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Europe's central bank is considering to implement quantitative easing in order to salvage the situation, which is something they have tried to avoid in the past few years.

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Europe's central bank is considering to implement quantitative easing in order to salvage the situation, which is something they have tried to avoid in the past few years.

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The "sick man" of Europe may very well be all of Europe. Since the Great Recession of 2008-2009, growth has been generally slow and painful, and the danger of prolonged stagnation in Europe is a very real possibility. The euro has dropped to its lowest value in nine years. With Europe accounting for 25% of global trade, its recovery is imperative to the health of the global economy. The forecast for 2015 is looking dismal, only marginally better than 2014.

"Frankly, it's very hard to be optimistic about Europe. There are lots of issues," says Mauro Guillén, Wharton management professor and director of The Lauder Institute. The continent is facing a "deceleration of the German economy. Southern Europe is not working as it was supposed to and there are lingering problems with high unemployment and high taxes," Guillén adds.

Unless there is a decisive change in structural, fiscal and monetary policies, Europe may continue to languish in the upcoming year, according to the Organisation for Economic Co-Operation and Development (OECD). " Europe is at the center of weakness in the global economy Twitter ," says Catherine L. Mann, the OECD's chief economist. The institution forecasts growth in the eurozone to be just 1.4% in 2015. That's an improvement over the low 0.7% for 2014, but it's well below what Europe should be achieving.

Last year, the overall world economic growth rate stood at 3.1%. And Mann points out that the global rate is still below the 4% average between 1995 and 2007. She explains that with the burgeoning sizes of "faster-growing emerging economies, world GDP should be expanding faster - not slower - than past norms. Investment and trade globally have yet to pick up to full steam."

Mario Draghi, president of the European Central Bank (ECB), has announced that he is preparing to change course to resuscitate the eurozone's "fragile and uneven" economic recovery, possibly with quantitative easing measures, a strategy that Europe has previously shied away from. Since the last half of 2014, the ECB has "adopted a variety of measures to stimulate bank lending. The real question is how far can they go and how effective will it be," says Joao F. Gomes, a Wharton finance professor.

By having several countries drastically reduce their deficits all at the same time, growth was undercut and the adjustment has been incredibly painful. It's a Catch-22, notes Olivier Chatain, strategy and business policy professor at HEC business school in Paris and senior fellow at Wharton's Mack Institute for Innovation Management.

"Frankly, it's very hard to be optimistic about Europe. There are lots of issues." - Mauro Guillen

"Low inflation and deflation are becoming major problems," Chatain notes. The inflation rate has "been very far below the European Central Bank's 2% target for a very long time, which makes debt consolidation much more difficult." Inflation has stayed precariously low, hovering at 0.3%. Spain and Greece have actually been in deflation, a trend that could spread to the rest of Europe.

Unemployment in Europe, with the exception of the U.K., is in the double digits and not forecast to drop until 2016. According to Mann, "Consumer spending and investment have consistently failed to pick up, leaving Europe with high unemployment and weak tax revenues." On the positive side, Chatain points out that "the activity rate of adults who can work is actually much better now - as good as it in the U.S. - than it was in the 1990s."

However, within Europe, countries with very different personalities are contributing to an unsteady recovery effort that is affecting the entire continent.
The Greece Drama
One of the first and foremost countries to set the tone in Europe for 2015 is Greece, which has been among the countries that have been hardest hit by the crisis. The OECD predicts Greek unemployment will continue to hover around 25% until 2016, even after the IMF forecast that Greece's unemployment rate would reach no higher than 15% when bailout programs were first put in place in May 2010. Household incomes have fallen by one third and public debt has exceeded more than 175% of Greece's GDP. Governments like Greece ran big deficits and lived off borrowing from the outside world, notes Gomes.

Following a tense drama where Parliament failed to agree on a president in three rounds of voting, Greeks will now go to the polls for an early election on January 25. What's at stake is how the country will adhere to the current austerity regime. "The idea behind the austerity policies is to create sustainable growth, but it's a painful, long process. At least the next five years will be extremely painful," explains Guillén. Greece's opposition political party, Syriza, is quickly gaining momentum and campaigning on a platform to renegotiate the budgetary guidelines imposed by the "troika" - the European Commission, the ECB and the IMF. "Greece has improved but the elections are complicated and adding external concerns," says Gomes.

When the debt of countries like Greece and Spain began to spiral out of control at the beginning of the global recession, there was speculation that the eurozone might fall apart. Draghi vowed to keep the member countries from defaulting. But talk about Greece leaving the eurozone is starting to bubble up again.

In the current situation, Chatain explains the "key underlying issue is that the current debt level is too high and that debt still needs to be further restructured. The only question is whether this happens within the eurozone or outside, and sooner or later. Syriza, if elected, wants restructuring within the eurozone." However, other countries, like Germany, may not want to permit restructuring and may very well allow Greece to leave the eurozone," adds Chatain. German Chancellor Angela Merkel's spokesperson had to calm the waters this week following reports that top German authorities now see a Greek exit from the euro as a manageable risk. The spokesperson said Merkel's position continues to support stabilization of the eurozone without any members dropping out. But speculation was nevertheless rampant that Merkel has come around to the view that a Greek exit from the eurozone ("Grexit") would not be a catastrophic blow to the system.

While Greece's financial tremors aren't sending giant quakes to the European markets yet, the worry is that the political repercussions could rattle other EU countries and jeopardize a eurozone-mandated chance of a Greek revival.

"I think the real issue [for Greece] is the extent of the political contagion." - Franklin Allen

"I think the real issue here is the extent of the political contagion," notes Franklin Allen, Wharton finance professor and executive director of the Brevan Howard Centre at Imperial College in London. "If Syriza wins and manages to renegotiate, then it will lead to parties in other countries doing the same thing. If it is unable to negotiate and decides to leave the euro and defaults instead, then how it does so will be crucial to what other countries do going forward. If it does well, then other countries may do the same thing. If it does poorly in relative terms, then other countries obviously will stay put."
Russia at a Crossroads
The Russian Federation caused chaos in the European markets with the Ukrainian conflict, and oil prices have plummeted in a plunging spiral. Investors and consumers are jittery that Russia will not scrape its way out of a recession. Since European and U.S. sanctions began at the start of August, the rouble has depreciated by 25%. As one of the largest importers of Russian oil and an important trading partner, Europe has been greatly affected by Russia's decisions. "An unstable Russia will destabilize Europe. It's a big energy supplier for European companies. The confrontations and sanctions add uncertainty and apprehension to the markets," notes Guillén.

No one knows exactly how things will all pan out in 2015. President Vladimir Putin could dig his heels in against Europe and the United States, or he could make some moves to stabilize the Russian economy, which will in turn help businesses feel more confident about investing in Europe. "It's very difficult to forecast what will happen with Putin. My own view is that he won't give in to sanctions and will push harder in Ukraine and elsewhere to extend Russian influence," says Allen.

In a recent report, European Union officials said that the sanctions "could pose a larger roadblock to European growth prospects than currently envisaged in the forecast," according to The New York Times. Germany, Poland and other neighboring countries are exposed to Russia. If there was an economic collapse of the Russian economy, the growth in Europe is too slow to absorb the impact without consequences, notes Gomes.
The Slowdown of a Stalwart?
On the other end of the spectrum, stalwart Germany is still the driving engine in the European Union, though its current 1% growth rate is far from turbo-boosting the rest of the continent. Germany is also imposing harsh constraints on its European trading partners, while maintaining the world's largest trade surplus. "We need rebalancing of trade and financial flux within the EU. This requires more inflation in exporting countries," says Chatain.

"Europe has serious problems with demographics. Encouraging population growth and the current generation to work a little longer is important." -Joao F. Gomes

In addition, the country isn't investing very much in infrastructure. While Germany is the only economy that investors trust to make good on its promises, the German government also doesn't "want to engage in as much stimulus as the [U.S.] Federal Reserve has. They want to be more conservative," adds Guillén.

In France, receipts were less than expected, mostly because inflation was almost zero instead of the projected 1%, says Chatain. Reforms to deregulate in small sectors of the economy are actually underway but not as fast as the ECB would like for France to meet its 3% budget deficit target, Chatain adds. Next year, the OECD forecasts growth in France to be 0.8%, an improvement from 2014's 0.4% figure.

Meanwhile, in countries like Spain, Italy and Portugal, tax rates remain extremely high, which discourages people from living there, much less working there, notes Gomes. On top of that, geopolitical weaknesses are affecting the economic recovery. Though Spain is expected to stay on track for a continued 2% growth rate, the country is facing some political unrest with the Catalonia secession question. The country's 24% unemployment rate is expected to decrease as exports improve in 2015, according to the OECD.

Portugal is facing elections with pressure from far-right factions that want to close borders and limit immigration. These developments will affect the longer-term economic recovery for Europe, Gomes says. "Europe has serious problems with demographics. Encouraging population growth and the current generation to work a little longer is important."

One bright spot has been the U.K., which has been one of the fastest growing economies in the Group of Seven countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.) Its strong recovery is expected to continue into 2015. The unemployment rate has been dropping steadily and is expected to reach 5.6% in 2015, according to the OECD. Consumer spending and investment have helped boost the economy. However, there are upcoming elections in May with the ruling Tory party under pressure by far-right political parties. Britain is vulnerable to downward drag if the rest of Europe, its biggest trading partner, doesn't start showing signs of resuscitation.
New Year's Resolutions
The economic outlook for Europe appears frighteningly similar to the way 2014 has panned out. Businesses may still be a bit reticent at pumping in investment. "There's too much on the plate for next year" with political turmoil, high unemployment, low inflation and policy challenges, says Gomes. The geopolitical arena is raising questions with Russia as the wild card, and leadership elections loom large in Greece, Portugal and Britain, which could put a spanner in the works. Far-right factions are increasing influence in many countries, touching the nerves of citizens weary of their governments bowing to the wishes of central European policymakers. The European economic and political situation is leaving little wiggle room for missteps, and dimming hopes for a strong European recovery in 2015. Guillén adds, "Europe is facing enormous problems, and it's very difficult to be optimistic."

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Europe in 2015: Uncertain, Uneven and Unpredictable

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The "sick man" of Europe may very well be all of Europe. Since the Great Recession of 2008-2009, growth has been generally slow and painful, and the danger of prolonged stagnation in Europe is a very real possibility. The euro has dropped to its lowest value in nine years.

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Since the great recession of 2008-2009, growth is slow and painful, with the danger of prolonged stagnation which is a likely possibility. 

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Since the great recession of 2008-2009, growth is slow and painful, with the danger of prolonged stagnation which is a likely possibility. 

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The euro had dropped to the lowest value in 2015 as compared to the past 9 years.

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But now, It may be difficult for Europe to regain and go back to its original power as constant efforts to help their economy have not been exactly successful hence, it shows the need of for better policies to help the economy.

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But now, It may be difficult for Europe to regain and go back to its original power as constant efforts to help their economy have not been exactly successful hence, it shows the need of for better policies to help the economy.

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- Shermaine Lim

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I used to think that Europe had one of the greater influences in the world economy.

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I used to think that Europe had one of the greater influences in the world economy.

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- Shermaine Lim

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But now i think that Europe is now in serious condition, it would be quite difficult for them to go back to being the most powerful economy. 

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But now i think that Europe is now in serious condition, it would be quite difficult for them to go back to being the most powerful economy. 

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-Evangel

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Introduction to the main economic and financial structures of the euro area economy.

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As in other highly developed economies, the service sector has the largest share of total output, followed by the industrial sector, while the share of agriculture, fishing and forestry is relatively small. The euro area is also one of the world’s largest economies in terms of population, with almost 340 million people. Exports of goods and services are 26.5% of GDP. Imports of Goods and services is 23.3% of GDP ( European Central Bank, Eurosystem) 

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As in other highly developed economies, the service sector has the largest share of total output, followed by the industrial sector, while the share of agriculture, fishing and forestry is relatively small. The euro area is also one of the world’s largest economies in terms of population, with almost 340 million people. Exports of goods and services are 26.5% of GDP. Imports of Goods and services is 23.3% of GDP ( European Central Bank, Eurosystem) 

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Exchange rate policy. A depreciation of the ER lowers the prices of domestically produced goods and services relative to foreign products. The country's exports are now relatively cheaper , if we assume our exports to be price elastic, a decrease in price would lead to a more than proportionate increase in demand. Which causes (x-m) to rise and in turn increasing AD. 

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Exchange rate policy. A depreciation of the ER lowers the prices of domestically produced goods and services relative to foreign products. The country's exports are now relatively cheaper , if we assume our exports to be price elastic, a decrease in price would lead to a more than proportionate increase in demand. Which causes (x-m) to rise and in turn increasing AD. 

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Expansionary monetary policy. Cuts in interest rates can stimulate the demand for money and thereby boost consumption. With lower interest rates, households are more likely to borrow money from banks, as the cost of borrowing decreases. Purchasing goods and services on credit has also become cheaper. Lower interest rates also leads to the lowering of opportunity cost of spending since savings in the bank offers low returns . With a raise in consumption, assuming ceteris paribus, as AD increases, GPL will also increase. For firms, the lowering of interest rates would also decrease the cost of borrowing for firms. This leads to more investment projects as expected rate of return is now higher with higher profits . With a rise in investment, AD also increases. Ceteris paribus.

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Expansionary monetary policy. Cuts in interest rates can stimulate the demand for money and thereby boost consumption. With lower interest rates, households are more likely to borrow money from banks, as the cost of borrowing decreases. Purchasing goods and services on credit has also become cheaper. Lower interest rates also leads to the lowering of opportunity cost of spending since savings in the bank offers low returns . With a raise in consumption, assuming ceteris paribus, as AD increases, GPL will also increase. For firms, the lowering of interest rates would also decrease the cost of borrowing for firms. This leads to more investment projects as expected rate of return is now higher with higher profits . With a rise in investment, AD also increases. Ceteris paribus.

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Expansionary Fiscal Policies to increase AD to resolve deflation. An expansionary fiscal policy will involve increasing government expenditure and decreasing taxes to boost AD hence GPL.  An increase in development expenditure, such as public projects will immediately raise AD. Increased in transfer payments will raise consumption expenditure but not by the full extent of the increase in transfer payments. This depends on their marginal propensity to consume. The threat to deflation might be reduced through lower direct taxes to boost households disposable income which leaves people with more to spend. Consumption expenditures will rise, thereby shifting the AD rightward. 

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Expansionary Fiscal Policies to increase AD to resolve deflation. An expansionary fiscal policy will involve increasing government expenditure and decreasing taxes to boost AD hence GPL.  An increase in development expenditure, such as public projects will immediately raise AD. Increased in transfer payments will raise consumption expenditure but not by the full extent of the increase in transfer payments. This depends on their marginal propensity to consume. The threat to deflation might be reduced through lower direct taxes to boost households disposable income which leaves people with more to spend. Consumption expenditures will rise, thereby shifting the AD rightward. 

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Unemployment in Europe, with the exception of UK is in the double digit, but it dropped a bit in 2016.

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Unemployment in Europe, with the exception of UK is in the double digit, but it dropped a bit in 2016.

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Low inflation rates and deflation are becoming major problems for Europe. The inflation rate has been very far below the European Central Bank 2% target for a very long time, which makes debt consolidation much more difficult. (Wharton University Of Pennsylvania)  Deflation can lead to a vicious cycle of decreased spending and increased unemployment. Deflation also causes a reduction in investment spending becuase businesses lose confidence in the economy and invest less as prices of their good and services fall, and profit margins are reduce

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Low inflation rates and deflation are becoming major problems for Europe. The inflation rate has been very far below the European Central Bank 2% target for a very long time, which makes debt consolidation much more difficult. (Wharton University Of Pennsylvania)  Deflation can lead to a vicious cycle of decreased spending and increased unemployment. Deflation also causes a reduction in investment spending becuase businesses lose confidence in the economy and invest less as prices of their good and services fall, and profit margins are reduce

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I used to think that Europe was one of the most powerful economies in the world. 

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I used to think that Europe was one of the most powerful economies in the world. 

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-Evangel Tan

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Isabelle:
Evangel:
Shermaine:
Lee Wai

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Now, I want you to think about how your ideas about Europe's economy has changed as a result of what your team has been discussing whilst completing the task above. Again in just a few sentences write down what you now think about  Europe's economy. Start your sentences with,

“But now, I think…”

Each of you must post your response in the space below this box.

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Task 3: Based on the findings from Task 1, One of your team members will need to address the policies to solve this problem.

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Task 3: Based on the findings from Task 1, One of your team members will need to address the policies to solve this problem.

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Explain and evaluate the use of 3 policies

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Task 2: One of your team member will also need to find out the current nature or structure of your economy, supported with research (eg news paper articles or video)

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Task 2: One of your team member will also need to find out the current nature or structure of your economy, supported with research (eg news paper articles or video)

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For example, is it a small and open economy? Is it a large economy? Is the economy an export-driven economy? Is it undergoing any structural changes? Please upload the links here too.

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 Task 1: Two of your team members in your cabinet need to identify the top macroeconomic problems your country is facing. Other than the video clip and newspaper provided in this page, you will need to do research (eg news  paper articles) and thereafter post in this wall.  Explain the potential sources of these macroeconomic problems your country is facing.

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 Task 1: Two of your team members in your cabinet need to identify the top macroeconomic problems your country is facing. Other than the video clip and newspaper provided in this page, you will need to do research (eg news  paper articles) and thereafter post in this wall.  Explain the potential sources of these macroeconomic problems your country is facing.

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Please write your response here, or you may just add new post. Use economic analysis (for example ADAS analysis) in your answers where possible.

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THE world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan's economy is struggling and China's growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond. But the biggest economic threat, by far, comes from continental Europe.

Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years. Its leaders have squandered two years of respite, granted by the pledge of Mario Draghi, the European Central Bank's president, to do "whatever it takes" to save the single currency. The French and the Italians have dodged structural reforms, while the Germans have insisted on too much austerity. Prices are falling in eight European countries. The zone's overall inflation rate has slipped to 0.3% and may well go into outright decline next year. A region that makes up almost a fifth of world output is marching towards stagnation and deflation.

Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the euro zone poses far greater risks. Unlike Japan, the euro zone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take fright, populist politicians will gain ground, and-sooner rather than later-the euro will collapse.

This parrot has ceased to be

Although many Europeans, especially the Germans, have been brought up to fear inflation, deflation can be still more savage (see article). If people and firms expect prices to fall, they stop spending, and as demand sinks, loan defaults rise. That was what happened in the Great Depression, with especially dire consequences in Germany in the early 1930s.

So it is worrying that, of the 46 countries whose central banks target inflation, 30 are below their target. Some price falls are welcome. Tumbling oil prices, in particular, have given consumers' incomes a boost (see article). But slowing prices and stagnant wages owe more to weak demand in the economy and roughly 45m workers are jobless in the rich OECD countries. Investors are starting to expect lower inflation even in economies, such as America's, that are growing at reasonable rates. Worse, short-term interest rates are close to zero in many economies, so central banks cannot cut them to boost spending. The only ammunition comes from quantitative easing and other forms of printing money.

The global lowflation threat is a good reason for most central banks to keep monetary policy loose. It is also, in the longer term, a prompt to look at revising inflation targets a shade upwards. But the immediate problem is the euro area.

Continental Europe's economy has plenty of big underlying weaknesses, from poor demography to heavy debt and sclerotic labour markets. But it has also made enormous policy mistakes. France, Italy and Germany have all eschewed growth-enhancing structural reforms. The euro zone is particularly vulnerable to deflation because of Germany's insistence on too much fiscal austerity and the ECB's timidity. Even now, with economies contracting, Germany is still obsessed with deficit reduction for all governments, while its opposition to monetary easing has meant that the ECB, to the obvious despair of Mr Draghi, has done far less than other big central banks in terms of quantitative easing (notwithstanding this week's move to start buying "covered bonds").

If there was ever logic to this incrementalism, it has run out. As budgets shrink and the ECB struggles to convince people that it can stop prices slipping, a descent into deflation seems all too probable. Signs of stress are beginning to appear in both the markets and politics. Bond yields in Greece have risen sharply, as support for the left-wing Syriza party has surged (see article). France and Germany are trading rhetorical blows over a new budget proposal coming out of Paris.

Joining the bleedin' choir invisible

If Europe is to stop its economy getting worse, it will have to stop its self-destructive behaviour. The ECB needs to start buying sovereign bonds. Germany's chancellor, Angela Merkel, should allow France and Italy to slow the pace of their fiscal cuts; in return, those countries should accelerate structural reforms. Germany, which can borrow money at negative real interest rates, could spend more building infrastructure at home.

That would help, but not be enough. It is a bit like the early years of the euro debacle, before Mr Draghi's whatever-it-takes pledge, when half-solutions only fed the crisis. Something radical is needed. The hitch is that European law bans many textbook solutions, such as ECB purchases of newly issued government bonds. The best legal option is to couple a dramatic increase in infrastructure spending with bond-buying by the ECB. Thus the European Investment Bank could launch a big (say €300 billion, or $383 billion) expansion in investments such as faster cross-border rail links or more integrated electricity grids-and raise the money by issuing bonds, which the ECB could buy in the secondary market. Another possibility would be to redefine the EU's deficit rules to exclude investment spending, which would allow governments to run bigger deficits, again with the ECB providing a backstop.

Behind all this sits a problem of political will (see article). Mrs Merkel and the Germans seem prepared to take action only when the single currency is on the verge of catastrophe. Throughout Europe people are hurting-in Italy and Spain youth unemployment is above 40%. Voters vented their fury with the established order in the EU's parliamentary elections earlier this summer, and got very little change. Another descent into the abyss will test their patience. And once deflation has an economy in its jaws, it is very hard to shake off. Europe's leaders are running out of time.

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THE world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan's economy is struggling and China's growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond.

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Video Clip on Eurozone economy: Italy

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How did Italy become more sceptical about membership in the EU? FT Rome bureau chief James Politi visits Parma in northern Italy and asks students, shop owners, the mayor and business people about the matter.

Transcript

See our accessibility page for more information about transcripts

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How did Italy become more sceptical about membership in the EU? FT Rome bureau chief James Politi visits Parma in northern Italy and asks students, shop owners, the mayor and business people about the matter. See our accessibility page for more information about transcripts

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Videoclip on the Eurozone Economy

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The European Central Bank has jolted investors with a bold package designed to stimulate the eurozone's economy, cutting interest rates to a new low and expanding QE. FT economics editor Chris Giles talks to FT editor Lionel Barber about whether it will be enough.

Transcript

See our accessibility page for more information about transcripts

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The European Central Bank has jolted investors with a bold package designed to stimulate the eurozone's economy, cutting interest rates to a new low and expanding QE. FT economics editor Chris Giles talks to FT editor Lionel Barber about whether it will be enough.

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Task 4: Based on the findings from Task 1,2 & 3, the group leader will evaluate and synthesize (similar to writing evaluative conclusion) whether the use of these policies will be effective in addressing these macroeconomic problems. 

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Task 4: Based on the findings from Task 1,2 & 3, the group leader will evaluate and synthesize (similar to writing evaluative conclusion) whether the use of these policies will be effective in addressing these macroeconomic problems. 

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You may wish to use specific judging criteria to assess the suitability of these policies.

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As an economic advisor (group leader), your role is to recommend and justify whether the use of policies have been effective in tackling recent macroeconomic problems faced by your country. Your job is to discuss with a panel of ministers (your team members) to do research and to propose solutions (policies) to solve these problems. Thereafter, you need to evaluate if the use of these policies  are effective or appropriate for your country.

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Before commencing the activities (Task 1 to 4 below) spend 3 minutes to think of this question:

You may have some initial ideas about Eurozone economy. In just a few sentences, I want you to write what it is that you used to think about Eurozone economy. Take a minute to think back and then post your response in the following format:

“ I used to think that Europe is ..........................

Each of you must post your response in the space below this box.