ECB, Monetary Policy and Germany – My Monday column

Mario Draghi’s stance is guarded. His latest press conference gave no indication of the change in communication tone that we are set to see from the European Central Bank in January.
The ECB is finally taking on board the strength of the economic cycle and so its communication stance must adapt to this shift. This is rather good news, as the central bank constantly appeared to be acting in reaction to an environment that could swiftly deteriorate, and this shift can bolster our confidence in the strength and length of the economic cycle. The other point noted by the ECB is the move away from an exclusively inflation-based focus and towards a more broad-based communication tone. This implicitly means that the ECB is extending its reach, but really when it comes down to it, this was already the case: the ECB’s intervention has hinged on the economic cycle rather than inflation since the euro was adopted in 1999. The chart below shows the Markit composite index and the difference in the ECB main refinancing rate over 5 months, and reveals that changes in the second indicator are clearly dictated by changes in the economic cycle, rather than in inflation.

The ECB is picking up its old habits from before the 2007 crisis. Continue reading

2018 – Strong expectations in a world that has changed

The year ahead gives us a number of reasons to be optimistic that I would like to share with you. World trade has taken an upturn, oil prices remain reasonable, and business leaders worldwide have a positive take on their environment. So the starting point for 2018 is solid.

Growth, along with the ensuing employment, will provide an opportunity for all citizens to regain a foothold in a complex and difficult world. Economic policymakers will be responsible for adopting the right reforms to set the stage for a recovery that provides enhanced job creation and reduces uncertainty for each and every member of society. In this respect, France has high hopes on the reforms that will be debated in 2018: the reform to vocational training and job skills lies at the heart of the French government’s roadmap and the policies the authorities adopt in this area will provide the key counterpart to the labor law decrees in making the job market more efficient. Continue reading

Inequalities according to Angus Deaton

The political upheavals and populist incursions of the past few years owe much to widespread perceptions of inequality and economic injustice in advanced economies. While median wages have stagnated, incomes at the top have continued to rise, and there is growing evidence to suggest that the two phenomena are connected.

PRINCETON – Inequality has been named as a culprit in the populist incursions of 2016 and 2017. But what is inequality, and what role does it play in inhibiting or encouraging growth, or in undermining democracy? Does inequality kill, say, by driving people to suicide or to “deaths of despair”? Or is inequality a necessary evil that we must tolerate at certain levels?

These are questions I am often asked. But, truth be told, none of them is particularly helpful, answerable, or even well posed. Inequality is not so much a cause of economic, political, and social processes as a consequence. Some of these processes are good, some are bad, and some are very bad indeed. Only by sorting the good from the bad (and the very bad) can we understand inequality and what to do about it.
Moreover, inequality is not the same thing as unfairness

Read the post here on Project Syndicate

Income inequality, labor market inequality

The report published recently by the Paris School of Economics measures income and wealth inequality around the world and reveals the high share of total income accounted for by the top earners, reflecting a very worrying situation. The report notes that the top 1% of earners worldwide captured 27% of total income growth since 1980 (net of inflation), while the bottom 50% captured only 12% of income growth over the same period. The world’s reference points have definitely changed over this period. Individual country income-inequality trajectories are sometimes even more stark, but inequality in Europe has remained relatively stable since 1980.

Income distribution inequality raises a number of questions, particularly the challenge of achieving strong and sustainable growth. If growth only benefits a very small minority, then our aims cannot merely be restricted to growth at any price. The trickle-down theory whereby the poor derive benefits when the rich get richer is clearly not working, so it is vital to come up with different targets and mechanisms alongside growth to ensure a more balanced society. Continue reading