The ECB has announced a further expansionary shift by beefing up a range of existing policy instruments. Barring unexpected positive shocks this will not be enough to break out of a deflationary environment and convincingly underpin growth and a rapid reduction in unemployment. For that to happen fiscal policy must turn expansionary and/or the ECB must cast caution to the winds and adopt new tools. At the press conference following the policy announcement ECB President Draghi gave a tantalizing glimpse that new tools may indeed be on the way: we may yet see monetary financing of fiscal policy, or helicopter money as it is popularly known. [Read more…]
Productivity growth is a nice thing to have. You – as an individual or a whole economy – can produce more goods and services without working any harder, or work shorter hours while maintaining material living standards.
So Christian Odendahl is right to be concerned about the just-released 2015 GDP figures for Germany, which show that productivity has still failed to pick up noticeably since recovering from the crisis. Output per working hour in Germany continues to rise at the sluggish pace of around ½ of a percentage point per annum. In the period between unification and the last year of the pre-crisis boom productivity growth had been around 1.8%.
Here is a graph showing the German productivity trend. (This is essentially the same graph as Odendahl’s, although for reasons that will soon become apparent, I use annual European data.)
Figure 1: Productivity growth in Germany, GDP per working hour, annual % change
The steady decline is clear, interrupted by the collapse and then initial recovery during the crisis. Odendahl briefly discusses some reasons and remedies for the German trend. In fact, hand-wringing about sluggish German productivity is not new. Back in the early and mid-2000s Adam Posen (subsequently Bank of England governor, now at the Peterson Institute) did the rounds with dire tales of German stagnation and the deep structural reasons for it located in German political economy: its banking sector, the cloying influence of its consensual industrial relations system and so on (e.g. here and here). Meanwhile German economists such as Hans-Werner Sinn were asking rhetorically whether Germany could still be saved (Ist Deutschland noch zu retten?). As we now know, it could.
Before jumping to the conclusion that German institutions are broken and need fixing, a simple exercise is to compare German performance to that of its European peers. [Read more…]
Although its roots go back some considerable time, in the summer of 2015 Europe was suddenly and unexpectedly confronted with a dramatic increase in the number of refugees seeking sanctuary and asylum. The “refugee crisis”, as it is often portrayed, raises primarily humanitarian, political and ethical issues, both for individual member states and, not least, for the European Union as a whole. In particular the sharing of costs and issues relating to the freedom of movement between EU countries raise thorny issues. Xenophobic and nationalist elements have sought to make political capital out popular fears associated with the inflow of refugees.
Against this background, the sharp rise in refugee inflows also raises questions about the likely economic, fiscal and labour market effects. There is still considerably uncertainty about the size of current inflows, not to speak of their composition in terms of country of origin, age, skill level, or their likely distribution across Member States. It is also unclear for how long elevated inflows from countries like Syria and Afghanistan, blighted by war and acute physical and economic insecurity, will persist. Last but not least, the economic, fiscal and labour market effects of the influx will depend on the policies implemented by Member States; as these are currently being formulated, against the background of a controversial public debate, these also, remain clouded in uncertainty.
With these important caveats in mind, an attempt is made here to collate the existing information. Where necessary making various assumptions, orders of magnitude of the impacts that might be expected, both positive and negative for EU countries and their domestic populations, are indicated. On this basis suggestions for an appropriate policy response that maximises benefits and minimises costs are made. [Read more…]