Should Europe follow the IMF’s recommendation?

The IMF recently reported concerns with excess debt. Conversely, economists and publications report Europe’s public infrastructure deficit is setting back the Old Continent’s productivity gains relative to the frontier. Others argue otherwise, that investment and regulatory reform should combine to favour a Renaissance of European industry and innovation.

Historically high Financial Account surpluses and low Central Bank rates reduced the real return rate of portfolio investment within the EU. 

Whether European legislators choose to strengthen investment and otherwise, the role of other factors such as improvement to management processes that induce TFP

Europe should consider how it invests where TFP is not tracking GDP growth. Spurts of growth far and beyond TFP may indicated overheating economies, even if “masked” by low real interest rates.
UPDATE: @LJKawa just notice how low this return can go “Federal Reserve officials and Wall Street are ramping up their warnings about an inversion of the Treasury curve. When long-term yields dip below shorter-term counterparts, it’s usually been a sign that a recession is nigh.” 

For now the European curve remains better than the US’ but who knows when policy begins to normalise? 

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WWII, IMF, EU, US and last week’s tariffs

Newspapers and blogs are crammed with stories about the dismantlement of world’s multilateral value chains. The world’s current commerce setup results of the need to restore the currency peg after WWII. 

White’s idea of restoring the peg through limited loans and redistributive commerce opposed Keynes’ capital controls and an effectively unlimited Fund. By safeguarding the dollar’s contribution to the clearing mechanism, White effectively let commercial exchanges clear current account deficits. 

This has much to do with the redistribution of wealth occured during the II WW.

It also shaped the current world setup, including the obligation of European countries to establish a union and the role of US debt as store of wealth.

Understanding the Euro became the foremost currency in commercial exchanges and that the EU accumulates current and financial account surpluses, the US must ensure it maximises returns from China’s surplus before those twin surpluses extend East.

Challenged Europe

Reading the Post this morning. 

Mallaby identifies Europe’s challenges with the lack of fiscal transfers between surplus and deficit Member-States, and an insurance against bank failures. Both assume markets are inneficient in allocating capital and we could safely assume so when considering Target (the ECB-managed set of accounts that depicts the unequal transfers between Member-States).

Mallaby also suggests labour costs won’t adjust considering Europe’s significantly cross-border lower labour mobility.

We’ve known since Ricardo markets clear in currency Unions when asset endowments and prices are free-float. With fiat currency, that means either currency issuance or factor allocation is free – hence Mallaby’s worry about capital mobility (between successful and less successful countries, through banks) and labour mobility (that Mallaby contrasts with the US).

It just so happens DGSE models applied to Europe miss the crux of firm growth in the Old Continent: how we understand welfare to be maximised and how we defend through our competition policy.

Read more here 

Factsheet on how competition policy affects macro-economy- OECD.org 

Competition and growth

European competition laws are thought so as to stimulate welfare maximising asset allocation. State Aid, for instance, epithomises exactly why competitive taxation is tolerated: State size matters and so does State’s capacity to influence capital within it’s jurisdiction.

Read more about it from the Max Planck Institute:

Tax Competition in the Eurozone http://www.mpifg.de/pu/mpifg_dp/dp13-13.pdf

On Automation and Education

Inclusive Growth

Bruegel’s Event on Inclusive Growth in the European Union was an excellent opportunity to learn more about growth asymmetries and factors leading to it. The second session was particularly relevant to those looking into macroeconomic factors of inequality.

The session reflected upon technology and its role in shaping labour markets and wages. Professor Dalia Marin presented interesting research on how the United States and Europe contrast when automating manufacturing. Professor Marin presented how wage convergence in some countries in Europe regardless of skills, and low-skill premium in other countries, contrasted with increasing inequality amongst low-, medium- and high-skill labour in the United States. Professor Marin concludes the skill premium in Europe is declining because Europe has invested more in education than the US, where the technology premium is higher. Thus in Europe it would not make sense to push for more Higher Education as the premium for attaining it is quite low – thus redirecting the issue from skilled-labour/unskilled-labour to capital/labour.

I couldn’t help but ask: how may firms endogenise these benefits? And is the role of Government in this redistribution?

In her reply, Professor Marin was explicit in saying the replacement is between capital and labour. And that the United States epitomise the phenomenon. And that governments have as much leeway in regulating the change.

I made my case poorly – and so here goes a clearer reasoning for the question.

Continue reading “On Automation and Education”