Global Economic Prospects, Risks and Challenges for Europe Robert F. Wescott, Ph.D. SACE Milan 18 November 2005

2 Perceived Global Investment Risk Source: UBS Index of Investor Optimism, August 2005 Percent rating the region “low risk” minus percent rating it “high risk”

3 Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China

4 Oil: A Growing Burden on the World Economy Source: EIA, IMF WEO

5 Investors Concerned about Energy Percent giving each answer to the question, “how much are energy prices hurting the U.S. investment climate?” Source: UBS Survey of Investor Optimism, Sept. 19, 2005

6 The Oil Price Pass-Through to Inflation is Falling Source: Bureau of Labor Statistics and Energy Information Agency

7 Why Isn’t the Dow at 12,800? (because of energy prices) Source: Bureau of Economic Analysis, Yahoo! Finance

8 Housing Prices Rising Worldwide Percent Change, Source: The Economist

9 Potential Impact of a Housing Crunch on GDP Assumed Price Drop Assumed Effect on Real GDP U.K.9%-0.7% Spain8%-0.4% Australia7%-0.3% France6%-0.4% Italy5%-0.4% U.S.5%-0.3% Canada2.5%-0.4% WorldN/A-0.3% Source: Global Insight

10 Can Disequilibrium Continue? (China produces, the U.S. consumes?) Source: IMF WEO

11 Historically, Rising Interest Rates Add Financial Pressures Source: Federal Reserve

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13 China’s Trend Has Been Sharply Upward Source: IMF

14 The Euro Area’s Unemployment Rate Exceeds that of the Rest of the Industrialized World Source: OECD, Standardized Unemployment Rates*South Korea

15 Europe Lags the U.S. in Productivity Eurozone0.7% Italy-0.3% Germany0.7% France1.3% U.K.1.8% Japan1.9% Canada0.7% U.S.3.5% Average percent change in labor productivity, Source: OECD

16 High Tech Manufactures: Asia Rising, Europe Declining Source: National Science Foundation, “Science and Engineering Indicators 2004”

17 Greenspan’s Medicine Would Help Europe (Real short-term interest rates) Fed funds / ECB policy rate deflated by “core” CPI inflation EU real interest rate US real interest rate EU real interest rate Sources: Federal Reserve, Bureau of Labor Statistics, European Central Bank, European Commission

18 Cross Country R & D Spending Source: National Science Foundation, Science and Engineering Indicators 2004 Percent of GDP, 2000 (latest available year)

19 Percentage of Year Olds in Science and Engineering Programs Source: National Science Foundation, Science and Engineering Indicators 2002