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Latvia adopts euro – Let’s revisit eurozone divergence and convergence

January 6, 2014 in Euro Zone, Historical and Research

Eurozone flagLatvia became the 18th country to enter the euro-zone and that brings  one more country with negative inflation under the umbrella of the single currency i.e. the euro. On the other hand this new addition takes the leadership position as far as the real GDP growth is considered. With the expected GDP growth of 4%, Latvia comes at the number 1 position in the euro zone. Euro has always attracted it’s fair, and many times unfair, share of criticism. The main arguments have always been same even if the words might have been different that those have been about  the economic diversity of the member states, or countries in this regard.

Criticism about the euro project

The main argument against the euro project has been whether or not the member countries meet the requirements to make this as an Optimum Currency Area (OCA) or Optimum Currency Region (OCR). The main requirements for an  Optimum Currency Area is flexibility to adopt to the changes in the economic situations and the convergence of the economic models and approaches.

Optimum Currency Area

  • Smooth flow of labor (labour) and capital with the changes in demand and supply situation.
  • Efficient fiscal flow mechanism with the openness for the government revenues to flow from stronger economic areas to the weaker ones in the times of crisis.
  • Not too much diversity and barriers which prevent the adoption to strategic, proactive and uniform monetary policies.

With Latvia’s inclusion, it’s time to revisit the divergence and convergence in the euro-zone, especially after a period of severe crisis situation in the euro-zone when the serious question were being raised about the survival of the euro. The following table highlights some of the economic factors like gross domestic product (GDP), GDP per capita, GDP growth rate, inflation rate, unemployment rate, minimum wages, and governments’ debt to GDP ratio. Please note that the minimum wages are not applicable in some of the countries. Germany is supposed to declare minimum wage of euro 8.50 per hour from the year 2015. It is estimated that 17% of the workforce in Germany earns less than this amount.

Key economic data of Euro zone member countries

Country Member since GDP in billion euro –
Population in millions
Latest data during the years 2012 and 2013
GDP per capita
(Prices- Year 2012)
Real GDP growth – expected in 2013 Inflation (Yearly basis)
Year – end of 2013
Average Inflation (Yearly basis)
Year 2000
(harmonized) end of the year 2013
Minimum wages applying Purchasing Prices Parity Debt to GDP – end of 2012
Austria 1-Jan-1999 € 323.28 8.44 € 36,400 0.40% 1.40% 2.34% 4.80% N.A. 74.00%
Belgium 1-Jan-1999 € 391.31 11.14 € 34,000 0.10% 0.97% 2.54% 9.00% €1501.82 99.80%
Cyprus 1-Jan-2008 € 18.59 1.13 € 20,000 -8.70% -2.13% 4.86% 17.00% N.A. 86.60%
Estonia 1-Jan-2012 € 17.68 1.34 € 12,700 1.30% 1.50% 4.01% 8.80% €320 9.80%
Finland 1-Jan-1999 € 202.25 5.41 € 35,600 -0.60% 1.40% 3.04% 8.40% N.A. 53.60%
France 1-Jan-1999 € 2,113.92 65.7 € 31,100 0.20% 0.70% 1.69% 10.90% €1430.22 90.20%
Germany 1-Jan-1999 € 2,750.60 81.89 € 32,299 0.50% 1.34% 1.44% 5.20% N.A. 81.00%
Greece 1-Jan-2001 € 201.52 11.28 € 17,200 4.00% -2.90% 3.15% 27.40% €683.76 156.90%
Ireland 1-Jan-1999 € 170.13 4.59 € 35,700 0.30% 0.30% 5.55% 12.60% €1461.85 117.40%
Italy 1-Jan-1999 € 2,488.26 60.92 € 25,700 -1.80% 0.66% 2.54% 12.50% N.A. 127.00%
Latvia 1-Jan-2014 € 22.95 2.03 € 10,900 4.00% -0.40% 2.64% 11.90% €284.74 70.00%
Luxembourg 1-Jan-1999 € 46.21 0.53 € 83,600 1.90% 1.20% 3.15% 5.90% €1874.19 21.70%
Malta 1-Jan-2008 € 7.06 0.418 € 15,300 1.80% 0.30% 3.04% 6.40% €697.42 71.30%
Netherlands 1-Jan-1999 € 624.71 16.77 € 35,800 -1.00% 1.47% 2.31% 6.90% €1477.8 71.30%
Portugal 1-Jan-1999 € 171.91 10.53 € 15,600 -1.80% -0.20% 2.85% 15.70% €565.83 124.10%
Slovakia 1-Jan-2009 € 74.12 5.41 € 13,200 0.90% 0.50% 12.17% 13.90% €337.7 52.40%
Slovenia 1-Jan-2007 € 36.79 2.06 € 13,200 -2.70% 0.70% 8.87% 10.10% €783.66 54.40%
Spain 1-Jan-1999 € 1,091.34 47.27 € 22,700 -1.30% 0.20% 3.43% 26.70% €752.85 86.00%

Sources: EuroStat (European commission), TradingEconomics and IndexMundi and world Bank.

There were 11 countries which joined the hands when the Euro came into the existence on January 1, 1999. The physical currency came into the existence much later in the year 2002. The virtual euro existed by pegging the exchange rates of the currencies of the member nations within a margin during 1st January 1999 to 2002 when the physical euro banknotes and coins were launched. The zone expanded to it’s current status of 18 countries under the umbrella.

The above data shows that out of 18 member countries, 8 countries are having negative growth of GDP i.e. the economies are shrinking, 4 are having negative inflation rate, 4 countries have a government debt to GDP ratio well over 100% with Spain expected to join that club soon and 10 countries have an unemployment level of over 10% with Spain and Greece well over 25%. GDP per capita has a wide range with Latvia at the bottom with euro 10,900 to Luxembourg at the top with euro 83,600. Latvia is also at the bottom as far as the minimum wages are concerned with a monthly minimum wage of 284.74 euro while Luxembourg again tops in this category with a minimum wage of 1874.19 euro per month. Belgium follows with 1501.82 euro per month with Ireland and France close behind with respectively euros 1461.85 and 1430.22 per month respectively.

Diversities are always there even in any single country but the easy flow of workforce and capital are much simpler in case of a single government and no issues about geographical barriers etc. The fiscal transfers or governmental aid to geographies in need are also simpler and efficient when there is one single country and single central government. Another major factor which comes as another strong barrier is lack of single language which again prevents easy flow of labor even if other hurdles are taken care of. Considering all these an economic zone with a group of nations would always have  challenges in becoming an efficient “Optimum Currency Area”.

While we are talking about the individual countries, let’s also check into some the comparison of euro-zone as a whole and the United States.

Euro zone and the U.S. Key Economic Data Comparison

Economic region GDP in billion euro –
Population in millions
Latest data during the years 2012 and 2013
GDP per capita
(Prices- Year 2012)
Real GDP growth – expected in 2013 Inflation (Yearly basis)
Year – end of 2013
Average Inflation (Yearly basis)
Year 2000
(harmonized) end of the year 2013
Debt to GDP – end of 2012
US 15,680 314 49966 1.60% 1.20% 3.38% 7.00% 101.60%
EU 12195 337 31949 -0.40% 0.90% 2.03% 12.10% 90.60%

Please note that there may be some minor differences in the data because of rounding off to a whole number at some places where it does not matter much e.g. population etc and also some minor differences because of compilation of historical data from various sources even when the sources are authentic.

11 EU Countries Embrace the ‘Tobin Tax’

January 23, 2013 in Euro Zone


Not surprisingly, the crisis in the Euro zone led to renewed calls for the imposition of a financial transaction tax, principally to pay for bailing out shaky banks, reducing risky bets and provide budgetary support to cash-strapped Euro zone governments. Derivatives also magnified the fallout of the financial crisis, and therefore could be reined in through the tax.

However, there was no unanimity on the proposal, and finally, on January 22, 2013, a smaller group of 11 countries that included key states France and Germany were given the go-ahead to implement the tax by the Euro zone finance ministers during their meeting in Brussels.

The UK and 15 other EU members have not agreed to the proposal. The UK and Sweden objected on the grounds that the tax would be effective only if it could be implemented globally. Sweden has opposed the tax also on the basis of its own experience with the tax which had to be repealed. Luxembourg and Cyprus declined to participate due to their status as offshore centers.

Tobin Tax

The Financial Transactions Tax is proposed to be charged on shares and bonds at the rate of 0.1% of their value, and on derivatives at the rate of 0.01% of the contract value. It would be applied to any financial instrument transaction excepting primary market issues and bank loans, and would become payable if at least one party to the transaction is based in the implementing country.

It is estimated that the tax could garner as much as €35 billion within the 11 implementing countries.

James Tobin

American economist James Tobin (March 5, 1918 – March 11, 2002) served on the Board of Governors of the Federal Reserve and taught at Harvard and Yale. An exponent of Keynesian economics, he was awarded the Nobel Memorial Prize for Economic Sciences in 1981.

Tobin was critical of the speculation in international currency markets, which he thought hampered the conduct of genuine business by inducing risky and volatile currency movements. He proposed the introduction of a tax on these transactions that would make it unprofitable for speculators to indulge in speculative and short-term ‘round-tripping’ currency transactions. This so-called ‘financial transaction tax’ soon became widely known as the Tobin Tax. Tobin floated the idea of this tax in 1972 amidst the turmoil created by the end of the Bretton Woods system.

Tobin’s Concept

Since then, the mention of the Tobin Tax generally cropped up during times of other fiscal upheavals such as the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis. In 2001, Tobin detailed his concept as follows:

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied – let’s say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties’ crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.

Objections to Tobin’s Concepts

Unfortunately, the tax has been found to be difficult to implement, principally due to the inherent tendency to avoid it through various stratagems, which make it necessary that it be in force throughout a region rather than only a few willing countries.

There are also valid objections to the almost certain loss of liquidity in the markets due to the resulting curb on speculation.

Also, with banks already facing pressures on margins, the tax would have the unintended consequences of triggering further consolidation among banks, an unpleasant thought in the ‘too-big-to-fail’ scenario.

Opponents of the move also say that the objectives of the tax might as well be achieved through other taxes already in place, and that it would place another burden on consumers and/or savers. It would be particularly hard on pensioners.

Lars Oxelheim, Professor of International Business and Finance at Sweden’s Lund University says: “A 30-year-old worker, retiring at the age of 65, having a pension fund yielding 5 per cent per annum, with a turnover of the portfolio of 1.5 times a year, will see his pension reduced by 5 per cent due to the Tobin tax.”

The tax could also lead to a fall in GDP, and according to ECB President Mario Draghi, the tax could lead to a further flight of investment capital out of Europe.

ZEW Indicator of Economic Sentiment in Germany – January 2013

January 23, 2013 in Euro Zone

The Centre for European Economic Research (ZEW) announced that its ZEW Indicator of Economic Sentiment for Germany increased by 24.6 points in January 2013.

This monthly indicator is determined from a survey in which about 350 financial experts participate. The indicator is derived by computing the difference between the share of analysts that are ‘optimistic’ and those that are ‘pessimistic’ about the performance of the German economy over the ensuing six months.

The survey indicates that financial market experts now view Germany’s economic condition over the next six months’ timeframe in a more positive light. According to ZEW President Prof. Dr. Dr. h. c. mult. Wolfgang Franz, the results of the survey could also be interpreted to mean that German companies now think the uncertainty surrounding the Eurozone has abated, and these companies may now proceed with capital investment hitherto kept on hold.

The latest January reading of 31.5 puts the ZEW indicator for Germany for “Economic Expectations” at the highest level witnessed after May 2010. On a note of concern, the country’s trade partners are still economically weak, and this may impinge on growth in Germany, resulting in only moderate growth during 2013.



Germany – An Optimistic Economic Picture Amidst Weak Macroeconomic Trends

January 17, 2013 in Euro Zone

The 2013 outlook presented by the Federal Ministry of Economics and Technology of Germany painted an optimistic picture amidst weak data.

“We have every reason to be optimistic: Germany will continue to lead the way for the economy and the labor market in Europe in 2013. We expect that the weak period this winter will be overcome in the course of the year and that our economy will gain a firm foothold again. We expect the economy to grow by 0.4% in 2013. In 2014, we anticipate even stronger growth, at 1.6%. The labor market will remain stable at a record high, incomes will continue to rise, and the development in prices will be moderate. This success is not least due to this government’s policy of pro-growth budget consolidation.”, Federal Minister of Economics and Technology, Philipp Rösler, said yesterday in Berlin.

German Optimism around weak macroeconomic data and trend

(As presented by Federal Minister of Economics and Technology of Germany)

GDP and Unemployment

Decline in Gross Domestic Product

Germany has lowered down the yearly GDP growth forecast for 2013 to 0.4% from the previous 1.0%. This is lower than the GDP growth of 0.7% during 2012. Philipp Rösler mentioned that a growth to 1.6% is expected during 2014.

Increase in German unemployment

The year on year change in the average unemployment during 2012 was 6.8% according to the estimates of Federal Labor Office. The projection shows an increase in the same to 7.0% during 2013.

The yearly change in total employment during 2011 was 1.4% which had declined to 1.0% during 2012. The outlook for 2013 shows 0% growth in the total employment.

When we talk about the total unemployment level we should also consider the population. Germany has been seeing a reduction of population. The historical population data is shown in the following chart:

Germany population

GDP by Expenditure

The change in the private consumption expenditure had seen a decline from 1.7% to 0.8% from 2011 to 2012. Further decline is expected to 0.6% during 2013.

during 2012 the investment in equipment had gone down to -4.4% from the previous year’s 1.7%. A negative change of -1.3% is expected during 2013.

An improvement is expected in the investment in construction. 2012 had seen a decline of -1.1% from previous year’s change of 5.8%. The outlook of 2013 shows a positive change of 1.3%.

Balance of Trade

German Exports

The year on year change in exports during 2012 was 4.1% which was quite less than previous year’s 7.8%. Year 2013 projection shows further decline to a change of 2.8%.

German Imports

The percentage yearly change in the total imports, which had seen a negative growth from 2011’s 7.4% to 2.3% in 2012 is expected to rise to 3.5% during 2013.

Germany – Balance of Goods and Services Trend

With the volume of exports going down and imports rising up the balance of goods and services had declined in 2012. The year on year change was 2.6% which was quite lower than the change witnessed in 2011 which was 2.8%. The projections for 2013 stand at  the same level i.e. 2.6%.

The macroeconomic figures at a glance

German economic key figures

Germany’s Move to Repatriate its Gold Reserves

January 16, 2013 in Euro Zone

German newspapers’ prediction that a move is afoot by the Bundesbank to repatriate at least some of its gold reserves held with the New York Fed and the Bank of France, has come true.

The Bundesbank announced today a “new storage plan” that seeks to store half of its gold reserves in its own vaults by 2020.

According to the bank, the new storage plan gives weightage to “the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold trading centers abroad within a short space of time.”

The bank also clarifies that since “France, like Germany, also has the euro as its national currency, the Bundesbank is no longer dependent on Paris as a financial center in which to exchange gold for an international reserve currency should the need arise. As capacity has now become available in the Bundesbank’s own vaults in Germany, the gold stocks can now be relocated from Paris to Frankfurt.

There are, however, motives that could be ascribed to this move to get back a part of the almost 3,400 tons of gold held abroad by Germany.

One, the Bundesbank may be paying heed to long-standing calls to audit its gold reserves for their real quantity and quality. Germany moved its gold reserves abroad during the Cold War for their security, and it appears that it missed the 2010 audit after the one in 2007. The Bundesbank has not been very forthcoming about the reasons for missing the audit.

Two, it could be that Germany is now worried about the economic conditions prevailing in the United States with its impending problems relating to the debt ceiling, and France, located in debt-afflicted Euro zone. This time Germany’s gold may need to be protected not from Cold War hostilities, but fiscal crisis confiscation. Considering the worsening scenario, Germany may feel that home is the best place for its $177 billion worth of yellow metal.

Three, the Bundesbank may want to look good in the eyes of the German people, reassuring them with its solidity, while the region is afflicted with economic crisis.

Whatever may be the true reason, the move could create an environment of doubt and mistrust between the major central banks of the world. More particularly, it may show the world is no longer confident in the UK or the US as the custodians for its gold reserves. It may be recalled that Hong Kong and Venezuela also moved their bullion home earlier.


German GDP Growth – 2012

January 15, 2013 in Euro Zone

Germany’s GDP growth during 2012 came in at 0.7%, marginally missing expectations of 0.8% growth. This was much worse than the 3% growth witnessed during 2011 and 4.2% reported during 2010.

The reading puts a cloud on the GDP growth forecast for 2013, and adds meaning to the Bundesbank’s prognosis that GDP will grow by an insignificant 0.4% this year.

Most of the meagre growth may be credited to the country’s foreign trade. Imports were up by 2.3% during the year while exports grew 4.1%, the import-export balance therefore creating GDP growth of 1.1%.

“In 2012 the German economy proved to be resistant in a difficult economic environment and withstood the European recession”, said Roderich Egeler, President of the Federal Statistical Office.

Unemployment in the Eurozone

January 9, 2013 in Euro Zone

Figures released yesterday for November from Italy reveal that over 37% of young Italians (15-24 years) are unemployed. This is a powder keg-in-waiting for whoever succeeds Prime Minister Mario Monti. When viewed in the context of the overall unemployment rate of 11.1%, the difference appears even starker. Bleak economic conditions in Italy, possibly due to austerity measures, are putting pressure on employment.  In addition, businesses already fearful of the uncertain economic situation are afraid to hire workers in the context of tough labour laws that make firing difficult.

Note that across the pond, in the United States, even a single digit unemployment rate of 7.8% has caused massive concern to the political leadership.  Youth unemployment in Italy has grown for the third month running, and its current level is the highest seen since 1992 when records started.

But Italy is not the only problem area in Europe as far as employment is concerned. The continued overhang of the sovereign debt crisis has put the economies of the region under recessionary conditions that have impacted employment.

Yesterday Eurostat released employment data for the Eurozone, and revealed that the number of people out of work in November reached 18.8 million, catapulting the unemployment rate to a new all-time high of 11.8%. The unemployment rate across the EU area as a whole was 10.7%.

Significantly, both the statistics are up hugely over the same month in 2011, when they reported at 10.6% and 10% respectively.

Here is a look at the country-wise unemployment rates as reported by Eurostat.

European Commissioner for Employment, Social Affairs and Inclusion, Laszlo Andor said “2012 has been another very bad year for Europe in terms of unemployment and the deteriorating social situation,” in his annual review of employment trends.

He also commented that a widening gap was emerging in the performance of the economies between Germany and neighbouring north side economies, which were economically better off than Europe’s southern Mediterranean rim.

Austerity Measures And Strikes And Unrest in Europe

November 14, 2012 in Euro Zone

austerity measures and strikes in spainThe second general strike of the year was called in Spain, demonstrations, partial strikes across Portugal, Italy and Greece and the unions of workers across Europe falling in line for bigger coordinated protests.

Effects Of The Second General Strike

It was estimated that the number of auto workers working in the night shift who joined the strike were some where between 50 to 100%. Over 80% of the metal workers and over 70% of teachers also joined the forces. 50% of the workforce in healthcare sector is estimated to have boycotted the work.

While the drop in the electricity consumption at 12% due to the drop in the production and overall work was much less than the previous general strike  when it was approximately 22% but the growing unrest of the public against the severe austerity measures is evident.

Economic Outlook

The unemployment rate has gone up in Spain by 26%. This is slightly higher than Greece’s 25.4% in this 5th largest economy of European Union with the second highest budget deficit. The budget deficit of Spain in 2011 was slightly higher than 8.5% of the GDP against Greece’s 9.4%.

The Spanish economy has been in recession since 2008 with the GDP growth rate going down.

Spanish GDP Growth Rate

Spanish GDP growth Rate

Though the austerity plans should help government in bridging the gap between spending and revenues to bring the budget deficit in the reasonable and acceptable level as a percentage of GDP but on the other hand the growing unrest and loss of productivity is hurting the GDP.


Greece Gets 2 More Years – Clouds Of Questions Against The Ray Of Hopes

November 14, 2012 in Euro Zone

Another compromise reached in Brussels when European finance ministers met to discuss the ongoing Greece rescue issue. Options have been only two! To risk the Greece to default or compromise on the rescue terms? The latest compromise has been to grant Greece 2 more years i.e. up to 2016 for bringing down the budget deficit to the permissible level of 2% of GDP.

Greece GDP and Budget Deficit

In 2011 the nominal GDP of Greece was Euro 208.532 billion and GDP considering the purchase power parity was Euro 234.383 billion. The budget deficit as percentage of GDP in 2011 was 9.5%. During the first 10 months of 2012 the state budget deficit was estimated to be Euro 12.29 billion and was little better than the target of Euro 13.57 billion. But if we consider it on pro-rata basis then Greece may end up with a budget deficit of near close to 7% in 2012. The target for this year is 6.6% and for next year i.e. 2013 the target of budget deficit is 5.2% of the gross domestic product.

Greece Austerity Measures and Side Effects

On one side the austerity measures and spending cuts will help in reducing the budget deficit but on the other hand it leaves us with the questions about the effects of budget cuts of the contraction of economy and overall employment. The unemployment of Greece has already crossed over 25% to 25.4%.

Greece Unemployment Rate

Greece Unemployment Rate - Historical data

The chart shows that continuously increasing unemployment rate in Greece. The budget cuts are surely not going to help this growing rate of unemployment and hence the cyclic negative impacts on the economy.


Today’s Economic Releases (Europe is at the Central Stage)

October 1, 2012 in Euro Zone

PMI (Purchasing Managers Index) reports from both Germany and Euro zone came positive today. September’s  Markit Manufacturing PMI from Germany was 47.4 against the previous 44.7, while the consensus were for 47.3.

Euro zone’s Markit PMI for manufacturing for September was 46.1 against the previous 45.1 and the consensus of 46.0.

UK lagged behind a bit with the Purchasing Managers Index for manufacturing as 48.4 which was less than the previous 49.5 and expected 49.0.

US Manufacturing data is going to be released soon but the expectations are that we may not be getting much positive News from that end also.

European unemployment rate remained at it’s highest level at 11.4% and that would be one of the most important factors to keep pressure on Euro. After all the debt crisis can not be solved in days or months and may take years. The plans and attempts of rescue may bring spikes of optimism but that is just the temporary relief and is just like a mirror and lights which can show a better face even though the face remains same.

The high unemployment issues in Europe in general and the conditions for budget cuts to receive the rescue funds in the countries suffering may make us see some stronger bearish pressures against the common currency in the coming days or even in coming months.