The Current Economic The Current Economic Situation in the Euro AreaSituation in the Euro Area

Presentation by Nigel NagarajanFaculty Orientation – 2009 Euro Challenge

Federal Reserve Bank of Boston, December 8th 2008

The 2009 Euro Challenge | The Current Economic SituationThe 2009 Euro Challenge | The Current Economic Situation

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The 2009 Euro ChallengeThe 2009 Euro Challenge

Start with the question

1.“Describe the current economic situation in the euro area (the economic region consisting of the 16 EU member countries who have adopted the euro).”

Key words: current, economic situation, euro area

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What do we mean by “current”?What do we mean by “current”?

Key words: current

Huh?: This means the “short-term economic outlook”

We can help you: numbers from the European Commission economic forecast

Extra credit: provide context – how does the current situation compare with the recent past?

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What do we mean by “economic situation”?What do we mean by “economic situation”?

Key words: economic situation

Huh?: We want you to discuss three economic indicators: • GDP growth: the speed at which the economy is growing (new goods and services produced). NB we want GDP growth not total GDP.• Inflation: the overall increase in prices in the economy.• Unemployment: the percentage of the civilian labor force that is unemployed.

We can help you: Look on the forum for hints and tips

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What do we mean by “euro area”?What do we mean by “euro area”?

Key words: euro area

Huh?: Know the difference between the euro area and the EU!

We can help you: No need to discuss individual countries here!

Extra credit: provide context – how does the euro area compare with the US?

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What has been driving growth in recent years?What has been driving growth in recent years?

In recent years US had mainly domestically generated growth.

Strong house price appreciation helped to stimulate consumer demand

More reliant on externally generated growth (i.e. exporting to other countries, e.g. US, UK, China)

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What about this “decoupling” idea I keep hearing about?What about this “decoupling” idea I keep hearing about?

• Decoupling is the idea that, even if the US slows down, other regions (e.g. Europe, Asia) can still grow at healthy rates

• But there are strong inter-linkages (trade, investment, financial flows) that make different regions increasingly interdependent

• The US has been the main “locomotive” for the world economy until recently. The rest of the world has relied on US growth

• Europe’s resilience to a US slowdown was overestimated (most euro area countries have less flexible markets than US)

• The old saying rings true: “When the US sneezes, Europe catches a cold”. Now they both have pneumonia!

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Europe and the financial crisisEurope and the financial crisis

• European banks have exposure to US sub-prime mortgages (“toxic assets”) and did not properly understand the risks associated with them

• Some EU countries have had their own housing bubbles which are now deflating, i.e. Ireland, Spain

• Higher oil and food prices eroded the purchasing power of European consumers just as in US

• Strong trade, investment and financial links transmit the US shock across the Atlantic to Europe (where markets are not as flexible)

• EU policy response – a fragmented, national response gives way to more coordinated, comprehensive approach

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Real GDP growth in the euro areaReal GDP growth in the euro area

Source: European Commission economic forecast (January 2009)

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Inflation in the euro areaInflation in the euro area

Source: European Commission economic forecast (January 2009)

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Unemployment in the euro areaUnemployment in the euro area

Source: European Commission economic forecast (January 2009)