Macroeconomic Analysis Eurozone

January 2015

Economic Growth

• Crisis 2008

• Debt-fuelled boom

thanks to low interest

rates set by the ECB

• Recovery in 2010

• Recession in 2012:

paying back debts =>

uncompetitive Exp

• GDP growth is around

1% now, which is still

too low for the ECBSource: IMF – World Economic Outlook of October 2014

Inflation

• ECB target for

inflation in

Eurozone is 2-3%

• Debt-fuelled boom

got inflation back

up to a normal

rate of 2-3%

• Deflation from

2012 up to now

Source: IMF – World Economic Outlook of October 2014

Unemployment

• Unemployment

rate has been

rising for the past

few years.

• 45% of EU’s

unemployed have

been without a

job for more than

a year.

• Big problem in

youth

unemployment.Source: IMF – World Economic Outlook of October 2014

Government Net Debt

• Debt is very high in

Eurozone:

Greece, Spain and

Portugal have high

public debts

• These public debts are the foundation of the Eurozone current crisis

Source: IMF – World Economic Outlook of October 2014

Government Fiscal Deficit

• Government Fiscal Deficit (Revenues – Total Expenditure).

• EU rule: countries using the euro can’t have a deficit of more than 3% of GDP.

• Spain, Greece and Portugal and other countries have failed to keep to that rule.Source: IMF – World Economic Outlook of October 2014

US vs. Eurozone Growth

• US recovered quicker than the EU after the crisis

• QE measures more effective than traditional expansionary monetary policy.

Source: IMF – World Economic Outlook of October 2014

US vs. Eurozone Inflation

Source: IMF – World Economic Outlook of October 2014

• Inflation goal of the US is 2% vs. ECB 2-3%

• Deflation of prices since 2012 but to a lesser extent in the US

US vs. Eurozone Unemployment

• Unemployment has been raising in the EU because of rising prices

• Obama implemented the “American‘s Job Act” which decreased unemployment in the long run

Source: IMF – World Economic Outlook of October 2014

US vs. Eurozone Gov. Fiscal Deficit

Source: IMF – World Economic Outlook

• The bigger deficit in the Us is caused by the previous expansionary fiscal policy in order to boost the economic growth from 2009

• Eurozone countries who got loans faced the prospect of defaulting

US vs. Eurozone Gov. Net Debt

Source: IMF – World Economic Outlook of October 2014

• Austerity measures have slowed down debt levels in the Eurozone

• The US spending increased sharply because of the QE

Problem to Solve

1) High Unemployment

2) Deflation ( Sav ; P ; Rev ; U ; Inv )

3) Economic Growth

Monetary Expansionary Policy

Conventional EP not effective

Quantitative Easing is more reliable

• Abernomics (2012)• US (2009-2013)• LTRO (2011-2012)

QE Effect

Effects of QE:

– Depreciation Exp ; Imp

– More Money Int ; Inv ; C

Risks :• Ineffective on Consumption• P of necessary imported goods (petrol)

Fiscal policy

1. 75% coverage of SS for new employers (U )

1. Tax Incentives for eurozone manufacturing firms (U )

1. Credit line for strategic goods imports (ex: Petrol)