Do you want euros with that?

The relative performance of the bigger EU countries in terms of GDP per capita has been interesting over the period 2006  to 2017 (i.e. from just before the financial crisis. ) If we look at the average for the EU-28 as a whole (100), only Germany has managed to increase its relative position, rising from 116 in 2006 to 124 in 2017. By contrast, Spain, France, Italy, and the United Kingdom, have seen a fall in their GDP per capita relative to the average. Actually, Spain and Italy have moved from an above-average position to a below-average position: in other words their per capita GDP in purchasing power parities is now below the average for the EU-28. The UK has seen a decline from 116 to 110 but it is still above the EU average.

It’s also interesting to look at some of the outsiders, not part of the EU. Switzerland, for instance was already in a very strong position in 2006, with  income per capita at 150, i.e. 50 per cent above the average income in the EU-28. The US in 2006 was even better off at 155. However, between then and 2018,  Switzerland did even better rising to 160 but the US fell back to 141. Finally, Japan which was at 110 in 2006, has fallen to 99,  in other words below the average income in the EU, which is rather remarkable.

 

 

GDP per capita in PPS
Index (EU28 = 100)
Data from 1st of December 2018. (Source Eurostat)

 

In 2006 the euro area (18 countries) was above the average for the EU as a whole, at 109, and the UK higher again at 116. However by 2018 the positions had reversed. The euro-area had fallen to 106 while the UK had fallen further to 105. In other words, people in the UK used to be better off than people in the eurozone. And now they’re worse off. Maybe if the UK had joined the euro, it might have done better.

If the UK leaves the European Union, it may not be forever. A change of government, and a change of heart, and, perhaps, economic realities in the UK, may after some years cause opinion to shift and the UK to reapply for membership. In such a situation, however, there won’t be much enthusiasm on the EU side for all the opt-outs that the UK had secured in the past, whether for budget rebates , abstaining from the Schengen agreement, or for staying out of the euro.

More prescriptions for the euro

“Handelsblatt” is a daily newspaper published in German in which is really very good. It gives a comprehensive coverage of German and international business news and issues. On its website, it also has something called “Handelsblatt Today”, which gives some material in the English language. It had a piece recently about the euro, entitled “The euro must be fixed or dropped”. This is heavy on assertions and light on facts, apart from a reference to Alexander Hamilton and the federal takeover of state indebtedness at the formation of the United States of America.
“To survive in the long term, the euro zone needs at a minimum: the ability to tax and spend, combined with balanced-budget laws in member states; automatic stabilizers such as unemployment benefits for the whole currency area; and joint deposit insurance for banks”.

Well, the eurozone is a subset of the EU, and the EU has already some ability to tax and spend. Balanced-budget laws would be too restrictive, fetishizing a particular 12-month period: instead we have had the Stability and Growth Pact, excessive deficit procedures and so on. Unemployment benefits for the whole of the euro area are not necessarily an obvious requirement, because cultural and language differences have militated against a single labour market in the EU, and social services and public health systems are stronger than in the United States. Finally, although there is a long way to go, joint deposit insurance for banks is under consideration by the Council. But there are national schemes in place, and it’s not clear that the absence of a wider scheme is essential for the euro zone to “survive in the long-term”.

IMF projections and international trade policies

As usual, the IMF World Economic Outlook has been published in connection with the annual meeting of the World Bank and the IMF. The new report has a special emphasis on the impact of changes in trade policy, which as we know has seen a lot of action in the field of tariffs, with sanctions also playing a role. The revision of the NAFTA agreement, involving Canada, Mexico and the United States, is a further factor.
Behind the world economic survey is a huge amount of data and forecasting work, which encompasses broad economic and policy variables, giving a detailed picture in macroeconomic terms of each country as well as its various aggregates, up to the year 2023 in the case of the current survey. This data is of interest in its own right, but it is also interesting to compare the forecasts made at a detailed level this year with those made last year. Looking at the NAFTA countries, it seems that Mexico has had its expectations increased quite a lot. Compared with last year’s survey, Mexico’s GDP is almost 25% higher in all the years from 2018 to 2022. Canada has had its forecast increased by something over half a percent in the later years. Apart from Mexico, a big beneficiary of the revision of the projections has been the United States, where the US GDP in 2022 is 6.8 per cent higher than the estimate made last year. China’s increases on the other hand, are pretty small, with the GDP estimate for 2022 being revised upwards by 0.1 per cent
At world level the picture is a negative one. The IMF now thinks that world GDP growth in 2022 will be 3.58 per cent, while a year ago it was forecasting 3.76 per cent. Eurozone growth in 2022 is now forecast to be 1.45 per cent (previously 1.49 per cent).
Do these IMF forecasts imply that the US will be a slight beneficiary of its recent confrontational trade policies, since the US GDP forecast has been revised upward and world growth forecasts revised downwards? Well, perhaps, but macroeconomic forecasts embody a lot of things, such as structural change, technological change, resource constraints and so on, some of which the forecasters themselves may be not even be aware of. In other words, trade policies may not be the only factors at work.
And even if you do think that confrontational trade policies benefit the US, you should also ask yourself whether losses for the rest of the world won’t reduce the impulses for US growth farther down the line. And you should consider how much better it would be if the US and its trade partners were reducing barriers to trade (and investment) rather than increasing them.