Thursday, September 08, 2005

Eurozone More Exposed?

Chief OECD economist Jean Philippe Cotis wasn't only proferring recommendations to the Federal reserve yesterday. He was also not backward in coming forward with his opinions about future growth in the eurozone. Even if Cotis isn't exactly my favourite economist I feel here he may be a little nearer the truth.

The occasion for M. Cotis' observations was the official press briefing for an interim OECD assessment of the economic situation in Europe, the United States and Japan.

As the Financial Times puts it:

The eurozone economy is suffering chronically weak demand, is more vulnerable than the US to an oil price shock, and could be at risk from deflation, the Organisation for Economic Co-operation and Development warned yesterday.

In his latest global economic assessment, Jean-Philippe Cotis, the OECD's chief economist, said signs of a pick-up in European economic activity could not be described as "anything other than a technical recovery at this stage", although some recent German investment data had been more encouraging. Monetary policy needed to be "highly accommodative", he said.

But there's more:

Mr Cotis argued that the eurozone's "chronic demand deficiency" had been reflected in the trend decline in the "core" inflation rate - excluding energy and food prices - to an historic low. One, optimistic, explanation was that prices had become more flexible, helping to ensure price stability over the long term. A more pessimistic interpretation was that the eurozone "could be in danger of entering into deflation", Mr Cotis said.

Mr Cotis argued that coping with the oil price shock was likely to be easier for countries such as the US, where the economic expansion was broader based. In the eurozone, the shocks had been milder but "resilience is below that in the US".

Now this comes hot on the tail of an earlier report in the FT (which strangely still has offered us no details of its source) that ECB research was leading to a lower eestimate of the potential long-term growth rate of the eurozone economy:

According to the FT, it emerged on Monday (5 September) that long-term growth in the Eurozone lies no higher than 2 percent ? and possibly even below that. The ECB primarily blames demographic factors for the shift in its growth projections. While European populations have continued to grow older, participation of several groups in the labour force has been disappointing ? sparking sluggish productivity growth.

The bank sees its changed forecasts as a call upon governments in the Eurozone to step up structural reforms in their economies, particularly in their labour market, the FT notes. Long-term growth projections in the UK, which is outside the Eurozone, lie at just below 3 percent, while the "potential" growth in the US is even higher - at 3 percent or more.
(Source EU Observer)

I've cited the EU Observer version here, since it is actually more explicit than the original FT version I saw. They obviously have had sight of a document I have yet to see. As regular readers will appreciate I regard this as 'light at the end of the tunnel' news, since I think this marks the first time I have seen the demographic issues (which have long been around in things like the pensions debate) explicitly recognised as a factor influencing immediate growth problems and listed amongst topics to address in even short term monetary policy. After years of arguing without response, is there a chink of light here?

On the other hand Cotis's 'throw money at the situation' suggestion, seems well behind the curve, since, in case he hasn't noticed, they're already doing that, and in the German case it just isn't working.