Friday, 31 August 2012

Greek current account deterioration in the 00s: a few factors left unsaid

Lots of commentators claim that the deterioration in the Greek current account can be blamed on the country adopting the Euro. Well, if you just look at aggregate figures it may seem that way.

source: Eurostat

If one bothers to drill down a bit more then a slightly different picture may start to emerge. Let’s take a closer look then.

One factor that contributed to the widening of Greece’s current account deficit was the drying out of current transfers from European Union after Greece’s accession in the EMU.

source: Eurostat

Next I would like to take a more detailed look at the merchandise trade balance (according to the SITC classification).

The relevant balances for Food,Drinks&Tobacco and Chemicals were essentially flat over the 1995-2011 period.

source: Eurostat, own calculations

Now let’s take a more detailed look the individual balances that contributed to the deterioration of the current account.

source: Eurostat, own calculations

Out of all the sub-accounts of the merchandise trade balance the one having the biggest net contribution to the widening of the current account deficit is the Mineral Fuels balance. I think it is obvious that the deterioration of this balance have nothing to do with the deteriorating competitiveness of the Greek economy per se, but its wide deficit is due to structural factors and buoyant demand over the 00s.

The Machinery&Transport Equipment balance deficit widened significantly during the run-up to Greece’s accession in the EMU and then narrowed exhibiting widening spurts which contributed in the periodical deteroration of the overall deficit (like for example in the 2005-2008 period when Greece recorded the widest current account deficit in the years that my data run). This occurrence underlines one single fact, that the household consumption bubble that Greece experienced in the 00s was the driving force behind the current account’s trajectory. This was a demand-pull phenomenon. Investment in machinery and investment in transport equipment were both quite robust in the 00s so the fact that the balance improved simply means that GDP expanded more than said imports and that the driving force was due to other factors (i.e. demand-driven).

I think that the next chart is interesting in this respect. 

source: Eurostat, own calculations

Our next stop is the Other Manufactured Goods balance, which deteriorated as well. I would like to highlight a couple of points. First, notice that the deterioration commenced before Euro membership was a reality but nonetheless continued during the 00s. Second, during the 2005-2008 period when this particular balance recorded its highest deficit these past 15 years, the Greek private consumption bubble reached its apogee, something which in my humble opinion means that at least part of this deterioration was again a demand-pull phenomenon. Undoubtedly, part of the widening of this balance can be attributed to falling competitiveness. But what part of it is due to the Euro’s strength and what part of it should be blamed on the accession of the Central-eastern European (CEE) countries and the explosive growth of their exports? I can’t apply econometrics to give you a precise answer, but I can attempt to shed some light with the next few charts. We shouldn’t forget that (at least in the start, since now CEE countries have upgraded their export baskets while Greece has not) Greece’s basket of merchandise exports was quite similar with that of certain CEE countries.

 The next chart can serve as further evidence of the validity of the claim that households’ final consumption was the main catalyst behind the said balance’s deterioration.

source: Eurostat

Of course, correlation is not causation but this a rather close fit, don’t you think..? If you believe that this would usually be the case, then take a look at the same chart for Germany, that did not experience a households’ final consumption bubble. Not such a good fit, is it?

source: Eurostat, own calculations
Now a simple observation. If the widening of the merchandise trade deficit could be blamed on Greece’s loss of competitiveness then Greece must have recorded significant losses in its market share as far as goods exports are concerned. This is not the case here.

source: Eurostat
A further takeaway from the chart above is that the slowing down of growth in Greece’s export market share coincided with the acceleration of growth in the respective shares of Bulgaria and Romania. Again, correlation is not causation but…

Finally. let’s take a look at the services balance. Here too the claim was that Greek services exports suffered due to Euro’s strength. Well, I have a chart here that might tell a slightly different story.

source: Eurostat, own calculations

As the EUR strengthened relative to the USD, the balance improved and later in the decade, as the EUR weakened after 2009 it improved as well. Can someone seriously believe that currency fluctuations are the only factor at play here? International trade is such a multifaceted affair that very careful and painstakingly-detailed analysis is required to get a whiff of the factors leading to such changes. Besides, looking at balances does not always tell the whole story since changes could be driven by the import-side or the export-side.

Once again the post is very long, so I'd better wrap this up. I think that changes in the Greek current account cannot be attributed to the Euro’s strength/weakness. The widening of the deficit in the 00s is, always in my humble opinion, mostly a demand-driven affair. If one wants to dig further, deeper structural problems of the Greek economy will start to emerge (e.g. the composition and stationarity of the country's export basket or the miniscule external sector/lack of international orientation of the majority of businesses, etc.). Naturally, some part of it can be attributed to loss of competitiveness but what part of it is due to the emergence of new exporters and what due to currency-induced, reduced price-competitiveness? This is my point exactly, claims that loss of competitiveness can be blamed on currency strength alone border to the simplistic…

Saturday, 18 August 2012

Current account adjustment in Southern Europe: not too shabby

I know that the adjustments that several European nations are undertaking right now are a touchy and controversial issue but I want to zero in on facts tonight.

The current account adjustment is progressing quite fast in Southern Europe, admittedly not the first place that springs to mind when thinking of successful current account adjustments right now.

Of course I’m talking about Spain and Portugal, whose current account deficits were quite sizable during the run-up to the current depression. Currently though, their external sectors performance seems stellar.

source: Eurostat

Goods exports’ growth for both of them steadily outperformed the Euro-Area (EA) average after the great trade collapse (i.e. 2009). There are two things that I want to highlight. Firstly, Portuguese goods exports seem to buck the declining growth trend prevailing in most EA countries. I do not know whether this will continue to be the case if the slowdown deepens but their current performance is not something that one should ignore. Secondly, Spanish goods exports seem to slightly underperform the EA average now that things appear to slow down (Again I do not know whether this is of significance).

When it comes to services’ exports, both countries outperformed the EA average again, with Spain being the one that managed to buck the trend here, until Q1 2012 that is, when it succumbed and joined the bandwagon.  

source: Eurostat

If we look at quarterly data for the current account balance then the improvement becomes very much apparent.

source: Eurostat

Of course, both countries' external sectors are not as large as Ireland's to take up the slack from crumbling domestic demand but you got to start from somewhere and this is definitely a step in the right direction for these countries in their respective efforts to find a more sustainable footing. Admittedly, if the slowdown deepens then the brunt of the adjustment would have to come from the imports side and this would make it much more painful…

Thursday, 2 August 2012

Euro Area: the lower educated unemployment timebomb

I would like to take a look at unemployment and to be more specific, at unemployment among people of a relatively lower education level, mostly during the 00s. The reason is simple. The Euro Area’s economy seems to be getting more and more geared towards activities that require workers to have acquired a higher education level and there is the distinct risk that people of lower education will get excluded.

There are a number of secular trends at work here that make up the current picture of employment/unemployment in the Euro Area.

One of them is deindustrialization. Some people claim this is due to outsourcing or delocalization of activities in lower-cost countries. I think that this is indeed happening but to a much smaller degree than conventional wisdom wants it to be and that most of the deindustrialization we are witnessing is due to the closing down of firms in the sector (for a number of reasons) or the increased automation/mechanization of production processes at the plant level. What’s more, in the remaining activities, at least in some Euro Area countries (not in my native Greece), there is a shift towards high or medium-high technology manufacturing. Finally, due to the new technologies, production processes is possible to be dissected with certain parts of them, mostly those that require less skilled labour, being moved to lower-cost settings. Of course this being a world under constant change, more and more parts of processes that require more skilled or better schooled labour are possible to be delocalized.

Here’s the chart showing unemployment in the Euro Area by educational level.

source: Eurostat

Of course, as with all aggregate figures this is disguising some considerable disparities among EA countries.

I would like to approach the issue not from a regulatory angle but from a sectoral angle, i.e. which sectors absorbed unemployed workers with lower education and which ones shed workers during the current depression. My working hypothesis is that lower education workers are mostly employed in manufacturing, construction and wholesale and retail trade, transport, accommodation and food service activities. To make things easier, from now on, I will call the last sector as retail trade. Here we go.

There may be some considerable differences among EA countries labour markets but they share some common characteristics. The first one is deindustrialization that translates into the manufacturing sector shedding workers and the second one is that the sectors that absorbed unemployed workers of a lower education were construction and retail trade. I would like to try and group EA countries into some distinct classes.

The first one includes those that underwent a credit boom which morphed into a construction boom (I won’t characterize those booms as bubbles or not), hence saw a considerable spike in construction employment. Another common feature members of this group share is that after their respective property crush occurred, unemployment went through the roof.

One of them is Ireland. 

source: Eurostat

As we can see in the chart when, manufacturing employment was stable and employment in retail trade (etc.) and construction was growing, unemployment was falling. When manufacturing employment started to fall, despite the strong growth in retail trade and construction, unemployment among workers of lower education remained broadly stable. One explanation I can think of is that many ex-workers that had dropped off the labour force came back and tried to get a job or that new jobs required more skills. When the crisis hit Ireland like a ton of bricks and all sectors pictured laid-off workers, the unemployment rate increased almost four-fold. 

Another one belonging in this class is Spain.

source: Eurostat

The story here is pretty much the same with Ireland except that manufacturing employment decreased only marginally as the 00s progressed, hence, unemployment eased a little bit further. Maybe after a while jobs created by the retail trade and the construction sector are not as suitable for workers with a lower education background (or maybe unregistered employment and a possible inflow of immigrant workers played a role here). Unfortunately I do not have such detailed data on the subject to delve deeper here.

source: Eurostat

Finally, here’s Estonia, that also went through a building boom. The unemployment rate here decreased significantly during the 00s, as it seems that a bigger number of lower education workers were absorbed by construction and retail trade. An explanation could be that the relevant sectors in Estonia were less sophisticated (than their counterparts in Ireland and Spain) so workers were more suitable for alternate employment here.

The second class is made up from countries that didn’t experience a construction boom, hence the unemployment rate there remained mostly unchanged.

One of them is Belgium.

source: Eurostat

Just before the 00s rolled in there was a substantial drop in unemployment among workers with a lower education background. During the 00s though, manufacturing employment decreased steadily bringing the relevant unemployment rate at the level it stood at the beginning of the decade.

The next one is Austria.

source: Eurostat

During the decade, employment in all sectors featured in the chart was broadly unchanged and unemployment among workers with lower education, remained in a 6%-8% range without any significant moves.

I will include Netherland here too, that like Belgium experienced a sharp drop in unemployment right before the 00s, and then moved in a range during the decade. The crucial difference among the two cases is that the level of unemployment in the Dutch case is half that of Belgium.

source: Eurostat

A third class would have to include countries where the relevant unemployment rate increased after the crisis broke out but I’m skeptical whether the rate will indeed remain lower than the level it stood before the 00s.

The first one here is France.

source: Eurostat
As we can see in the chart employment in construction and retail trade hasn’t budged since the crisis erupted and the spike in unemployment can be attributed solely to the decrease in manufacturing employment without growth in some other segment this time to square things off. With growth this low I somehow doubt it that employment will remain unchanged in construction and retail trade.

The next stop is Italy. Unemployment in Italy is lower than France, mostly due to the fact that the pace of deindustrialization is slower here (at least employment-wise). Again, construction and retail trade haven’t shed any workers and I find it hard to believe that his will continue to be the case in an environment of recession or stagnation if one is very optimistic.

source: Eurostat

We’re done with the countries that can be classified in distinct categories, so here come the “special” cases.

The first one is Portugal.

source: Eurostat

In Portugal, during the 00s the construction sector was in constant retreat and with the manufacturing sector shedding jobs all through the decade, the unemployment rate steadily increased.

Now let’s take a look at Finland.

source: Eurostat

After a fierce crisis in the early 90s, unemployment in Finland went vertical. But Finland is one of the few countries that managed to turn the tide and reindustrialize in the 90s. As a result, along with robust increases in construction and retail trade employment, the relevant unemployment rate fell from above 23% in 1995 to 12,8% in 2008. After the crisis broke out though, unemployment increased on across the board lay-offs. The relevant unemployment rate at almost 17% is rather high even for Euro-Area standards.

Finally, here’s Germany. 

source: Eurostat

Germany is the only country in the Euro Area that the relevant unemployment rate is in a downward path since 2006. It still is rather high, standing at about 15%. Workers with a lower education background were not absorbed by construction or retail trade in this case. Unfortunately, more detailed data are needed here to produce an explanation, something that I don’t possess.

The post is already too long, especially for summer reading material (although admittedly there’s nothing normal about this particular summer), so let me wrap this up. If one conclusion can be reached, it is that despite differences in local employment markets one common theme can be discerned: unemployment among workers with a lower education attainment is rather high in the Euro-Area. The reasons that brought unemployment down during the 00s are not in place anymore (in most cases) and no one should have thought them to be sustainable. This can only mean one thing, the Euro-Area needs a new growth model since this one’s definitely broken. What's more, in a time that the welfare state European model might come under pressure this will only serve to put more pressure on it. When a whole category of people are excluded from the labour market, this can spell trouble in a whole set of different levels and can have spill-overs in a whole lot of others. Construction and consumption booms were maybe Euro-area’s last chance to defer finding solutions to this rather serious problem. Let us be assured, the fact that these past years an enviable social calm loomed over the Euro Area, it doesn’t mean that we can take it for granted. Problems like this one, undermine exactly this. By all these I don’t mean that solutions to such problems are easy and it sure is way easier to tap your keyboard than solve such deep rooted problems owed to secular shifts, the thing is that the problem remains though…