Each country for itself – My Monday column

Growth has made a comeback but each country already wants to take its own path. Unity is no longer on the cards and the world economy is fast going down a very different road.

During the recovery in 2016 and 2017, the worldwide situation was relatively stable, with no major imbalances, and the central banks cut some slack when required to make it through any bumpy patches. This approach worked fairly well as the pace across the various areas of the world became more uniform, driving growth and trade momentum, and economists were constantly forced to upgrade their forecasts.

But those days are gone, and this cooperative and coordinated dimension has disappeared. Continue reading

Six major changes since the financial crisis – My Monday column

Developed countries’ economies were enjoying robust growth in the first half of 2008, despite some initial cracks that had been appearing since the previous summer. That was ten years ago, and since then, world economic dynamics have transformed completely, as the sources of momentum and adjustment systems have changed, especially in developed countries.

We could potentially identify a whole raft of differences but I have focused on six that I feel are useful in helping us understand the new world economic order.

1 – World trade is no longer growing at the same pace

World trade has entirely changed pace since the crisis in 2008. Before that date, it fluctuated fairly broadly around a trend estimated at 6.8% per year in volume terms, thereby creating a strong source of momentum in each economy and driving economic growth, with an overall virtuous dynamic between trade and economic activity.
But since 2011, world trade has seen little fluctuation and the trend is now at 2.3%. The turning point in 2011 can be attributed to austerity policies and in particular programs implemented in Europe. So momentum that can be expected across the rest of the world is no longer on a par with past showings. This change is significant for Europe as the continent used to wait for the rest of the world to pick up a pace before staging its own improvement, and this explains the systematic time lag in the cycle between the US, which traditionally recovered very sharply after a negative shock, and Europe, which always seemed to be lagging slightly. Continue reading

2018 – Strong expectations in a world that has changed

The year ahead gives us a number of reasons to be optimistic that I would like to share with you. World trade has taken an upturn, oil prices remain reasonable, and business leaders worldwide have a positive take on their environment. So the starting point for 2018 is solid.

Growth, along with the ensuing employment, will provide an opportunity for all citizens to regain a foothold in a complex and difficult world. Economic policymakers will be responsible for adopting the right reforms to set the stage for a recovery that provides enhanced job creation and reduces uncertainty for each and every member of society. In this respect, France has high hopes on the reforms that will be debated in 2018: the reform to vocational training and job skills lies at the heart of the French government’s roadmap and the policies the authorities adopt in this area will provide the key counterpart to the labor law decrees in making the job market more efficient. Continue reading

German risks for Europe

After the failure to form a coalition the first thing to notice is that Merkel is no longer at the center of the game. She has been replaced by the German president, Frank-Walter Steinmeier, who will decide what will be the next steps.

These steps can be threefold
1 – A coalition between the CDU-CSU and the social democrats of the SPD but the SPD is reluctant to participate.
2 – A minority government but with the risk of doing nothing while important issues have to be managed (the current negotiation failed on the refugees’ question, on carbon emissions, on taxes and on education) These are important issues that cannot be postponed.
3 – New elections at the beginning of next year

I favor the third possibility but my guess is that in this type of situation domestic questions are at the center of the discussion or of the campaign.
European questions were not at the center in recents days but with Merkel’s recent point of view was a kind of guarantee that Europe would not be forgotten.
It could be the case in a foreseeable future if Merkel is no longer the leader. Europe could then be erased from discussions

The recent improvement in the perception of Europe is twofold.
1- GDP growth is stronger and employment is improving rapidly
2- The commitment between Merkel and Macron to improve the way institutions are working at the European level

If Merkel is weaker and focused on internal issues then European reforms will no longer be on the agenda
This would create an uncertainty that could reduce the economic horizon then limiting investment and the possibility to improve the potential growth. Therefore it can have a negative impact on growth and could  be damaging.

Another point on reforms is that with stronger growth it limits the risk of populism. If, because Merkel is no longer at the center of the picture, reforms are not done then we will see the convergence to a lower growth trend rate and more that the come back of populism with the risk of weaker institutions. Some nationalists want to exit from the EU.
The political process in Germany is at risk not only for the Germans but also for Europeans as the current momentum would become more fragile opening the door to populism

The impact on Brexit negotiators will depend on the result of the current political process. A bias positive to populism would a piece of cake for the UK government as populists do not like Europe. It would be the worst situation for a European citizen.

Is the strong euro set to last?

Trading at 1.18/1.19 to the dollar, the euro has become a pricey currency. But the European currency has also gained against all other currencies as its effective exchange rate has returned to levels unseen since the end of 2014. So we can no longer count on the euro losing value. This makes the ECB’s job harder as a strong euro allows for importing disinflation, thereby pushing back the chances that inflation in the euro area will swiftly converge towards the 2% target set by the central bank.

We can make three initial remarks on this situation.
The first is that the euro’s swift rise looks like a monetary restriction. Monetary policy has become more restrictive and the ECB’s stance must confirm its aim for accommodation in the long term so as not to increase potential expectations on a change in course. The second remark is that a strong euro is coherent with the euro area’s very high external surplus. The decline in the euro was not compatible with this surplus. The last remark is that the dollar is weak. Its effective exchange rate is at its lowest since the end of 2016: America is not doing well.

Following on from these three remarks, we can derive three explanations to understand this currency movement. Continue reading