The arrival of the Euro and its implications for Asia

The third stage of the European Economic and Monetary Union (EMU) commenced on January 1, 1999 with the launch of the European single currency, the euro. The first round of participants comprises 11 of the 15 European Union (EU) nations, dubbed “Euroland.” The potential implications of EMU for Asia are immense. The euro's emergence as an international currency and its impact on Asia can be assessed in 3 different domains: (1) as a medium of exchange for Europe's trade with Asia; (2) as a store of value in stocks and bonds in world capital markets; and (3) as part of official foreign exchange reserves of Asian central banks. Our analysis suggests that there is potential for the euro to play a bigger role in EU-Asia trade links, which will be underpinned by the collective importance of Euroland as a much-enlarged trading and investment partner for Asia. However, in the short term at least, Asian equity markets are unlikely to benefit from significant inflows of capital from the EU as the former have been decimated by the region's financial crisis. As for Asian bond markets, rapid deterioration of sovereign ratings of countries in the region over the past 12 months would make it difficult for Asian companies to raise funds through euro-denominated debt instruments. As for official foreign exchange reserves, the bulk of Asian reserves is currently held in US dollar assets. Judging from Asian trade and debt figures, it seems unlikely that the euro would challenge the US dollar as a reserve currency any time in the near future. Nevertheless, in the longer term, the euro's introduction could make it easier for Asian central banks to diversify their reserves from the greenback to the euro. The internationalization of the euro is likely to happen only gradually, whether in terms of international trade denomination and settlement, denominating international financial assets, or as a reserve currency. Since the magnitude of shock that the single European currency would bring to the international monetary system is still unknown, only very tentative conclusions for the impact on Asian countries can be drawn at this point in time.     

Wirtschaftspolitik für die Eurozone

At the root of the euro crisis was not only a sovereign debt crisis but also a balance-of-payments crisis. A multi-faceted approach is required to restore sustainable growth and prevent a vicious circle of public and private sector deleveraging leading to weaker economic activity, which in turn results in a further deterioration in banks’ asset quality. Both governments and the European Central Bank (ECB) face challenges. Governments must make progress in restoring the health and resilience of the banking sector and introduce microeconomic reforms in product, services and labour markets to reduce divergent trends in competitiveness and productivity. Budgetary discipline must be respected, and the ECB should avoid any deflationary bias while stabilising inflation at or around two per cent for the euro area as a whole.     

Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation?

This study provides quarterly estimates of the misalignment in the real effective exchange rate (REER) of Renminbi (RMB) for the period 1999–2008. Starting from a commonly used economic approach, the estimates are obtained from an extensive application of econometric techniques on a carefully constructed database that covers 22 economies that account for roughly 70 per cent of China’s total foreign trade. Our estimates demonstrate that the RMB underwent a period of undervalued misalignment during the early to mid‐2000s, if measured vis‐à‐vis the REER of a multilateral currency basket of the 22 economies, but the misalignment margin has disappeared since 2008. However, if the RMB is only evaluated by a subpanel dataset including only the United States and the Euroland, the resulting misalignment estimates are much more pronounced and withstand the recent recession. The difference between the full‐panel dataset and subpanel dataset estimates suggests that the current misalignment problem lies more with overvalued USD and euro rather than with an undervalued RMB. The finding thus refutes the claim that the current global trade imbalance could be resolved mainly by further and greater appreciation of the RMB.     

Angebotsökonomie: wenig Innovation — viele Jobs!

Deregulation of labour markets through structural reforms as proposed by supply side economists has a negative impact on innovation and brings down the growth rates of labour productivity. This paper discusses why the Schumpeter II innovation model is functioning poorly with higher labour turnover. Deregulation of labour markets also changes power relations between capital and labour, which leads to lower wage growth. Panel data analyses show that a one per cent lower wage increase leads to 0.32-0.49% lower growth of value added per labour hour.     

The adjustment mechanism in the Euro Area

This paper analyses the adjustment mechanism in the euro area prior to the crisis. Results show that the real exchange rate adjusted to redress cyclical divergences and that after monetary unification, real exchange rate dynamics became less reactive to country-specific shocks but also less persistent. Regulations affecting price and wage nominal flexibility and employment protection play a role in the adjustment mechanism. Indicators of product and labour regulations appear to matter for both the reaction of price competitiveness to cyclical divergences and for the inertia of competitiveness indicators.     

Exchange rate volatility effects on labour markets

With the transition to the euro, exchange rate volatility between the countries participating in European Monetary Union has been eliminated, reducing uncertainty and transaction costs. The other side of the coin is the loss of the exchange rate as a potential mechanism of adjustment to external shocks. The present article uses the case of Germany to study the implications of EMU for labour markets.     

The Macroeconomic Effects of the Canada–US Free Trade Agreement on Canada: A Counterfactual Analysis

We evaluate the macroeconomic effects of the Canada–US Free Trade Agreement (FTA) on Canada's economy using a counterfactual analysis. We exploit the dependence of GDP growth (labour productivity and unemployment, respectively) among different economic entities and construct the counterfactuals using data from countries other than Canada. We find that in the adjustment period from 1989:Q1 to 1992:Q1, Canada's economy bore the short‐run adjustment costs of the FTA with a decline of the annual real GDP by 2.56 per cent and a decline of the labour productivity by 0.62 per cent. After the adjustment period, the FTA had a positive and permanent effect of 1.86 per cent on Canada's annual real GDP growth and raised the labour productivity from 1992 to 1994 by 2.39 per cent on average. Moreover, the FTA increased Canada's annual unemployment rate by 1.81 per cent in the period 1989–94.     

Exchange Rates,Employment and Labour Market Rigidity

In this paper, we study the effect of labour market rigidity on the impact of exchange rate shocks on employment. We use a panel dataset comprising 22 manufacturing sectors across 23 OECD countries. In our econometric model, the impact of exchange rate fluctuations on sectoral employment is mediated by the degree of openness and by a measure of labour market rigidity: the OECD's employment protection legislation (EPL) index. Our results suggest that greater labour market rigidity reduces the impact of exchange rate shocks on employment. This effect is statistically significant for low‐technology sectors.     

Beschäftigungspolitik in Deutschland: Fine-Tuning statt Globalsteuerung

Until 2005 unemployment rates in Germany jumped after every recession to ever-higher levels. Neoclassical micro-economists interpreted this trend as market failure and consequently narrowed the debate to labour market policies intended to improve the assumed malfunctioning of labour markets. Macroeconomic relations were largely ignored or even negated, which also characterises the current approach of the federal German government towards European economic policy. This approach has contributed to high unemployment in the eurozone. The economic trends in the US show that monetary and fiscal policies that do not exclusively focus on low inflation but that also aim to improve growth and employment will be much more promising for Germany and Europe.     

Financial repression and debt liquidation in the USA and the euro area

Rising debt levels have caused a revival of financial repression in the euro area and the USA. The Federal Reserve directly represses US bond yields and assists in financing the state budget, resulting in an overall liquidation effect from falling bond yields of about three per cent of total government revenues and one per cent of GDP in 2011. In the euro area, the ongoing actions to contain the European debt crisis have also repressed interest rates, easing debt-servicing costs in all European countries and reducing the interest rate payments for the German government by about one to two per cent of total government revenues. This article argues that a slight rise in infl ation could even liquidate German debt.     

US-sclerosis?

The USA is currently experiencing “jobless” economic growth, a situation which has been characteristic of European labour markets, and which has been coined “eurosclerosis”. This lack of employment growth in Europe has almost unanimously been ascribed to labour market institutions, although there has never been hard empirical support for this position. Now the US job machine does not seem to be working, although the American labour market institutions have not changed. Will we now see a decade of “US-sclerosis”?     

EMU calls for comprehensive labour market reform

The debate about European monetary union has so far been dominated by questions of fiscal convergence, the adequate conversion exchange rate and the stability of the Euro. Relatively little attention has been given to the labour market effects although labour market performance will be crucial for the long-term success or failure of EMU. The following article deals with the interrelationship between EMU and labour market flexibility in Euroland.     

From dollarisation to euroisation

In the past the dollar has been so dominant as an international currency that the term ‘dollarisation’ has become a synonym for currency substitution, i.e. the voluntary use of a foreign currency instead of the respective country's own legal tender. This article addresses the question as to whether the euro may be expected to partly replace the US currency in this function, focusing on the former's use as a substitution currency in countries on the periphery of the euro zone. Some policy conclusions are drawn for both the ‘euroised’ economies and Euroland.     

Service Offshoring and Productivity: Evidence from the US

The practice of sourcing service inputs from overseas suppliers has been growing in response to new technologies that have made it possible to trade in some business and computing services that were previously considered non‐tradable. This paper estimates the effects of offshoring on productivity in US manufacturing industries between 1992 and 2000. It finds that service offshoring has a significant positive effect on productivity in the United States, accounting for around 10 per cent of labour productivity growth during this period. Offshoring material inputs also have a positive effect on productivity, but the magnitude is smaller accounting for approximately 5 per cent of productivity growth.     

Impact of Trade on Canada's Employment,Skill and Wage Structure

Using newly constructed data for 88 Canadian industries (including primary, manufacturing and services), for 15 years (1992–2007), we analyse the impact of trade and technological change on labour demand, skill structure, wage premiums and welfare in Canada. Results show that export growth has no impact, whereas import growth reduces employment growth. But contrary to popular belief, Canada's job loss due to imports has been very small, only about 6,000 persons annually. China's negative impacts are more pronounced in industries where the share of information and communication technology (ICT) capital is rising fast and among low R&D intensive industries. In terms of skill change, ICT use and real exchange rate appreciation are biased towards high skill workers. Imports from the United States and China are skill‐neutral, whereas imports from Mexico are skill‐upgrading. Overall, neither export nor import growth has an impact on the wage rate. However, had there been no imports from China, the annual wage growth rate of high skill manufacturing workers would have been 0.6 per cent higher. Between 1992 and 2007, there was an annual net gain from the rise in imports at about 0.4 per cent of GDP, in addition to the gains obtained from 1992 import levels vis‐à‐vis autarky.     

Estimating the effect of the Internet on international trade

In this article, we study the effect of North American Free Trade Agreement (NAFTA) on the responsiveness of Mexican economy to real exchange rate shocks. We argue that, by opening the US and Canadian markets to Mexican goods, NAFTA made it easier for domestic producers to take advantage of the opportunities brought by the depreciation of the real exchange rate. To identify this mechanism, we use plant-level data and compare the behavior of employment, production and investment after two big real exchange rate shocks: the first observed in the mid-1980s, the second the Tequila Crisis of 1994–1995. The evidence indicates that after passage of NAFTA exporting firms exhibited higher growth rates of employment, sales and investment vis-à-vis non-exporters. We confirm our results by analyzing the behavior of a control group of firms, that had complete access to the US market during both devaluations, and we show that they responded in a similar way in both events. Finally, we also provide direct evidence on the relationship between exports and tariff reductions brought by NAFTA. Our results support the view that NAFTA has allowed Mexican producers to respond more quickly to real exchange shocks.     

Aufschwung bleibt moderat — Wirtschaftspolitik wenig wachstumsorientiert

The German economy is experiencing a moderate upturn. Gross domestic product is expected to increase by 1.6 per cent this year and by 1.5 per cent in 2017. The upturn will be driven by private consumption, which will benefit from continued employment growth, sizeable increases in wage and transfer income, and also purchasing power gains thanks to lower energy prices. Fiscal policy will also be expansively oriented, partly due to rising costs related to refugee immigration. Public budgets will still post significant surpluses in the forecasting period, however. Failing to use this room for manoeuvre to promote growth, as seen in recent years, is not a sustainable path. In view of the continuous slack in the euro area economy, the monetary policy stance is considered to be appropriate. Should it become obvious in the course of this year that production does not return to normal capacity and that the inflation rate does not move towards two per cent, further measures to stimulate growth might become necessary. The scope for further monetary policy measures has been widely exhausted, though. A further economic stabilization could only be achieved through a combination of expansionary fiscal and monetary policy. This could severely damage the credibility of monetary policy, however.     

The Prospects for Future Economic Growth in the Euro Area

With a long-term projection of TFP growth of 0.2 per cent, a gradual decline in the work-age population and a static average workweek, we project a "baseline" average real GDP growth rate in the euro area of just 0.6 per cent over the next decade — even if the unemployment rate and investment share of GDP return to their pre-crisis levels by 2020.     

The US Dollar and the Euro as International Currencies

For many decades the US dollar has remained unchallenged as the world’s dominant international currency. What is behind its persistent pre-eminence in the international monetary system and can this be expected to last? Could the euro rival or even surpass the dollar as the leading currency? If it did, what would be the consequences for Euroland?      

Competition among the regions in Euroland

Following the introduction of the euro, competition among individual EMU countries for jobs and capital investment is likely to be increasingly replaced by competition among regions. Will this enhance convergence of per capita incomes or will it, rather, contribute to widening the gap between the rich and the poor regions of Euroland?