Showing posts with label external balance. Show all posts
Showing posts with label external balance. Show all posts

Friday, May 18, 2018

18/5/18: Euro area current accounts 1980-2017


What happened to the Euro area current accounts since the introduction of the Euro?

Periodically, I update my charts on the Euro effects on the external balances of the EA-12, the original economies of the Euro area. Here are the updates:

Considering first cumulated current account balances over 1980-2017 period, the chart below aggregates the EA12 into two sub-groups:

  • The 'periphery' defined as a group composed of Italy, Greece, Spain and Portugal
  • The 'core' group composed of the remaining EA12 countries

The chart shows several interesting facts
  1. Current account deficits in the 'peripheral' states predate the introduction of the Euro
  2. Since the introduction of the Euro through 2013 there was a consistent increase in the current account deficits amongst the 'periphery' states, with acceleration in deficits staring exactly at the point of the introduction of the Euro
  3. Current account deficits in the Euro area 'peripheral' states were rapidly accelerating into 2009
  4. Since 2014, current account deficits in the 'peripheral' states have been drawn down, at a moderate rate, as consistent with the internal deleveraging of these economies
  5. Meanwhile, the introduction of the Euro accelerated accumulation of current account surpluses within the 'core' group of EA12
  6. The rate of current account surpluses acceleration increased dramatically around 2004 and then again starting with 2009
In terms of external balances, the creation of the Euro area clearly resulted in compounding pre-Euro era existent structural imbalances in the EA12 economies.

Meanwhile, there is no discernible impact of the Euro on supporting growth in trade within the Euro area (here, we use changing countries composition of the Eurozone):

  As per above chart:
  • From 2000 and prior to 2014, Eurozone performance in terms of growth rates in exports of goods and services largely underperformed other advanced economies (ex-G7) and was in line with G7 performance
  • Before 2000, Eurozone was broadly in line with both the G7 and other advanced economies in terms of growth rates in exports of goods and services
  • Lastly, starting with 2014, the Euro area has been outperforming both the G7 and other advanced economies in terms of growth in exports of goods and services - a development that is more consistent with the fallout from the twin Global Financial Crisis (2007-2009) and the Euro Area Sovereign Debt Crisis (2011-2013), as the process of internal devaluation forced a number of Eurozone countries into more aggressive exporting
On the net, there remains no current account-linked evidence to support an argument that the creation of the Euro has been a net positive for the Eurozone member states in terms of improving their external balances and exports flows. On the other hand, there is little evidence that the Euro has hindered trade flows growth rates, whilst there is strong evidence to claim that the Euro has exacerbated current account imbalances between the 'core' and the 'periphery' states.

Thursday, May 15, 2014

15/5/2014: Jobs & Employment: Lot Done, More to Do, Still


The is an unedited version of my Sunday Times article from April 27.



As cooperative organisations go, Paris-based OECD is one of the more effective ones. Its regular assessments of member states economic policies and performance drill into various sectors and often flash light into the darker corners of policy formation and implementation that are often untouched by the likes of the IMF, the central banks and the EU Commission.

Good example is the OECD’s third annual review of Ireland's Action Plan for Jobs, published this week.

The review starts by highlighting the positive achievements to-date set against the Action Plan targets and the realities of the unemployment crisis we face.

After hitting the bottom of the Great Recession, Irish labour markets have recorded a rebound in 2013. As the result of the robust jobs creation in the economy, Irish employment levels rose by around 60,000 in 12 months through Q4 2013. New jobs additions were broadly based across various sectors and predominantly concentrated in full-time employment segment. All of which is the good news.

Being a diplomatic, politically correct body, the OECD does not question the aggregate numbers of new jobs recorded. As this column noted on numerous occasions before, the 60,000 figure includes a large number of jobs in agriculture – a number that generates more questions than answers. But from the point of view of the OECD and indeed the Irish Governments 2012 Action Plan for Jobs, quality is a distant goal, while quantity is the primary objective. By this metric, as OECD notes, Ireland is now well on track to deliver on the interim target of 100,000 new jobs by 2016.

Still, accolades aside, Irish non-agricultural employment is lingering at 39 percent of total population – implying a dependency ratio that is comparable with that seen in the late 1990s. Official unemployment counts are around 253,000 and factoring in those in State training programmes the number rises to over 330,000. 16 percent of our total Potential Labour Force is currently not in employment. A things get even scarier when we add all people searching for jobs, underemployed, unemployed that have been discouraged from looking for work, those in State training programmes and the net emigration of working age adults. By this metric, the broadest joblessness rate in the country stands at around 32 percent.

Unlike the Government, faced with the above numbers, the OECD recognises that the Action Plan target of 100,000 new jobs by 2016 is a reflection of our public culture of low aspirations. "While Irish policymakers can take some satisfaction in the economy’s return to growth and recent robust job growth, significant challenges lie ahead if the country is to rapidly bring down the unemployment rate," said report authors. Anodyne a statement for you and me this screams a serious warning to the Government in OECD’s language.

There are legitimate concerns and uncertainties about the pace of the labour market recovery. At peak of employment in Q3 2007, there were 2.17 million people working in our economy. At the bottom of the Great Recession, in Q1 2012 that number fell to 1.825 million. In Q4 2013 the number employed was 1.91 million or 76,000 above the trough, but almost 260,000 below the peak. Meanwhile, Irish working age population has grown by some 93,700 despite large net outflows due to emigration. In other words, jobs creation to date has not been enough to fully compensate for demographic changes in working age population.

Beyond headline unemployment numbers, Ireland is facing a huge crisis of long-term joblessness, the crisis that was recently covered in depth by this column. With it, there is a significant risk that improved jobs creation in the future is not going to provide employment for those out of work for more than a year.

While reversing emigration and accommodating for growing population will require much higher rate of new employment growth than we currently deliver, the Government’s Medium Term Economic Strategy published this year is aiming to bring employment levels to 2.1 million in by 2020. This means thirteen years after the on-set of the crisis our employment is expected to still fall short of the pre-crisis peak.


Which begs a question: who will be the unemployed of tomorrow?

OECD is rather serious on this subject. "Tackling unemployment and ensuring that high cyclical unemployment does not become structural and persistent are important challenges. A relentless focus on activating those most vulnerable to alienation from the labour market will be even more important than aggregate job creation targets in this regard."

In other words, according to the OECD, long-term unemployed, youth out of jobs and out of education, as well as those with low skills and of advanced working age are at a risk of becoming structurally (re: permanently) unemployed, even if the Government targets under all existent strategies are met.

Much of this stems from the sectoral breakdown of jobs being created and types of jobs that are growing in demand in modern workplace.

For example, the OECD praises the Government for focusing Action Plan "on private sector-led, export-oriented job creation by getting framework conditions right and continually upgrading the business environment". But export-led growth is not going to do much for our high levels of long-term unemployment. Jobs creation in exporting sectors is directly linked to modern skills sets and high quality of human capital. Long-term unemployment is linked to lower skills and/or past skills in specific sectors, such as construction. To make a dent in an army of long-term jobless we need domestic growth. To make this growth sustainable, we need productivity enhancements in domestic sectors and SMEs that require employment of higher skills in these sectors. There is a basic contradiction inherent in these two drivers of recovery: skills in supply within the pool of long-term unemployed are not matched to skills in demand within the modernising economy.

Something has to be done to address this dichotomy.

Under various policy reforms enacted during the crisis, Ireland witnessed introduction of significant changes to the benefits system, employment programmes, as well as reduced levels and duration of unemployment insurance cover. In addition, the Government used restructuring of training programmes to introduce a new concept of one-stop support centres, Intreo, which are being rolled out across the country. All of this is in line with previous OECD and Troika recommendations and much of it is needed.

But, as OECD notes, six years into the crisis, more remains to be done.

The OECD identifies Government's flagship activation programme, JobBridge as "large and expensive" and insufficiently targeted to help the most disadvantaged groups. In other words, JobBridge has became a synonym for unpaid apprenticeship for recent graduates instead of being a stepping stone from unemployment to a job requiring moderate re-skilling. OECD also highlights the risk of State training programmes effectively delaying job searches by the unemployed or reducing their job search efforts.

Beyond the above, the OECD points to the risk that the longer-term and lower-skilled unemployed may fall outside the resources and remit cover of the new agencies - the SOLAS and the Intreo.

With all reforms to-date, the OECD highlights the lack of willingness on behalf of the Government to rationalise some of the labour market programmes, even where there is clear and available evidence of their low effectiveness.

One example is the long-established Community Employment Programme (CEP), which accounts for a full one third of all spending on activation programmes. Data available to the Government strongly shows that CEP is not cost-effective and has a spotted track record in terms of securing the participants return to regular employment. Instead of the CEP, the Irish state should focus resources on developing a modern apprenticeship programme that can replace existent ineffective schemes. This focus on market skills-based training available under the apprenticeship system, supported by the OECD report, is in line with policy suggestions presented in this column in the recent past and with the Entrepreneurship Forum report published last year.


The OECD report also provides a detailed analysis of the institutional reforms that are needed to deliver sustainable jobs creation in Ireland in line with the Government agenda. There is a need to mobilise employers to engage with the Government programmes to develop employment and skills systems that can address future demands in the real economy. Instead of craft-focused and manual professions-oriented training, Ireland needs more MNCs and SMEs-driven skills acquisition and upgrading programmes.

The OECD also stresses the need for stimulating productivity growth by developing more skills-intensive domestic sectors. Unlike the Irish authorities, the OECD is painfully aware that aggregate productivity growth, jobs creation and skills development must be anchored to indigenous sectors and enterprise, including the SMEs, and not be relegated to the domain of the SMEs and exports-oriented producers alone.


In all of this, the report highlights a major bottleneck in the Irish human capital development systems – dire lack of training and up-skilling programmes available to SMEs and early stage companies that are capable of supplying skills that are in actual demand in the markets and that can simultaneously drive forward productivity growth and innovation in Irish enterprises.

Slightly paraphrasing Fianna Fail’s GE2002 posters: in the case of Government delivery on jobs and unemployment, “A lot done. Even more to do.”





Note: PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers.  

PLS3 indicator is unemployed persons plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training 






Box-out:

Since the early days of the EU, one of the most compelling arguments in support of the common European currency was the alleged need for eliminating the volatility in the exchange rates. It remains the same today. High uncertainty in the currency markets, the argument goes, acts to depress international trade and distorts incentives to transact across borders. Alas, theory aside, the modern history puts into doubt the validity of this argument. During the 1990s, prior to the creation of the euro, Irish current account surpluses averaged 1.9 percent of GDP just as the economy was going through a period of rapid accumulation of capital - a process that tends to put pressure on current account balance. Still, in the decade before the euro introduction, Ireland's external balance ranked fifth in the European Economic Area. During the first decade of the euro, owing to the massive credit bubble, Irish current account balance collapsed to an annual average of -2.3 percent of GDP. Since hitting the bottom of the crisis, our performance rebound saw current account swinging to an average annual surplus of 7 percent. Alas, this reversal of fortunes ranks us only 7th in the EEA. In fact, since 2000 through today, non-euro area economies of Denmark, Sweden, Switzerland have consistently outperformed Ireland in terms of current account surpluses. Cumulatively Swiss economy generated external balances of 135 percent of GDP between 2001 and 2013, Swedish economy 88 percent and Danish economy 51 percent of GDP. Irish cumulated current account balance over that period is a deficit of 9 percent of GDP. Let's put the matters into perspective: between 1990 and 1999 Irish economy generated a total surplus of USD12.5 billion. Since the introduction of the euro, our cumulated current account deficit stands at USD23.5 billion. At current blistering rates of current account surpluses, it will take us another five years to achieve a current account balance across the entire period of 30 years. Meanwhile, deprived of the alleged benefits of currency stabilisation, Denmark accumulated curret account surpluses of USD149 billion between 2001 and the end of 2013, Sweden USD378 billion and Switzerland USD645 billion. The euro might be a good idea for a political union or for PR and advertising agencies spinning its alleged benefits to European voters, but it has not been all too kind to our own trade balances.






Sunday, May 4, 2014

4/5/2014: Ireland's Fabled External Balance Performance: 1990-2013


Ireland's external balance performance has always been a major point for departure in analysis of our economic growth, sustainability of our debt and overall consideration of our economic infrastructure quality. As a Small Open economy, Ireland is trade-intensive. As an MNCs-led economy, Ireland is even more trade-dependent, in so far as we need larger external surplus to deliver same jobs creation as other European economies with smaller MNCs-induced GDP/GNP gap.

Since the start of the crisis, Irish current account performance was invariably brought forward as evidence of significant improvements in the underlying economy's competitiveness. And our gains were pretty strong - judging by this metric:
  • In the 1990s, Ireland averaged current account surpluses of 1.85% of GDP annually
  • In the 20002, we run current account deficits averaging -2.29% GDP per annnum
  • Since 2010 through 2013 we have been running current account surpluses averaging 3.35% per annum
  • The swing - from the deficit to surplus is 5.43% of GDP for Ireland - seemingly strong stuff.


The question is, of course, are the above numbers really strong, as in exceptionally strong or very strong as judged by comparison with other similar economies?

Let's consider EEA24 - 24 advanced economies of EEA community (excluding those economies of EEA that are not making it into 'advanced economies' club).
  • In 1990-1999 Ireland's performance was strong in terms of the current account, but it was not exceptions - we ranked 5th in the EEA24 in the size of average current account surplus, behind Belgium (4.67% of GDP), Luxembourg (10.52% of GDP), the Netherlands (4.16% of GDP), and Switzerland (6.93% of GDP).
  • In 2000-2009 we ranked 14th (no need to list the countries we were behind in this metric during this period - we were doing badly).
  • In 2010-2013 we ranked 7th - behind Denmark (6.09%), Germany (7.05%), Luxembourg (6.91%), the Netherlands (9.17%), Sweden (6.08%) and Switzerland (10.74%).

Here's a chart illustrating this performance - for legibility, I only left in the chart Small Open Economies.



But what about the overall period of the crisis, you might ask? 

Instead of decades-averages, let's take a look at the average current account balances over 2008-2013 period. Here we rank 8th in the EEA24 with our current account surplus averaging 5.4% of GDP.


The key point here is that Ireland's current account performance has been strong, but it has not been exceptional. Certainly not exceptional given the need of this economy for deleveraging (and associated requirement for higher current account surpluses). 

The good news is that at 5.4% of GDP, our current account surpluses since 2008 are above those in the deleveraging period of 1992-1997 when these averaged 3.13% of GDP.

The bad news is that we are still to undo the aggressive current account leveraging accumulated during the 2000s. In the decade of 2000s, Ireland's cumulated current account deficit amounted to USD52.42 billion. During the 1990s our cumulated surplus was USD12.49billion and in 2010-2013 our cumulated surplus was USD28.88 billion. In other words, from 1990 through 2013 we are still in a deficit of USD11.04 billion and if we take 2000 as the starting point, our cumulated deficit is USD23.54 billion.

For comparison, Switzerland's cumulated 2000-2013 surplus is USD644.86 billion, Sweden's USD377.99 billion, Denmark's 149.18 billion. 

In fact, non-euro EEA24 members are in a vastly stronger current account position than their euro area counterparts, but that is probably a matter best covered separately, although it does probably explain why euro area needs ESM and other means for borrowing externally.

Lastly, however, let's come back to that 'swing' in our current account from deficits in the 2000s to surplus in 2010-2013. Remember, the swing was a sizeable 5.64% of GDP. But it only ranks us as 5th economy in the EEA24 in terms of the magnitude of improvement in our competitiveness. Not exactly an 'exceptional case' either.