The European Central Bank surprised (almost) everyone by fully entering into the unknown world of negative interest rates. I am not going to discuss the details of the ECB’s decision, for that I refer to a table at the end of this article. I want to address a key issue here: Why is the ECB so willing to destroy our saving plans?
For an average individual with positive savings, the law of compound interest is history. Liquid assests are not able to provide decent returns, not even in nominal terms (don’t forget we are experiencing deflation in some Euro countries). Risk appetite is a natural consequence of the zero interest rate environment and it will get worse as baseline rates turn negative.
Deflation is a symptom of a more general economic malaise and, like high fever, it must be averted. High fever may cause brain damage. Similarly, debtors suffer from deflation because debt is indexed in nominal terms and their income shrinks with lower prices. If you avoid reading this fact with moralistic attitude but rather through economic thinking, there are many reasons to take bold action against deflation.
So, why should creditors and savers suffer? Actually, net savers must suffer, because aggregate savings are too high. Germans complain that Draghi is playing with their savings. On Friday Handelsblatt, the main German financial newspaper, titled: “Mario Draghi Dangerous Game with German Saver’s Money“. Germany’s record trade surplus goes hand in hand with an excess of savings, that contributes to depress demand in the whole Eurozone. Excessive savings is a global problem (search for “savings glut“), but in Europe it is particularly acute.
Besides the problem of lack of demand, let’s not forget that the ECB is in the middle of a currency war and it is top priority for the central bank to keep the Euro low compared to other currencies. Given that China and Japan are undertaking very aggressive monetary policies and the US has the power to do more, for the ECB not following this expansionary trend would risk an appreciation of the Euro and a consequent damage to exporters and to the fragile recovery.
The measures taken by the ECB will have little real effect. Yet, I dont think Draghi had no room of manoeuvre to do otherwise.
If you are an economist, think that the German Statistical Agency holds several micro-census datasets, in particular the Official Firm Data for Germany (AFiD). The AFiD is a panel dataset that includes administrative data on a broad range of business-related information combined with detailed environmental statistics at the firm level. Currently it covers the period 1995-2014. Imagine that the German legislator would pass a law that limits the length of retention of such business data to only few years. That would destroy a piece of scientific treasure!
If you are not an economist, just think that official firm-level datasets are the most reliable data sources to carry out economic research on the determinants of productivity growth, employment, innovation and many other factors related to the economy of a country. There are researchers and doctoral students out there that have spent years of their life working on these datasets and are hoping to turn their sacrifice into well published scientific articles. Just realize that a new bill discussed in the German Parliament will turn their impressive effort into a useless endeavour, if nothing is done.
The Bundestag, the German Parliament, is discussing in these days an amendment to the Bundesstatistikgesetzes (Statistics Act) that for privacy concerns will require company identification numbers to be deleted after ten years.
The datasets affected by the bill are mostly about firms, not households, and they are already hardly accessible to safeguard privacy. You can find some examples of these datasets here. They contain general information on the balance sheet and income statement of firms, as well as data on their use of labour and energy. Privacy is already well protected. Researchers never have access to real firm identifiers but only to non-systematic firm numbers. Researchers cannot get information on a single firm – not even a small group of firms – but only run analysis on large samples, but it is very important that the firm numbers stay the same and are not deleted! Currently, such data cannot be copied and the only possible way to access them is to go to the Statistical Agency and work on a PC disconnected from the rest of the world. Apparently this good balance between privacy (of firms!) and open access for scientific discovery is not enough for a group of companies that have triggered this initiative in the Bundestag.
The Science Minister of Baden Württemberg, Theresia Bauer, has recently spoke out and warned of the great damage this measure will do to economic research, not only in Germany (read here, in German). The Verein für Socialpolitik (German Economics Association) has prepared an open letter to protest against this bill (in German). If the bill passes, not only many interesting economic questions cannot be investigated with a time frame of barely a decade – for procedural reasons it will be, de facto, up to 6 years – but it also means that the results of a paper will not be replicable after some years because the identifiers are deleted.
As an economist, I am touched by this silent drama even if I have not worked with such datasets so far. I know how important they are for advancing our knowledge on several important economic topics and I am honestly horrified by knowing that such bill will be passed by the German parliament. Nobody is aware of this problem, probably not even the members of the Bundestag that are discussing the amendment. The media coverage has been completely absent and policymakers are going to decide soon. Social media can help to raise awareness on that, so my call is to you to spread the news through your contacts!
Il grafico mostra l’andamento dell’occupazione per settori a partire dal IV trimestre del 2012, corretto per gli effetti stagionali. I dati sono presi dal sito ISTAT e sono stati pubblicati oggi.
Il detto “torniamo a zappare”, tanto popolare durante l’ultima lunga recessione in Italia, è diventato realtà. Il settore più dinamico in termini di occupazione negli ultimi tre anni è stato proprio l’agricultura.
Non so cosa ci sia dietro questo trend. Senza dubbio però il grafico ci fa capire che l’ottimismo delle fanfare governative è decisamente infondato.
Some Eurozone countries are playing a foolish game. Structural reforms are oversold with moralistic arguments to avoid accepting the obvious: some kind of transfer system is necessary and urgent.
We all agree that the European Monetary Union (EMU) needs a different institutional framework with better governance. We also all agree that EMU economies will never completely converge and, actually, the process of readjustment to “fundamentals” occurring in Italy, Greece and other Southern countries is very painful and politically disruptive. The mantra of structural reforms is a desperate attempt from Germany and other Nordic countries to avoid accepting the truth: the EMU will never work without some kind of cross-country transfer system to mitigate unbalances in the short-medium term.
What are structural reforms for?
Structural reforms cover a broad range of policy areas. In countries like Italy, the average number of days required to enforce a contract is three times higher than in Germany. Southern European countries in general have low appeal for innovators and public funding to research and innovation lags behind Germany and France (see here and here). Greece scores quite badly in the Ease of doing business indicator compared to other EMU peers. Structural reforms have indeed the potential to increase the long-run GDP levels of the “weak” Eurozone countries. Yet, this does not mean structural reform will restore balance in the monetary union, nor make it sustainable.
Any serious assessment of the actual results produced by structural reforms around the world – particularly in Latin America and Eastern Europe since 1990 – would have poured cold water on such expectations [on structural reforms in Greece]. Privatization, deregulation, and liberalization typically produce growth in the longer term at best, with short-run effects that are often negative.
This is a no-brainer. Increasing productivity is not an easy task and it often involves painful surgery – that is short-term losses for monopolists and for other firms with low productivity, as well as defaults to clean up the economy from zombie firms. As it is for surgeries, it takes time to heal and complete cure is not guaranteed.
You might confuse structural reforms with measures that rebalance labour costs through cuts in real wages and prices but you should not. Structural reforms, as correctly interpreted by Rodrik, aim at achieving convergence in living standards between Germany and Greece. We might order Greece to cut public sector wages to realign costs with productivity but this has very little to do with long-term growth. This is about asking Greece to rebalance their public and private expenses with the fundamentals, that is to move to an equilibrium where labour and capital are paid according to their productivity. This can be done quickly – in a monetary union is done with real devaluation – but this just ensures that Greeks live with what they can afford now. Such adjustment do not necessarily lead to higher long-term productivity.
The political game
Germany leads the group of EMU countries opposing any kind of transfer system within the monetary union. The President of the Deutsche Bundesbank, Jens Weidmann, recently stated that:
[…] But the big risk is that payments intended to cushion country-specific shocks become permanent one-way transfers.
Some have even come out and explicitly called for a revenue-sharing arrangement. France’s economy minister Emmanuel Macron, for example, said in an interview with the Süddeutsche Zeitung: “Monetary union without a revenue-sharing scheme – that’s impossible! The strong have to help.”
Macron concedes that advocating permanent fiscal transfers is breaking a taboo for Germany, but in turn, raises the prospect of reforms in France, arguing that we all have to change our ways. In other words, France wishes to remain the sole decision-maker in questions of structural reform, but is indicating good intentions.
Ladies and gentlemen
If I may return to the image of a crooked frame: regular transfer payments, without setting up a genuine fiscal union, would be like skewing the angle of a crooked picture even more.
The German establishment claims that all other EMU countries should copy Germany’s model and the Eurozone crisis will be solved. All the emphasis on structural reforms comes from Germany. I borrow a sentence from Lawrence Summers‘s paper on secular stagnation, that perfectly fits in this case:
to the extent that the focus of structural reform is on increased competitiveness, it is likely to be a zero-sum game.
Germany’s fortune in the last decade came from exports (any doubt on that, check this out). The Eurozone is the major export market for German firms. If everyone exports more – which is anyway unlikely – Germany will suffer heavy losses. International trade is ultimately a zero-sum game. Summers continues, while discussing measures that will possibly overcome sluggish productivity growth in developed countries:
That is not to say that structural reform is a bad thing or should not be substantially encouraged. But the idea that structural reform will help area-wide secular stagnation can be supported by neither theory nor evidence.
The rhetoric used to oversell the benefits of structural reforms has the problem of being too extreme. Germany and its allies are pretending that the only possible solution of the current EMU instability comes from firm rules and economic policy measures that have uncertain and, in the best case, long-run positive effects. Nice to have clean and respected rules to guide expectations and improve credibility. At the moment, rules only manage to anchor investors expectations that we are heading towards a disaster and convince observers that the EMU is consistently designed to implode sooner or later. The dominant view in the Eurogroup is that order and coherence are important values per se.
Restore intellectual honesty
My message is simple. Structural reforms are not substitutes for a Euro area mechanism that mitigates unbalances in unemployment and asymmetric downturns in GDP across countries. Yes, it is some kind of transfer system but it should not necessarily involve the transfer of money from a government to another. Such system is crucial to avoid political upheavals in suffering countries. What about a Euro area unemployment benefit scheme that goes from a central EMU authority to the individual unemployment person, regardless of the nationality?
The current approach of the Eurogroup assumes that Eurozone economies will not diverge over time and, if they do, national politicians will bear the political cost of the painful transition periods, because it is their fault if their country does not catch up. Any reasonable observer knows how absurd is this assumption, reality is just very different. As you can see, at the moment the EMU governance is based on moralistic principles and no substance.
The political game of some EMU countries that avoids acknowledging the necessity of some kind of short-term transfer system and oversells structural reformswith moralistic arguments is extremely dangerous. There is a high risk that political upheaval in Southern countries will break the Euro apart, if we only rely on the effects of structural reforms.
Comparing Italy and the United Kingdom is instructive to spot the most severe problems of Italy’s Research and Innovation system. Despite Italy’s disheartening scoring in innovation indicators (two examples here and here), on average Italian researchers seem not to lack funding. Fixing Italy’s innovation performance requires much more than rising government spending.
The United Kingdom is a top destination for the many frustrated and hopeless young Italian researchers that decide to continue their career outside their home country. The UK is one of the most dynamic and innovative economies in the world and British universities are well represented in the rankings of world’s top 50 research institutions.
Is Research and Innovation (R&I) so much better funded in the UK than in Italy? The Organization for Economic Cooperation and Development (OECD) publishes a comprehensive set of indicators to evaluate the state of the R&I system in most industrialized countries. Let’s have a look into the Main Science and Technology Indicators to see what really differs between Italy’s and the United Kingdom’s R&I. Tables 1-3 below report extracts for some selected indicators in 2013 and I add two column to include as well Germany and Spain. Germany is not only one of the global scientific powers, it also shares similar traits with the Italian manufacturing-centred economic structure. Spain is a Mediterrenean country that distinguished itself for R&D excellence despite not having the economic strenght of other European partners.
Gross Domestic Expenditure on R&D,
GERD (current PPP $, millions)
GERD as a percentage of GDP
(current PPP $, millions)
GERD per capita population
(current PPP $, millions)
Table 1. R&I funding indicators, year 2013 (Source: OECD).
GERD: Gross Domestic Expenditure on R&D (definition). GBAORD: Government budget appropriations or outlays for research and development (definition).
It appears quite stricking that yes, the UK invests more in R&I than Italy does, but the difference is quite small. In terms of spending per unit of Gross Domestic Product (GDP), Italy invests only 0.35 percentage points less than the UK, but less than half than Germany. Total government expenses in research can be measured by Government budget appropriations or outlays for research and development (GBAORD). As Table 1 shows, in Italy GBAORD are very similar to the level of public expenses in the UK (note: GBAORD are planned, not actual). Are Italian researchers just too many to share the pie?
The answer seems to be No. According to official aggregate statistics, Italian researchers are not underfunded. The paradox arises from looking at the amount of funding per unit (full time equivalent researcher), which is much higher in Italy than in the UK (Figure 1 and Table 2). The amount of funding that both the private and public sectors invest in research and innovation and that is available on average per one researcher is quite high in Italy, even higher than in Germany in 2013.
Yet, the situation appears not so bright for Italy once we take into account of all R&D personnel, that includes technical support as well as administrative staff (definition here). Data suggest that the Italian R&I system is highly bureocratic. Researchers in Italy are only 47% of R&D personnel (Table 3), whereas in the UK the share of scientists on all people involved was 70% in 2013. The percentage is also low compared to Germany (61%) and Spain (61%).
GERD per researcher
GERD per R&D personnel
GBAORD per researcher
GBAORD per R&D personnel
Table 2. Other selected indicators of R&I strenght (Own calculation from OECD data). FTE: Full Time Equivalent.
By looking at a wider set of statistics (Table 3), we might get a better idea of which is the most serious problem of the Italian R&D system. Researchers in Italy need more colleagues than more funding. The total number of researchers in Italy is only 4.78% of all people employed in the economy, that is nearly half of in the UK and in Germany, and still much lower than in Spain. Is this the result of austerity and spending cuts? Well, no.
(Full Time Equivalent)
Total R&D personnel
(Full Time Equivalent)
per thousand total
Business Enterprise researchers
as a percentage of national total
Table 3. Employment in the R&I sector (OECD, MSTI data)
Figure 2 clearly indicates that the number of researchers in Italy has grown by 80% over the period 2000-2013. The statistic sums up all researchers in the public and private sector and it shows no sign of slowdown during the last recession after 2008. Despite this trend, the Italian R&I sector remains understaffed and the reason for this is absolutely not clear.
Why are hordes of young Italian researchers fleeing from a system that still provides a good level of funding compared to the UK, one of the countries where they are heading to?
The MSTI has more disaggregated information, but I avoid to break data into different sectors (High Education, Business, Government, Non-profit). Comparing countries with statistics is always a slippery ground because differences may be due to accounting methods rather than reality. The OECD dataset is highly harmonized but, for instance, it does not allow to make precise statements in diversity with respect to resources allocated to the High Education and Government sectors because, as the documentation explains, government-sponsored National Research Centres are not included in the same sector in all countries. That is why I keep using aggregates. Italy seems to have a much lower funding directed to Universities compared to the UK, but this might be just due to a different statistical classification.
What we get from this pieces of evidence is the paradox of a country that experiences a massive brain drain in the research sector (there is an in-depth analysis on the topic in the latest European Commission’s Country Report, page 41) but does not perform badly in terms of funding per researcher. The data shown here do not explain much, but they give an important hint: in Italy investing more money in R&I is not a sufficient condition for improving the country’s innovation performance.
My take is that money does not attract researchers because of the unappealing institutional framework (that includes the business environment). Research activities in Italy are like oasis in the desert. The country must invest on a lot of complementary factors, as human capital and scientific culture, as well as finally making the university system more meritocratic, before thinking about spending more money on research. Data on Venture Capital funding in Italy is horrific. If you have a look at chapters 4-7 of the pocketbook “Science, Technology and Innovation in Europe“, you can get a better idea of what I am talking about. In Italy more than in all other industrialized countries, investing in teachers and training is the prerequisite for investing in more researchers.
Note: OECD data for Italy are provided by ISTAT and the original dataset can be found here. By contacting ISTAT, the institute confirmed that “Assegnisti di Ricerca” are included in the calculation of Total Researchers.
Eurostat ha recentemente rilasciato nuove statistiche sui flussi trimestrali relativi all’entrata e uscita dalla disoccupazione nell’Unione Europea. Quante persone disoccupate hanno trovato lavoro nel secondo trimestre del 2015? Quante sono rimaste disaccupate e quante hanno smesso di cercare lavoro?
I nuovi dati per paese mostrano che i recenti sviluppi nel mercato del lavoro italiano sono in controtendenza rispetto all’Europa. Nella Tabella 1, l’Italia appare subito come un outlier in termini di abbandono del mercato del lavoro. La quarta colonna mostra la percentuale dei disoccupati che in quel trimestre ha deciso di smettere di cercare lavoro ed uscire perciò dalla forza lavoro. È il 41.6%, dato ben superiore agli altri paesi, compresa la Spagna e la Grecia. L’Eurostat ci dice anche che questo è un trend in aumento, cioè che il flusso di persone che diventano inattive risulta in aumento del +3.3% rispetto al secondo trimestre del 2015.
L’Italia ha anche un basso tasso di successo nel trovar lavoro e solo il 14.3% dei disoccupati ne ha trovato uno, dato più basso di molti altri paesi. Questo flusso di persone “fortunate” risulta in lieve flessione del -0.3%.
Tabella 1 – Flussi nel mercato del lavoro, per paese, III trimestre 2015
Questi dati non sono corretti per gli effetti stagionali ed il confronto fra paesi ha senso se queste componenti cicliche sono simili tra paesi. In ogni caso, questi dati devo essere analizzati in un contesto più ampio ed è bene sapere quale sia stato il trend negli anni precedenti. I grafici qui sotto mettono a paragone l’Italia con la Spagna (Figura 2a). A differenza degli Stati Uniti (Figura 2b) dove il tasso di partecipazione è in caduta libera dall’inizio della crisi finanziaria e della Grande Recessione, in Italia e Spagna il livello di partecipazione nel mercato del lavoro è rimasto pressochè stabile, se non in aumento. Ciò vuol dire che il tasso di disoccupazione in paesi come l’Italia e la Spagna tenda a rimanere alto perchè molte persone rimangono disoccupate ma non smettono di cercare lavoro, a differenza degli Stati Uniti dove il declino di partecipazione ha contribuito a “snellire” il dato sulla disoccupazione.
È chiaro perciò che non basta leggere le ultime statistiche trimestrali per farsi un’opinione, ma i nuovi dati devono essere confrontati con i trend degli ultimi anni. In ogni caso emerge che in Italia il processo di riassorbimento della forza lavoro disoccupata è ancora troppo lento.
While reading the latest Voxeu article by Lucrezia Reichlin and coauthors, “The Eurozone has been infected by the US slowdown“, one of the graphs in the article made me reflect – again – on the dominance of Gross Domestic Product in discussions on the state of an economy.
Most of the time commentators refer to the total GDP, whereas GDP per capita is very often ignored or, even worse, implicitly considered a synonym of the other term. In the graph below, Reichlin and coauthors aim at showing the level of correlation in business cycles between the US and the Euro area.
My intention here is to convince you that the graph should not be interpreted as a divergence in living standards across the two sides of the Atlantic (again, that’s not what Reichlin et al. claim). Ah, the ill-fated creation of the currency union! I already feel someone is having this though right now. As the picture below shows, using a comparable measure of per capita GDP – unfortunately only available for a short time series – we do not observe a dramatic divergence in the growth rate of GDP per capita in the last 25 years. The first graph was indeed showing a divergence.
Where is most of the divergence in total GDP coming from? Population trends, as you can see below. Both statistics are important: the larger is the economy, the larger are markets for European firms and this is beneficial for their growth. Also in terms of diplomatic relationships, power increases with the size of the economy. On the other hand GDP per capita is much more suitable to measure the living standard of the average individual in a country. Lets keep it in mind next time we discuss GDP data.
Welcome to Crudedatalash. Let me briefly explain you the idea behind this blog. There are a lot of very good economics and finance blogs out there, so I was hesitant to start this new project. Tough competition calls for specialization and I must have something special to offer for you to keep reading my blog. Will this blog give you something completely different?
These are my interests and expertises:
I am an economist specialised on macroeconomics and my research so far has been mostly about the impact of economic policies on productivity and economic growth. My interests are broader, as you’ll see from this blog. I worship Bloomberg Surveillance almost every day.
This is what I am planning to write here:
The main idea of this blog is to brief you on the most interesting economic and financial reports that are newly released by major think tanks, as OECD and IMF for instance, as well as academic economic articles (that are not on Voxeu…). I have to read them for work and you might not have the time for it, so demand meets supply.
The name crudedatalash comes from the idea of (manually) crawling economic and financial statistics for new exciting pieces of evidence. There are lots of new data released every week and even all other bloggers together cannot spot all interesting economic and financial facts.
I will give my read on current affairs, blending the opinion piece with a summary of the most interesting opinions I find out there.
Some articles will be written in Italian for the Italian audience. The objective is to build another bridge between the Italian public opinion, usually very provincial with few exceptions, and the most important English-written news and opinion sources.
Is that it? Well I also want to write about cooking, but I don’t promise it at this stage.
The Organization for Economic Cooperation and Development (OECD) just revised worldwide growth projections for 2016 and 2017 downwards to 3% and 3.3%. Global growth is called “elusive” and the OECD advocates for prompt policy intervention. Not from central banks, but from governments. According to the Interim Economic Outlook, current fiscal policies are contractionaryin all mayor OECD countries and the economic think-tank recommends to undertake government-led large-scale investment plans to relaunch demand and, surprise!, to reduce the debt burden. Apparently the investment multiplier is so large that the increase in the level of public debt would be eclipsed by GDP growth, that reduces the famous debt to GDP ratio. The OECD criticises the Juncker’s investment plan as to have an insufficient scale and to be implemented too slowly.
Even if their predictions on benefits from higher public investment seems to me an upper bound on hopes, the OECD indicates the right direction. I am not convinced by the anecdotal evidence of Robert Gordon on the case for a technological crisis, which would make such investment plans ineffective. I am more on the side of those that see a chronic laggard demand, not able to catch up with faster technological progress. Don’t be fooled by TFP and other wannabe productivity growth measures: they track both demand and supply factors, even if many commentators pass off them as evidence for dismal technological progress. Gordon’s book is coming out soon, I will talk about this influential thesis again.