The situation has improved, so now is the time for reform

The situation is currently better in the euro area, so now is time to shake it up.
The long period of lackluster growth since 2011 led to a drop in potential growth. High unemployment and lack of investment dented the mainsprings of European growth. The euro area no longer has the same facility it had before the 2008 crisis to grow at an average pace of 2%. In the current circumstances, 2% looks close to the economic cycle peak, and the situation is even more stark in France, where growth stood at around 2% on average before the financial crisis, while the 2017 figure is poised to come to 1.8% at best. These figures along with statistics for 2018 are close to the cycle peak and we should expect growth to take a downturn from 2019 onwards. The role of economic policy should be to promote an improvement in potential growth to keep the economy on a stronger growth path over the long term.

Key areas for consideration. Continue reading

On the state of the Monetary Union

Synthetic publication by Thomas Philippon (NY University) on the state of the European Monetary Union.
It distinguishes different times depending on whether one is interested in the financial crisis, economic crisis or political crisis. These three dimensions overlap but do not fall within the same period.
He suggests to go faster on the Union Bank and the union of capital markets but also create Eurobills to prevent money market disruptions.

The Euro Area’s New Momentum

Article that was published in the June Issue of International Banker
It is available online here

The good surprise in 2015 and the next two years will probably come from the Euro Area. After a long period of stagnation during which the level of economic activity remained unchanged, we can have expectations for a stronger trajectory. GDP growth will probably converge to 2 percent next year and will be higher in 2017. The strategy has dramatically changed since last spring with the implementation of a new and non-orthodox monetary policy. The ECB (European Central Bank) wants to create an impulse that will change the Eurozone’s momentum. That’s an important issue as it completely changes the perspective.

Four points to notice to explain this long period of stagnation 

  • The strategy since 2011 has been based on the idea that the adjustment had to be done at a country level. This was the consequence of an incomplete monetary union. For an optimal monetary area, it is necessary to have an endogenous mode of adjustment. Usually it goes through the labor market and/or the fiscal policy. The problem with European institutions was that such an adjustment was not possible. The sovereign-debt crisis was then perceived as a series of asymmetric shocks with an adjustment at the level of each country.

Continue reading

Mario Draghi’s speech in Jackson Hole? A game changer

In his speech in Jackson Hole, Mario Draghi has launched new thinking for a new economic policy in the Euro Area.
His starting point is the analysis of unemployment (major theme this year in Jackson Hole) which has short-term and more structural explanations. He said that in such an environment, monetary and fiscal policies must be coordinated in the short run to support demand and that at a mid-term horizon structural reforms were needed in order to improve competitiveness and growth autonomy (his text is here)

Short term issues
Mario Draghi is clearly worried as the Euro Area can be characterized by its low economic momentum, its high structural unemployment rate and its low inflation rate (0.4% in July)
Continue reading