The Financial Cycle Around the World in 2016

As the year is coming to a close, the financial economy in large parts of the world is characterised by high levels of uncertainty and central banks navigating through widely unknown territory. In this article, I want to take a brief look at the state of affairs in a few different economic areas and analyse potential implications for monetary policy decisions. For this purpose, a proxy for the financial cycle as developed by Drehmann et al. (2012) from the Bank for International Settlements (BIS) is presented as a visualisation tool. This concept captures cyclical fluctuations in both private credit and house prices. A high point represents above-trend volume of credit to the private non-financial sector and elevated asset prices. A low point on the other hand indicates a contracted credit and housing market (You can find a very brief description how the financial cycle is derived at the end of this article). Additionally, I consider some other important developments throughout the global financial economy. Continue reading “The Financial Cycle Around the World in 2016”

Unemployment in the Eurozone: A Tale of Two Countries

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unemployment as share of active population (%); data source: Eurostat

On Friday, Eurostat, the statistical office of the European Union, announced that the unemployment rate in the euro area continued to fall in May, from 10.2 to 10.1 percent. While this constitutes a considerable recovery from its high of 12.1 percent in the second quarter of 2013, there is still a long way to go back to the pre-crisis level of 7.3 percent. Moreover, this number shrouds the highly diverse situation within the euro area, with Germany and Greece sitting at the two ends of the spectrum. Both countries entered the crisis with an unemployment rate of 7.5 percent in the second quarter of 2008. After a minor bump in 2009, the German labour market consistently strengthened and now stands at an unemployment rate of 4.3 percent in the first quarter of 2016. This development is mainly attributed to increased wage flexibility due to the so-called Agenda 2010 and the extended use of short-time labour subsidies during the crisis (e.g. Rinne & Zimmermann, 2012 and Krause & Uhlig, 2012). Once been labeled Europe’s “sick man”, Germany now has had the lowest unemployment rate in the euro area for more than two years. Greece, on the other hand, has fallen into a deep depression, intensified by the Greek government-debt crisis and, as argued by many, darkened by austerity policies (just whether budget cuts or tax hikes have been more devastating depends on whom you ask, for example Paul Krugman or John Cochrane). The unemployment rate mirrors this crisis, rising to a shocking peak of 27.9 percent in the third quarter of 2013 and recovering at a slower pace than the Eurozone average, considering pre-crisis levels, decreasing to 24.3 percent in the first quarter of this year. The youth unemployment rates (capturing the unemployment share of the active population younger than 25) present a similar picture. Continue reading “Unemployment in the Eurozone: A Tale of Two Countries”

The Times They Are A-Changin’

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This article reflects my personal opinion.

On Friday, supporters of the Remain campaign in the United Kingdom European Union membership referendum were faced with the ruins of their beliefs. In contrast with most of the latest polls, a majority of the voters had decided for an exit of the UK out of the EU. Although the demographic analysis of the referendum has not yet been finalised, it is already rather clear where the lines between the two camps ran. Besides the obvious separation between London, Northern Ireland and Scotland as net supporters of the Remain campaign and most of the rest of England and Wales as Leave strongholds, voters divided alongside age-demographic and educational lines. Areas with many young and well-educated residents were more likely to vote “Remain” while areas with a high concentration of low-skilled workers and old residents tended to vote “Leave” (see this guardian article for a colourful demographic breakdown of Thursday’s referendum). A lot of young voters feel that their future has been sabotaged by a generation who will not be around long enough to suffer the consequences of their vote. Congruently, many academics and other high-skilled workers perceive the referendum as a blow to their economic opportunities by ill-informed protest voters. And together, Remain supporters all around the world ask themselves “How did this happen?” Continue reading “The Times They Are A-Changin’”