1. What We Have Learned So-Far
Lecture 3 1st Hour
A Short Review of
What We Have Learned So-Far
And
An Introduction to
the Euro Area Economy

2. Brief Review of Lecture 1 on the Global Economy
-- US, EU, Japan, and China are about 54% of the global economy
-- Global economy is slowing down due to slow growth in the EU, reduced growth among emerging markets, lackluster performance by China, slow growth from the US. World growth 3.5% for 2015 (IMF).
-- Considerable apprehension over possible global recession, controversy over how to combat headwinds. Important to raise productivity. Productivity growth is slow now.
-- Two groups
(i) activists who favor greater stimulus and less emphasis on budget control, easy money, tight regulations on financial institutions, greater government control over markets
(ii) fiscal conservatives who favor less stimulus and regulation, smaller government and rules-based policies.
-- IMF seems to be turning away from austerity as a policy prescription and more towards discretionary economic policy, not rules.

3. Short Run – Long Run Dilemma (Stimulus vs. Austerity)
-- Recently some scholars have stated that too much debt (Debt/GDP > 0.90) can begin to reduce growth substantially and can lead to a financial crisis.
Short Run – Long Run Dilemma (Stimulus vs. Austerity)
Where do we place our worry and policy thinking?
-- Still another set of scholars have argued that overall economic development depends crucially on a political system that delivers either inclusive (good) economic institutions or exclusive (bad) economic institutions.
Political Economic Dilemma (Inclusive vs. Exclusive Institutions)
Can a country destroy itself trying to be more inclusive ?

4. Brief Review of Lecture 2 on the US Economy
-- US needs to grow at 2.5% to lower unemployment significantly
-- slow growth since 2010
-- even faster growth need to return to potential output (4.0%)
-- unemployment has improved substantially about 5.5%, but
many people leaving the labor force, baby boomers retiring
-- long term unemployment (U6) still very high but falling
-- inflation is below Fed target of 2%, but data is contaminated by
jumps -- many uncertainties continuing to plague US economy including
a. Debt ceiling negotiations in the near future
b. Implementation of Obamacare
c. Depletion of two Social Security funds and Medicare fund
d. Strong regulations on use of coal and oil
e. Implementation of Dodd-Frank financial act
f. Lack of comprehensive immigration legislation
g. Raising short term interest rates
h. US housing market tenuously returning to normalcy
-- Income and wealth inequality in US rising mainly due to lower
interest rates, rising stock and bond prices, and
concentration of ownership of assets in institutional hands

5. When you have wages or self-employment income covered by Social Security, you pay Social Security taxes each year up to a maximum amount set by law. For 2013, you will pay Social Security taxes on income below $118,500. You must pay Medicare taxes on all income. Update
Also, beginning in 2013 you must pay 0.9 percent more in Medicare taxes on earned individual income of more than $200,000 ($250,000 for married couples filing jointly). The tax rates shown below do not include the 0.9 percent:
Employees — the Social Security tax rate is 6.2 percent on income under $118,500 for The Medicare tax rate is 1.45 percent of all income;
Employers — the Social Security tax rate is 6.2 percent. The Medicare tax rate is 1.45 percent; and
Self-employed —the Social Security tax rate is 12.4 percent on income under $118,500 in The Medicare tax rate is 2.9 percent.

6. An Overview of the Euro Area Economy

7. How is the Eurozone Doing on Growth, Jobs, and Inflation ?

8. Growth 0.6% QoQ for 2016 Q1
Eurozone is continuing to grow stronger. Growth is now much better at 2.4% annual.

9. Average or Natural Growth is about 1.5% for the Euro Zone
Eurozone needs stronger growth 2.5% % to resolutely reduce unemployment.
Why is the Eurozone growing stronger today?

10. Source: IMF WEO April 2016

11. Original Source: Markit Economics

12. Short video by the IMF on the Eurozone Economy

13. What About Eurozone Unemployment?

14. Eurozone Long Term Unemployment Rate Drops to 5.4%
even as Overall Unemployment is Falling to 10.1% in May 2015

15. Eurozone Youth Unemployment is about 20.7%

16. No Core Deflation in the Eurozone
But There Certainly has been Disinflation

17. The Inherent Contradictions of the Euro Area
Lecture 3 2st Hour
The Inherent Contradictions of the Euro Area

18. Video on Optimal Currency Area – the Theory
Video on Optimal Currency Area – Applying to the Euro Area

19. The €-zone is facing a dramatic challenge of adjustment among its members
1) The €-zone does not meet Mundell’s criteria for an optimal currency area which becomes a problem when a heterogenous « union » is hit with a shock.
2) Need for alternative adjustment mechanism when ER and IR no longer available. Mundell specified following:
A high degree of labor mobility
Wage and price flexibility
Fiscal transfers from stronger to weaker states
Synchronized business cycles among OCA members
3) In absence of those, only alternative is painful « internal devaluation » (i.e. depression of deficit countries) made worse when surplus countries refuse their share of adjusting.
Taken from Guttman 2015

23. Euro Area Government Debt to GDP Ratio

24. How about the Eurozone Debt Problem ?
ITALY
GREECE

25. PORTUGAL
SPAIN
IRELAND UK