets on debt reductions. This group includes Germany, Italy and Euro area. The second group of countries represents a group facing steeper adjustments on fiscal deficits side and/or significant deterioration in debt positions. This group covers Spain, Advanced economies, G7 and France. It is worth noting that this group of countries faces stronger growth prospects, but Spain and France represent two weaker economies in this group.

Chart below provides an illustration of the debt challenges faced by the sample economies. General Government debt rose 48% in Spain form an average of 47.62% of GDP in 2000-2007 to 70.5% of GDP projected average for 2011-2016. In France, the same increase was 43.6% from 61.83% of GDP pre-crisis to 88.76% average in post-crisis period. At the same time in Germany, gross government debt to GDP ratio rose from 63.64% of GDP pre-crisis to 76.48% of GDP in post-crisis period – the second slowest rate of increase in the sample after Italy.

Overall, for the period of 2011-2016, average gross government debt levels are expected to range from 121.93% of GDP for the G7 economies, to 119.32% of GDP for Italy, 105.33% of GDP for Advanced economies, 88.76% of GDP in France, 87.55% of GDP for the Euro area, 76.48% of GDP in Germany and 70.49% of GDP in Spain.

Lastly, let’s take a look at the current account positions.

As chart above shows, cumulative 2011-2016 expected current account positions as the share of GDP are: Germany +25.9% of GDP, Euro area +0.67% of GDP, Advanced Economies -1.92% of GDP, G7 economies -7.13% of GDP, France -14.6% of GDP, Italy -17.4% and Spain -24.5% of GDP.


Now, let us pool the information contained in the above data to derive the overall riskiness of each economy/group in the sample. To do this, I assign to each country/group a score out of 1-14 based on their performance relative to the top performing economy. So top performer in each category of score below gets 14, the with the next performer getting 12 or less, with distribution of scores within each category/heading following the underlying data. The higher raw scores reflect stronger economic performance and / or lower risk. So the final risk scores are based on inverting the raw scores. Summing these up across categories/criteria produces the total risk score reported in the penultimate column of the table. These are ranked in the last column with 1=highest risk country.


The results are consistent with statistical distribution and are robust to several checks, namely:
1) Removal of the GDP per capita recovery statistics
2) Removal of the Employment index
3) Removal of the Government Expenditure metric

The core results are:

1. Germany clearly represents the most sustainable country in the sample of all Big 4. In fact, its fiscal and macroeconomic position would be significantly undermined if it were to move to Euro area harmonized position
2. Spain and Italy are the two weakest economies in the sample with very high risk rating
3. France is statistically closer to Spain and Italy than to Euro area harmonized economy and is clearly the least sustainable economy in the sample after Spain and Italy.
   

23/07/2011: Internet Age and Social Capital

We have heard on many occasions various arguments that Internet and the culture of new media and exchanges it has created are responsible for dumbing-down of society, reduced imagination, increased propensity to violence, contracting attention spans and a host of other evils.

My personal view on this – not scientifically proven, mind you – is that Internet is yet another medium for developing, visualizing and delivering information. I do not see it as intrinsically transformative of the way we interact with the world around us, but as a tool for amplifying the speed of our interactions. Hence, any dumbing-down – if it takes place at all – is, to me, not the outcome of the Internet Age, but of something in our human nature, in our ways of relating to the world.

At last, there is some evidence appearing – academic, not market research-led (again, not that there is any intrinsic reason to mistrust the latter or to trust the former) – that Internet might not be all that bad for us as ‘Social Beings’.

A recent study "Surfing Alone? The Internet and Social Capital: Evidence from an Unforeseeable Technological Mistake" by Stefan Bauernschuster, Oliver Falck and Ludger Woessmann, published by CESIfo (Working Paper 3469, May 2011) uses some wide-cover German data to attempt to answer whether the Internet undermines social capital or facilitates inter-personal and civic engagement in the real world.

The study “exploits a quasi-experiment in East Germany created by a mistaken technology choice of the state-owned telecommunication provider in the 1990s that still hinders broadband Internet access for many households.” In other words, the study uses East German data as control group for reduced exposure to Internet to see if such limitation yielded profound difference in social interactions compared against the groups with full access to broadband Internet.

The study finds “no evidence that the Internet reduces social capital. For some measures including children’s social activities, [the study] even find[s] significant positive effects.”

Per authors’ conclusions, “in virtually all specifications and for virtually all social capital indicators, both the value-added models and the instrumental-variable (IV) models yield positive point estimates on having broadband Internet access at home. …results indicate significant positive effects of broadband Internet access on the frequency of visiting theaters, the opera, and exhibitions and, …on the frequency of meeting friends. Exploring a relatively small sample of children aged 7 to 16 living in the sampled households, we further find evidence that having a broadband Internet subscription at home increases the number of children’s out-of-school social activities, such as doing sports or ballet, taking music or painting lessons, or joining a youth club. Broadband Internet access also does not crowd out children’s extra-curricular school activities, which include such areas as sports, music, arts, and drama.”

Crucially, “several tests of validity and robustness support a causal interpretation of our results”.

20/07/2011: EU's Banks Levy is a dangerous idea that will impede reforms in the sector

The latest calls for introduction of the banks levy within the EU (see here) as:

• the means for financing some of the banks rescue measures and
• the means for reducing the probability of the future crises
  

represents nothing more than a cynical and/or largely economically illiterate attempts by the EU lawmakers to dress up new revenue raising measures as ‘reforms’.

The core problems with this proposals are:

1. With current market structure & declining competition in Euro area banking sector, this levy represents another hidden tax on European households & companies. The current environment in banking sectors in many EU countries lends itself to the incumbent banks being able to pass the levy on to their customers without incurring any, whatsoever, direct moderation either on their own leverage levels or stabilization of their funding streams.
2. xWith declined competition in the sector, the new levy will act to further reduce Returns on Equity for any new entrant into the market, thus effectively acting as a barrier to entry and the means for protecting European zombie banks from competition from non-legacy banking institutions.
3. A levy will do absolutely nothing to resolve the problem if Europe’s zombie banks unable to exist as functional banking institutions, but sapping vital deposits and savings out of investment stream, thus starving the European economies of capital. European banks require some €250-500 billion worth of funds to cut their dependence on public funding and ECB/CB emergency assistance for funding and capital. Raising €10 billion annually through the proposed banks levy is simply too little to address the above gap.
4. In many cases, this levy will in effect result in a transfer of taxpayers’ own or guaranteed funds from the banks balance sheets (where these funds are now being deposited to support capital and funding activities of the zombie banks) to the EU collecting body.
   

A recent (June 2011) IMF Working Paper /11/146, titled “Recent Developments in European Bank Competition” by Yu Sun clearly finds that introduction of the common currency and the current financial crises have led to repeated reductions in overall degree of competition within the European banking sector, compared before and after EMU (1995–2000), post-EMU (2001–07) and post-crisis (2008-09)."

"Columns (3) and (4) in the table below report the H-statistic (higher H-stat reflects higher degree of competition in the banking sector) and standard error before EMU for each country or region, columns (5) and (6) after EMU. Column (9) displays the changes in the H-statistics from pre to post EMU period."

Thus, “the overall competition level in euro area dropped slightly after EMU, from 0.699 to 0.518 while competition levels across member countries converged [the standard deviation of H-statistics of euro member countries drops from 0.17 before EMU to 0.12 after EMU]."

“The finding that large and financially integrated countries or regions tend to exhibit less competitive behavior than smaller sectors is in line with others studies, including Bikker and Spierdijk (2008), who also find some deterioration in competitive behavior over time for Europe’s banks. They argue that banks in large and integrated financial markets are pushed by rising capital market competition and tend to shift from traditional intermediation to more sophisticated and complex products associated with less price competition."

“While the small decline in the level of bank competition for the euro area is statistically significant, it is somewhat smaller than the estimates reported by Bikker et al. (2008) using an un-scaled revenue function. For Austria and Germany, a slight increase in the competition level of their banking systems is estimated; however, the increase is not statistically significant. The H-statistics in Finland, France, Greece, Italy and Netherlands dropped after EMU. At the same time, Spain, the U.K. and the U.S. experienced some small but statistically significant improvement in the competition level of their banking systems."

Before and after the recent financial crisis: “The recent financial crisis and possibly corresponding policies seem to have left a strong mark on bank competition in many countries, as indicated by the competition indicators before and after the crisis for the sample…. Columns (7) and (8) of Table 3 show the H-statistics after the financial crisis. In the U.S., Italy, Germany, Spain and the euro area, bank competition seems to have declined following the financial crisis; however the declines in Germany, Italy and euro area are trivial.”

Bank competition among large (top 50) and small banks (bottom 50): “For some countries, like U.S. and U.K., small banks compete more intensively, while larger banks in Austria, France, Italy, Portugal and Spain are more competitive before EMU. In other countries, the competition indicators of larger banks are not statistically different from those of smaller banks before EMU”. Competition within small and large banks: “The euro area, France, Greece, Italy and Netherlands have experienced a significant drop in competition in both small and large banks, while both banks in the U.S. and U.K. showed a noticeable increase."

So overall, “the euro area experienced a significant but small decline in bank competition after EMU and the financial crisis. Some studies with similar findings have attributed the decline in competition to the process of consolidation, and the movement of bank activities from traditional financial business to off-balance sheet activities [both anti-competitive processes have accelerated under regulatory blessings of many Governments since the crisis]. More importantly, competition levels in euro countries seem to have converged after EMU, not just at the average national market level, but also between different bank types and ownership [so that less competitive markets became more competitive with euro creation, while more competitive ones became less so]. Finally, following the financial crisis, competition fell in many countries, and especially in some countries where large credit and housing booms took place."

In this environment, in my view, introducing a banking levy will simply reinforce the existent market structure and further prevent markets-led corrective adjustments in the sector. At the same time, the levy will exert new costs and pressures on banks clients.

20/07/2011: Foreign Nationals & Foreign-born population in EU27

Eurostat published new statistics on foreign-born and non-national populations across the EU for 2010 (see Statistics in Focus, 34/2011, "6.5% of the EU population are foreigners and 9.4% are born abroad").

In 2010, there were 32.5 million foreign citizens living in the EU27 Member States, of which 12.3 million were citizens of another EU27 Member State and the remaining 20.2 million were citizens of countries outside the EU27.

Foreign citizens accounted for 6.5% of the total EU27 population.

On average in 2010, foreign citizens living in the EU27 were significantly younger than the population of nationals (median age 34.4 years compared with 41.5 years).

Among the EU27 Member States, the highest percentage of foreign citizens in the population was observed in Luxembourg (43% of the total population), followed by Latvia (17%), Estonia and Cyprus (both 16%).
High proportion of foreign citizens in Latvia and Estonia is due to a bizarre situation where large numbers of residents of these countries have no official citizenship due to discriminatory (in my view) practices against people of non-Latvian and Estonian ethnicity. As Eurostat notes: “In the case of Latvia and Estonia, the proportion of non-EU foreign citizens is particularly large due to the high number of ‘recognised non-citizens’, mainly former Soviet Union citizens, who are permanently resident in these countries but have not acquired Latvian/Estonian citizenship or any other citizenship. The foreign-born would include people who were born in other parts of the former Soviet Union." It is worth noting that many of these 'non-citizens' have resided in these countries all their lives and many were actually born inside the borders of these countries. Despite this, the EU largely overlooks the issue of their rights within Latvia and Estonia, even though outside these countries, they are accorded the same rights as EU nationals.

The percentage of foreign citizens was less than 2% in Poland, Lithuania and Slovakia.

In terms of citizenship, nearly 40% of the EU foreign population were citizens of another EU27 Member State, with the highest shares in Luxembourg (86% of the foreign population), Ireland (80%), Belgium (68%), Cyprus (66%), Slovakia (62%) and Hungary (59%). A third of the foreign-born population were born in another EU27 Member State.

Since citizenship can change over time, it is interesting to complement this information with data on the foreign-born population. They include foreign citizens who have acquired the citizenship of the country of residence, but who were born abroad, plus nationals born abroad (for example in the territory of a former colony) or nationals born in a part of a state which, due to dissolution or border changes, no longer belongs to the same country.

The number of foreign-born people exceeded the number of foreign citizens in all Member States, except in Luxembourg, Latvia and the Czech Republic.

In 2010, there were 47.3 million foreign-born people living in the EU27, with 16.0 million born in another EU27 Member State and 31.4 million born in a country outside the EU27. In total, foreign-born people accounted for 9.4% of the total population of the EU27.

Data on the place of birth of the foreign-born population show that one third of foreign-born people living in the EU27 were born in another EU27 Member State, with proportions above 50% being observed in Luxembourg (83% of total foreign-born), Ireland (77%) and Hungary (67%).

19/07/2011: Ireland-Russia Bilateral Trade - April 2011

Updating our trade statistics for Russia for April 2011:

• In April 2011, Irish exports to Russia stood at €51.5 million, up from €40.6 million in March and up on €35.8 million a year ago
• Irish imports from Russia in April 2011 were €15 million, flat on March 2011 and down from €18.8 million in April 2010

• Irish trade balance with Russia in April 2011 stood at €36.5 million - the highest trade balance achieved in bilateral trade with Russia in any month since January 2009

Using data for the first 4 months of 2011, we can update (still very crude) forecast for annual bilateral trade:
One way or the other, the data suggests we are on track to post another record trade year and record trade surplus year in 2011.

Some more stats. For the first 4 months of the year, 2011 trade surplus with Russia amounted to €113.8 million, which was the 5th highest trade surplus for Irish trade with the countries other than EU 27 and US. Only Australia (€202.5 million), Japan (€251.9 million), Saudi Arabia (€179.3 million) and Switzerland (€1,032 million) yielded stronger trade surplus for Ireland than Russia in absolute terms. The trade surplus for the first 4 months of 2011 rose substantially - by 252.32% or €81.5 million compared to the same period of 2010.

In comparison with Ireland's trade surplus with Russia of €113.8 million in January-April 2011, Ireland recorded:

• A trade surplus of €30.6 million with Brazil,
• A trade surplus of €108.6 million with Canada,
• A trade deficit of -€61.7 million with China,
• A trade deficit of -€71.8 million with India,
• A trade surplus of €98.5 million with Mexico,
• A trade deficit of €343 million with Norway,
• A trade surplus of €74.7 million with Turkey
  

19/07/2011: Irish Trade Stats for May 2011

External trade figures for May (provisional) and terms of trade figures for April are out this week, so time to do some updates.

PS: Please, note - the source for these is CSO and all complaints about numerical values reported/shown arising due to some readers disliking some results for whatever reason - out to them.

• Imports in May 2011 came in at €3,727.9 million in seasonally adjusted terms, which was €1,199.6 million below April figure (-24.35% mom), €154.7 million above the same figure in May 2010 (+4.33%) and €357.5 million below May 2009 figure (-8.75%).
• Exports in May 2011 came in at €7,511.3 million which was €48.8 million below April figure (-0.65%), up €76 million (+1.02%) yoy and up €534.6 million (+7.66%) on May 2009.

• Trade balance in May stood at €3,783.5 million which is €1,150.9 million above April 2011 level (+43.72% mom), but down €78.7 million (-2.04%) yoy and up €892.2 million (+30.86%) on May 2009.

• Terms of trade continued to improve (vis-a-vis external sales with price of exports ratio to the price of imports falling) in April (there is 1 month lag in TT data compared to trade volumes data), posting an improvement for the 4th consecutive month. TT measured index 76.6, down from 77.1 in March and down 8.70 points yoy (-10.20%). Compared to April 2009, this year April reading was down 11.80 points or 13.35%.
  

So mapping the above progression:
The chart above suggests that in 2011 we are potentially entering some structural (and much expected - remember IMF forecast for trade growth for Ireland is about 50% below that attained in 2010) slowdown in the rate of growth in external trade.

Lastly, imports-intensity of exports (a ratio of exports volume to imports) has increased in May from 153.4% in April to 201.5% in May 2011 - an increase of 31.3% mom. At the same time, imports-intensity declined from a year ago by 3.2% although it is up on May 2009 by 18.0%.
So courtesy of CSO:

• "With seasonally adjusted exports remaining static and imports decreasing by 24% (or €1,200m) between April and May, the trade surplus increased by 44% to €3,784m" in mom terms. The improvement, therefore is solely due to decline in inputs imports and further contraction in consumption.
• "On an unadjusted basis, the value of exports in May 2011 (€7,390m) was slightly down (-0.6%) on the May 2010 figure of €7,435m. The value of imports (€3,749m) was up 5% on the May 2010 figure."

In January-April 2011, compared to the same period in 2010 exports increased by 8% to €31,161m:

• Exports of Medical and pharmaceutical products increased by 17% or €1,324m,
  
• Organic chemicals by 14% or €896m
• Overall Chemical and related products category exports rose from €17,347.3m in January-April 2010 to €19,607.7m in the same period of 2011, while imports in this category rose from €2,889.9m to €3,591.9m over the same period of time
  
• Petroleum by 126% or €208m. of course over the same period, petroleum imports rose from €1,410.1m to €1,752.8m
  
• Exports of food and live animals rose from €2,077.1m to €2,465.1m as trade balance in this category rose from €635.4m in the first 4 months of 2010 to €831.0 million in the same period of 2011
  
• Exports of goods to the USA increased by 17% or €1,069m, to France by 18% or €276m and to Switzerland by 25% or €258m. Exports to Belgium fell by 5% or €232m and to Spain by 19% or €225m.
• In the first four months of 2011, 52% of Ireland’s exports went to the USA, Belgium and Great Britain.
  

Over the same period, imports increased by 13% to €17,293m:

• Imports of Other transport equipment (including aircraft) increased by 27% or €401m,
  
• Petroleum increased by 24% or €342m and
  
• Medical and pharmaceutical products by 22% or €251m.
• Goods from Great Britain rose by 19% or €782m, from the United States by 7% or €188m and from Germany by 15% or €167m.
• Over half (54%) of Ireland’s imports came from Great Britain, the USA and Germany in the first four months of 2011.