Trade and Development Report 2016 - Europe Facts & Figures

• Growth in the euro zone accelerated from 0.9 per cent in 2014 to 1.7 per cent in 2015. Although no further acceleration is expected in 2016. This improvement did not result from an expansion of net exports, despite the depreciation of the euro in 2014–2015, but rather from higher domestic consumption and investment levels, with some increase in real wages as a result of rises in the minimum wage and falling energy prices. (TDR p. 4) European exports increased with the acceleration of trade within the continent, which accounts for roughly two thirds of European total trade. European exports to the United States were also robust. By contrast, exports to China and other large developing countries and economies in transition appeared to be subdued. (TDR p. 8)

• Recovery in the euro zone has lagged behind that of the United States, in part because of the more timid use of monetary policy in the years immediately following the crisis and a greater proclivity for severe austerity measures in some members of the zone. The tentative pick-up of growth from 2015 seems likely to stall this year, and could even be reversed due to the uncertainty triggered by the announced departure of the United Kingdom from the EU. Economic growth continues to be held back by weak domestic demand and only sporadic signs of an improvement in real wages. Efforts to tackle the sharply diverging economic performances of the countries in the euro zone are complicated by political uncertainties, such as the ongoing migration crisis, and doubts about the future pace and direction of European integration. (TDR p. I)

• European economies outside the euro zone have performed better in recent years, mainly because the monetary authorities in many of those countries have been willing, and able, to orchestrate financial bubbles. The economy of the United Kingdom, even without the threat of Brexit, was destined for a difficult period owing to its high level of indebtedness and a persistently large trade deficit. The longer term consequences of the Brexit vote are still unclear, given the unprecedented nature of the decision and the political uncertainty it has created, though growth will undoubtedly slowdown in the short term. Just how steep the drop could be, given the highly financialized and flexible markets in the United Kingdom, is difficult to predict. (TDR p. III)

• The justification for the growth of manufacturing is not only economic, but also geopolitical and social. In today’s globalized economy, a country that lacks a significant manufacturing sector may eventually face demand obstacles to growth and chronic balance-of-payments constraints, making it vulnerable to decisions of external financial agents and to policy conditions set by official creditors. Deindustrialization in developed economies, particularly in some European economies, has not been completely smooth and spontaneous to the extent that it has been associated with institutional and financial transformation and regressive income distribution. These factors slowed down the growth of aggregate demand and constrained the capacity of services to productively absorb labour released from industry, leading to higher and persistent underemployment or unemployment rates. (TDR p.59 and 66)

• The period of rapid economic growth in developed countries between the early 1950s and the late 1970s also saw profits and investment broadly move in tandem in France, Japan, the United Kingdom and the United States (chart 5.1). Retained earnings from corporate profits represented an important source of savings, which financed capital accumulation that helped the adoption of new technologies and spurred productivity growth. This, in turn, generated higher incomes, which then led to more profits and therefore savings, thereby creating an investment-profit dynamic. Since the 1980s, there has been an increasing tendency for companies to channel their profits to shareholders either in the form of dividend distribution or share repurchase. Given that dividend distribution remained robust after the 2008-2009 crisis, the slowdown in investment cannot be attributed solely to the need to repair companies' balance sheets. (TDR pp. 142-143)

• This financialization of corporate strategies and the rise of shareholder primacy in developed economies may have contributed to the worsening of income distribution and a deflationary bias through slower growth of global demand. A major feature of this trend has been that a growing share of corporate profits, rather than being used for corporate reinvestment, is being used for purposes such as dividend payments and equity repurchases. This ultimately strengthens the role of financial intermediaries in capital allocation, which in turn contributes to economic instability and financial imbalances. (TDR p.168)

• The overreliance on monetary policy in most European economies, combined with fiscal austerity, has not only failed to boost aggregate demand and output, but has also contributed to growing instabilities in the international financial markets and the renewed build-up of financial imbalances in many developing and emerging economies. Abundant cheap credit suddenly flooding these economies has supported asset price increases and increased exchange rate volatility, fueling financial booms and busts, rather than facilitating sustained and productive capital accumulation. (TDR p. 162)