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Europe – the lost continent?

Europe – the lost continent?. Howard Davies Director, LSE. ICEF HSE Cultural Centre 29 November 2010. The continuing Eurozone crisis is a cloud hanging over Europe: How far is the economic gloom justified? Has Europe faded into economic and political insignificance?

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Europe – the lost continent?

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  1. Europe – the lost continent? Howard Davies Director, LSE ICEF HSE Cultural Centre 29 November 2010

  2. The continuing Eurozone crisis is a cloud hanging over Europe: How far is the economic gloom justified? Has Europe faded into economic and political insignificance? If so, should Russia care?

  3. After the recession, global growth is resuming Global GDP growth, annual % change, 2003 - 2015 Note: Estimates start after 2009. Source: IMF WEO Database, October 2010.

  4. China is once again the star performer UK, US and BRICs’ GDP growth, annual % change, 2003 - 2015 Note: Estimates start after 2009. Source: IMF WEO Database, October 2010.

  5. Emerging market consumption now surpasses US levels US and EM consumption as % of global consumer spending, 1990 - 2008 Source: JPMorgan.

  6. The World’s Economic Centre of Gravity is moving eastwards Projection of the World’s Economic and Geographic Centre of Gravity Source: Grether JM, Mathys N (2008): Is the World’s Economic Center of Gravity Already in Asia?

  7. The European prospect has also improved, but not everywhere Source: FT Interactive: Europe’s economic weather map.

  8. So in Europe • overall growth is sluggish and • the eurozone is under great pressure.

  9. The European Union: 500 million people – 27 countries EU population, million people, 1986 – 2010 Source: Eurostat.

  10. The Euro: A single currency for Europeans EU countries using the euroEU countries not using the euro Source: http://europa.eu/

  11. The EU economy is close in size to that of the US GDP, current prices (Billion US dollars), 2009 EU (16,415 Billion USD) US (14,119 Billion USD) Source: IMF World Economic Outlook, October 2010.

  12. How rich is the EU compared to the US, Russia, China, and India? GDP per capita, current prices (US dollars), 2009 Source: IMF World Economic Outlook, October 2010.

  13. The EU-15 still has a substantial per capita GDP gap with the United States GDP per capita, $ PPP thousand, 2009 Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.

  14. Europe has already created many new jobs above population growth in the past decade Additional jobs, million, 1995 – 2008 Note: Numbers may not sum due to rounding. Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.

  15. And largely defended export market shares despite the rise of the BRICs Market share of total world exports¹, %, 1999 and 2008 1 Excluding intra-EU-27 trade. 2 Brazil, Russia, India and China. Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.

  16. But there is nonetheless a serious problem

  17. The euro was expected to bring convergence in economic performance, but productivity growth by region has been very different, and the competitiveness of periphery countries has lagged. fiscal deficits have ballooned in those countries, and the markets have become concerned at the prospect of default.

  18. Southern Europe continues to lag behind in productivity growth Productivity, $ PPP per hour worked, 2009 Note: Nothern Europe: Denmark, Finland, Ireland, Sweden, UK. Continental Europe: Austria, Belgium, France, Germany, Luxembourg, Netherlands. Southern Europe: Greece, Italy, Portugal, Spain. Source: MGI. Beyond austerity: A path to economic growth and renewal in Europe. October 2010.

  19. Real exchange rate* and relative export performance, cumulative change between 1999 and 2008 There has been a remarkable divergence in competitiveness *Real exchange rates are based on unit labour costs. Source: Bruegel Policy Brief, March 2010.

  20. Costs of borrowing in the Eurozone have been growing apart 10-year bond yields, %, 1 Jan 2010 – 12 Nov 2010 Source: JF Kirkegaard: Turmoil in European Bond Markets, but the Sky Is Not Falling. Peterson Institute for International Economics. 15 November 2010.

  21. The EU response has been hesitant: An ad hoc rescue package for Greece, with the IMF, A ‘temporary financial stability facility’ which was not intended for use, Another ad hoc package for Ireland, Leaving question-marks over Portugal, Spain and even Italy.

  22. It is now clear that to survive in the longer term, the Eurozone needs: A fiscal pact that works, A permanent ‘European Monetary Fund’, A financial sector bail-out mechanism. But these plans require treaty change, which is politically complex.

  23. Three possibilities • Muddling through: Austerity in the Club Med • Solidarity from the Germans • Greek (and Irish) Haircuts within the defaults: Eurozone • Two currencies: The euro and the medi

  24. Does this matter to Russia? • The EU is Russia’s largest trading partner • It acts as a political counter-weight to the US

  25. The EU is Russia’s largest trading partner by far Russian exports, top 5 destinations, % of total, 2009 Source: WTO statistics, 20 October 2010.

  26. EU is losing weight in global economic governance G8 G20 Source: www.g20.org.

  27. Europe’s leadership remains confused

  28. While Russia’s leadership is clear…

  29. But as we gently decline, we enjoy ourselves…

  30. Out of top 40 best countries to live in the world, 27 are EU Countries by rank, according to the World’s Best Countries Ranking 2010 Source: Newsweek. The World’s Best Countries 2010.

  31. In conclusion • The World’s Economic Centre of Gravity is moving East. • The European economic model is more robust than many think, but • The Southern European problem will have to be resolved, both in the short and longer term, • EU needs stronger institutions if it is to survive. • Europe’s leadership is currently inadequate for the challenges.

  32. Europe – the lost continent? Howard Davies Director, LSE ICEF HSE Cultural Centre 29 November 2010

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