Download In the Grip of `Secular Stagnation`?

N°28 MARCH 2015
ECONOTE
Societe Generale
Economic and sectoral studies department
EURO ZONE: IN THE GRIP OF ‘SECULAR STAGNATION’?

The euro zone economy has weathered six years since the beginning
of the Great Recession without even remotely approaching a full recovery,
prompting concerns that Europe may face a Japan-style lost decade (now in
its 23rd year). Behind the euro zone’s economic downturn is a historically
unprecedented collapse in investment.

While the economic outlook for 2015 and 2016 is improving, mainly
due to lower oil prices, the economy is expected at best to return to its precrisis potential growth rate in the medium term without catch-up to make up
for output losses since 2008.

The secular stagnation hypothesis is the claim that underlying
changes in saving and investment fundamentals may cause a chronic
shortfall in aggregate demand by lowering the 'natural' rate of interest - i.e.
the interest rate consistent with full employment - below zero. The fall of the
natural interest rate into negative territory is, however, viewed as a key
obstacle to recovery as it prevents monetary policy from being effective,
given the zero lower bound on nominal interest rates.

Consequently, the actual real rate of interest remains persistently
above the natural rate, causing chronically depressed investment demand
that plunges the economy into a low growth equilibrium trap. According to
this hypothesis, remedies include higher inflation and fiscal stimulus. While
the vast bond-buying program undertaken by the European Central Bank is
intended to raise inflation expectations, the Juncker plan aims at boosting
public and private investment.
Marie-Hélène DUPRAT
+33 1 42 14 16 04
[email protected]
ECONOTE | N°28 – MARCH 2015
In his November 2013 speech to the IMF Forum,
Lawrence Summers argued that the US economy may
be suffering from 'secular stagnation' caused by a
secular deficiency in aggregate demand1. The term was
coined in the late 1930s by the economist Alvin
Hansen, who suggested that the Great Depression
might herald a new era of persistently depressed
economy2. Back then, Hansen pinpointed demographic
factors as a major cause of secular stagnation: a
declining birth rate, he argued, meant low investment
demand that was causing an oversupply of savings. In
the years that followed WW2, the secular stagnation
hypothesis lost its relevance because of the baby
boom which altered the population dynamics and the
massive increase in government spending which
effectively put an end to concerns about insufficient
demand.
But the notion of secular stagnation has returned to
centre stage in the academic debate, as six years after
the Great Recession of 2008-9, growth in many
developed economies remains exceptionally low. So
could the advanced world fall victim to the same type
of economic malaise that has plagued Japan for the
last two decades3? For some, the world’s major
developed economies are suffering from a fairly
conventional recovery, albeit slower than usual, but
with normal growth resuming. For others, advanced
economies are facing structural changes that are
making sluggish growth the norm, rather than a
1
Summers, Lawrence (2013), “IMF Economic Forum: Policy Responses to
Crises”, Speech delivered at the IMF Annual Research Conference,
November 8.
2
See Hansen, Alvin (1939) "Economic progress and declining population
growth", American Economic Review, 29(1): 1-15.
3
The bursting of Japan’s huge bubble in equities and real estate in 1989-91
left behind an overhang of debt on the country’s private sector balance
sheets, which set the stage for a dramatic reduction in investment as
corporations gradually paid down their debts. This exacerbated the
underlying shortfall in consumption, leading to more than a decade of
virtually no economic growth (Japan’s so-called 'lost decade').
temporary phenomenon4. While most discussion on
whether major advanced economies are facing secular
stagnation has so far focused on the US, the American
recovery compares favourably to the economic
recoveries in almost all other developed nations,
especially in Europe.
This paper argues that the euro zone may be highly
susceptible to risks of secular stagnation. This is mainly
because of ongoing private sector deleveraging,
combined with a declining working-age population,
which acts as a driving force behind a sustained
downtrend in aggregate demand that may require, if it
is to be countered, a negative real rate of interest.
Moreover, and critically, the euro zone appears little
equipped to address the secular stagnation challenge,
owing to political and institutional considerations. All of
this suggests that we cannot exclude for the euro zone
a long period of slow growth and higher-than-normal
unemployment.
CRISIS, POST-CRISIS: NEW ERA IN THE
DEVELOPED WORLD
AN EXCEPTIONALLY SLOW RECOVERY
The Great Recession of 2008-9 was by far the most
severe economic downturn experienced by advanced
economies since the Great Depression of the 1930s,
but the resumption of growth has proven to be the
worst since the 1930s. No advanced economy has
experienced a V-shaped recovery from the Great
Recession, as might have been expected after a
downturn of such magnitude.
4
See Summers, Lawrence (2014), “US economic prospects: Secular
stagnation, hysteresis, and the zero lower bound”, Business Economics,
49(2): 65-73 National Association for Business Economics; Krugman, Paul
(2013), “Secular stagnation, coalmines, bubbles and Larry Summers”, The
New York Times blog, November 16; Krugman, Paul (2014), “Three charts
on secular stagnation”, The New York Times blog, May 7; Krugman, Paul
(2014), “Secular stagnation in the euro area”, The New York Times blog,
May 17; Teulings, Coen and Richard Baldwin (2014), “Secular stagnation:
Facts, causes, and cures”, Vox eBook, September 10; De Grauwe, Paul
(2015), “Secular stagnation in the euro zone”, VoxEU.org, January 30.
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ECONOTE | N°28 – MARCH 2015
Despite near-zero policy interest rates, unconventional
monetary policies and rising public debt, post-financial
crisis growth in the major developed economies has
been unusually sluggish, falling far short of longer-term
growth trends - gross domestic product today remains
well below its pre-crisis peak in many advanced
economies. This abnormally slow recovery has to be
contrasted with the regular recovery phase of the
business cycle, in which the economy is typically back
to where it started within six months, and catches up to
its longer-term trend within a year.
Since the global financial crisis, Europe and Japan
have consistently fared noticeably worse than the US,
with shorter, shallower recoveries followed by more
pronounced economic relapses. After plummeting by
more than 15% in 2008-09, the Japanese economy
contracted again in 2010-11, yet again in 2012, and
then once again in the second quarter of 2014 when it
shrank by 7.1% in the wake of the sales tax hike.
Likewise, the euro zone saw a deep recession in 200809, it then experienced an historically weak 0.5%
economic recovery in 2009-10, fell back into recession
in the subsequent 18 months driven by the downturn in
the peripheral economies, only to grow by a tepid 0.2%
in 2013-14.
THE GREAT RECESSION IN THE EUROPEAN
PERIPHERY
The recession which affected the periphery of the
European Union is eerily reminiscent of the Great
Depression of the 1930s.
THE UNITED STATES HAS FARED BETTER
After a brief, below-average initial recovery in late 2009,
the US economy has experienced three economic
relapses (slowing or negative GDP growth): in early
2011, in late 2012, and in the first quarter of 2014 when
it dipped into negative territory (-2.9%). In the years
2009-2013, America’s average economic growth rate
has been less than 2% a year, that is, about half its
historical norm. The US recovery, however,
strengthened in the second and third quarters of 2014,
when the economy expanded at its fastest pace in
more than a decade, with a combined 4.25%
annualised pace. The unemployment rate fell to 5.5%
in February - its lowest point since 2008.
The economic damage inflicted by the recession in the
southern European countries (including Ireland) has
been so massive and long-lasting, especially on the
labour markets, that it has been likened to that
experienced by the US during the Great Depression of
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ECONOTE | N°28 – MARCH 2015
the 1930s5. Unemployment remains today at record
highs in these countries, especially among young
people (e.g. over 50% in Spain).
SUB-PAR GROWTH AS THE 'NEW NORMAL'?
By the third quarter of 2014, real gross domestic
product was still well below pre-crisis levels in all the
peripheral countries.
The reasons why the recovery from the global financial
crisis has been so exceptionally sluggish remain a
source of considerable controversy6. Explanatory
theories are many, ranging from declining growth in
aggregate supply resulting from a slowing pace of
innovation7, to failed economic policies, to debt
overhang8, to a permanent shortfall of aggregate
demand due to an excess of desired saving over
desired investment (the secular stagnation hypothesis).
6
See Lo, Stephanie and Kenneth Rogoff (2014), “Secular stagnation, debt
overhang and other rationales for sluggish growth, six years on”, Paper
prepared for the 13th Annual BIS Conference, Lucerne, Switzerland, June
27.
PERSISTENT OUTPUT LOSSES RELATIVE TO PRECRISIS IN THE EURO ZONE
As 2015 begins, the USA may be strengthening its
economic footing, but the outlook for the euro zone
remains adversely affected by persistent structural
weaknesses. The euro zone is set to experience a
cyclical recovery in coming quarters, due mainly to the
fall in oil prices and the depreciation of the euro, but as
long as investment will remain wholly inadequate, a
full-blown, self-sustainable recovery will be out of
reach.
5
Between 1929 and 1933, US output fell by one-third, while the
unemployment rate soared to 25% of the labour force.
7
Gordon (2012), in particular, argues that the growth effect of the invention
of the Web, e-commerce and the Internet is likely to prove far lower than
that of the two previous industrial revolutions (i.e. steam and railroads from
1750 to 1830, and electricity, internal combustion engine and running water
from 1870 to 1900). This is because, he argues, the information and
communications technology (IT) system has a lower potential to positively
impact productivity than previous technological innovations. He points to
weak productivity growth in the recent past in the US, and forecasts that
productivity will fade in the foreseeable future, affecting medium-term
economic growth. See Gordon, Robert J. (2012), “Is US economic growth
over? Faltering innovation confronts the six headwinds”, NBER Working
Paper 18315, August. On the same line of reasoning, also see Kasparov,
Garry and Peter Thiel (2012), “Our dangerous delusion of tech progress”,
Financial Times, November 8.
8
There is growing evidence that high debt exerts substantial drag on
recovery and growth. This has long been argued by Reinhart and Rogoff
(2009), who find that financial crises that are preceded by a sustained buildup of debt are typically followed by unusually slow recoveries. See Reinhart,
Carmen M. and Kenneth S. Rogoff (2009), “This time is different: Eight
centuries of financial folly”, Princeton University Press. Reinhart, Carmen M.
and Kenneth S. Rogoff (2009), “The aftermath of financial crisis”, The
American Economic Review, 99(2): 466-472. The prominent role played by
the unwinding of high deleveraging in holding back growth is also
emphasised in the economic research on secular stagnation; see
Eggertsson, Gauti B. and Neil R. Mehrotra (2014), “A model of secular
stagnation”, July 4. Also see Mian, Atif R. and Amir Sufi (2014), "House of
debt: How they (and you) caused the Great Recession, and how we can
prevent it from happening again", University of Chicago Press.
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ECONOTE | N°28 – MARCH 2015
The secular stagnation hypothesis is the claim that
negative real interest rates are needed to equate saving
and investment with full employment. And this has
profound implications for capital spending. Admittedly,
one of the most troubling aspects of the current
recovery has been a persistent shortfall in investment.
And this shortfall in investment, in turn, could explain a
number of other disturbing observations since the
global financial crisis, such as slow economic growth
and low interest rates.
Adjusted for inflation, interest rates in major advanced
countries have been trending down for two to three
decades. The prevailing view in academic circles is that
this secular drop in real rates reflects, to a large extent,
a fall in the equilibrium or 'natural' rate of interest9 - the
short-term real interest rate consistent with full
employment - caused by underlying changes in
savings and investment fundamentals [see IMF
(2014)10]. According to proponents of the secular
stagnation hypothesis, the natural rate of interest
(which cannot be directly observed) fell to a negative
level (around -2 to -3%) at some point in the mid-1990s
owing to an excess of desired savings over desired
investment11.
SECULAR DOWNWARD TREND IN REAL INTEREST
RATES
This prolonged period of sub-par post-crisis growth in
the advanced world has taken place despite a fall in
interest rates to record low levels. The drop in interest
rates actually long preceded the global financial crisis nominal interest rates across the yield curve have been
tumbling since the early 1980s. A considerable part of
this reflects the downward trend and stabilisation of
expected inflation across the advanced world, largely
as a result of the increased credibility of the main
central banks’ commitment to price stability.
9
Knut Wicksell introduced the concept of the natural rate of interest in his
1898 paper: “The influence of the rate of interest on commodity prices”; he
then developed the idea in Geldzins und Guterpreise (1898), which was
translated by R.F. Kahn as “Interest and Prices” (1936). London: Macmillan.
10
International Monetary Fund (2014), “Perspectives on global interest
rates”, IMF World Economic Outlook, Chapter 3, April.
11
For an estimate of the natural rate of interest see Laubach, Thomas and
John C. Williams (2003), “Measuring the natural rate of interest”, Review of
Economics and Statistics 85(4): 1063-1070.
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ECONOTE | N°28 – MARCH 2015
BOX 1. WICKSELL’S NATURAL RATE OF INTEREST
In Wicksellian-type theory (named for Knut Wicksell), there exist two different concepts of the rate of interest
at the same time: (1) the observed interest rate in the market place (the interest rate on bonds), which is
determined by monetary factors, and (2) the ‘natural’ rate of interest (the rate of return on capital), which is
determined by non-monetary factors, such as productivity growth, population growth and household time
preferences. Economic theory suggests that the natural rate of interest varies over time in response to shifts
in technology and preferences. For example, a decline in the trend growth rate of potential GDP leads to a
lower natural rate of interest, and so does a rise in risk aversion, which puts upward pressure on
precautionary savings.
The natural rate of interest is not observed directly but, so to speak, exerts influence from behind the
scenes. Of course, there are many challenges in defining and measuring it. But since the seminal work of
Wicksell (1898) it has occupied a central place in both academic and policy making circles. The natural rate
of interest is a guide to a central bank for setting its policy interest rate target. In Wicksell’s theory, price
stability is achieved only when the natural rate of interest and the market rate of interest are equal. When the
natural rate is above the market rate of interest, capital accumulation grows and so does inflation;
conversely, when the natural rate falls below the market rate, the rate of growth of capital accumulation
declines and deflation unfolds. Thus, the purpose of monetary policy is to bring the observed market rate to
its natural rate.
The natural rate concept was taken up by Keynes in his A Treatise on Money (1930) to show that the market
rate of interest rate can remain too high to reach full employment for long periods of time.
The most common explanation for the alleged fall in the
natural rate of interest is an increase in global saving,
mostly
attributable
to
high-saving
emerging
economies, such as China or oil-producing economies
(the so-called 'global savings glut' hypothesis12). It is
argued that because of investors’ growing preference
for safe assets, partly due to a rising desire on the part
of central banks to accumulate reserves, these extra
savings have mainly been channelled into government
bonds, which has driven up demand for Treasuries and
pushed down debt rates [see IMF (2014)]. But the
decline in real rates could also be attributable to
depressed investment demand caused, for instance, by
slower growth in the labour force and productivity, or
by demographic shifts, particularly a decline in the
working population relative to the non-working
population.
Another explanation for the post-crisis sharp drop in
real interest rates points to the damage done by the
Great Recession to the economies’ labour force and
productivity, which would lead to a slowdown in the
growth of economic potential (an effect called
hysteresis13). There is mounting evidence that deep
recessions have a lasting negative effect on potential
output14. And lower potential growth, in turn, means a
lower return on capital which reduces the natural rate
of interest.
13
Blanchard, Olivier, and Lawrence H. Summers (1986), “Hysteresis and the
European unemployment problem”, NBER Macroeconomics Annual 198.
See also Haltmaier, Jane (2012), “Do recessions affect potential output?”,
International Finance Discussion Paper 1066, Federal Reserve Board,
December.
14
12
See Bernanke, Ben (2005), “The global saving glut and the U.S. current
account deficit”, Sandridge Lecture, Virginia Association of Economists,
Richmond, Virginia, March 10.
Potential output is the level of output that an economy can produce at a
constant inflation rate. It depends on the capital stock, the potential labour
force (which depends on demographic factors and the participation rates),
the non-accelerating inflation rate of unemployment (NAIRU), and the level
of labour efficiency.
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ECONOTE | N°28 – MARCH 2015
The jury is still out on the ultimate drivers of the longterm drop in real interest rates, but the debate serves
to highlight that there are good reasons to expect that
the natural rate of interest may have fallen to very low
levels in the advanced world in recent decades.
MONETARY POLICY AT THE ZERO LOWER BOUND
Another factor behind the fall in interest rates to
remarkably low levels in the aftermath of the global
financial crisis has been the central banks’ policy
reaction to the crisis. In response to the Great
Recession which followed the global financial crisis,
central banks around the world have slashed their
policy rates to zero or close to zero. Once the zero
lower bound on nominal interest rate was hit15, major
central banks then started adopting unconventional
monetary policy in an effort to reduce term premia and
long-term rates. These heterodox monetary policies
have included quantitative easing (QE) programmes
(through purchases of government securities and
private assets) to boost the monetary base, forward
guidance on the future path of the policy rate, and
programmes to directly support bank lending.
The problem is that in a world in which the natural rate
of interest has fallen below zero, the central banks
constrained by the zero lower bound on nominal
interest rates find themselves in a situation in which
they are unable to move their policy rates low enough
to generate adequate demand, leaving the economy
exposed to a prolonged economic slump.
THE SECULAR STAGNATION HYPOTHESIS
Increasingly, observers point out that the current
economic malaise in the advanced world has many of
the same symptoms as the US Great Depression of the
1930s and Japan’s lost decade, including persistent
15
Nominal policy interest rates have a 'zero lower bound' as, except for tiny
technical deviations, they cannot fall below zero. The reason for this is, of
course, that nobody would lend at a negative nominal interest rate rather
than hold the currency. The idea that monetary policy is ineffective under
zero-interest conditions is known as the 'liquidity trap' that Keynes
emphasised in his "General Theory". See Keynes, John Maynard (1936),
“The general theory of employment, interest, and money”, London:
Macmillan.
subpar growth, declining population growth, and a
nominal interest rate at zero. The secular stagnation
hypothesis is the claim that underlying changes in
economic fundamentals, such as slowing growth in the
working-age population, can explain long-lasting
shortfalls of demand by permanently lowering the
natural rate of interest below zero. The fall of the
natural interest rate into negative territory is, however, a
major obstacle to recovery as it prevents monetary
policy from being effective in providing the appropriate
stimulus, given the zero lower bound on nominal
interest rates. Put another way, the fall of the natural
rate below zero makes liquidity trap episodes more
frequent16. Indeed the past five years bear testimony to
the fact that the zero lower bound can be a binding
constraint in many advanced economies.
Although policy rates are at zero, the actual real rate of
interest remains too high or, put differently, the actual
rate remains persistently above the natural rate. This
could explain the prolonged period of underinvestment that advanced economies have been facing
since the onset of the global financial crisis, which in
turn could explain long-lasting 'output gaps'17 in these
economies, along with lower potential growth.
Surprisingly, the idea of secular stagnation has hardly
been developed in economic research on the liquidity
trap. One notable exception, however, is the recent
work by Eggertsson and Mehrotra (2014)18. These
authors show that a variety of forces can generate a
negative natural rate of interest, including a slowdown
in population growth, a tightening of borrowing limits
and, under some conditions, income inequality19. In this
setting, absent a higher inflation target, the zero lower
bound on nominal interest rates will bind, and a
persistent recession can take hold. As Eggertsson and
Mehrotra point out, many of the advanced economies
that have been suffering from subpar growth over the
16
See Krugman, Paul (2013), “Bubbles, regulation, and secular stagnation”,
The New York Times blog, September 25; Krugman, Paul (2014), “Do we
face secular stagnation?”, Speech delivered at a panel event in Oxford
organised jointly by the Sanjaya Lall Memorial Trust, Green Templeton
College, and the Department of Economics at the University of Oxford, May
14. On the liquidity trap, see also Krugman, Paul (1998), “It’s baaack:
Japan’s slump and the return of the liquidity trap”, Brookings Papers on
Economic Activity, 29 (1998-2): 137-206; Eggertsson, Gauti B. and Michael
Woodford (2003), “The zero bound on interest rates and optimal monetary
policy”, Brookings Papers on Economic Activity, 1: 139-233; Bernanke, Ben
S., Vincent R. Reinhart, and Brian P. Sack (2004), “Monetary policy
alternatives at the zero bound: An empirical assessment”, FEDS Working
Paper, September.
17
The 'output gap' is a measure of the difference between the actual output
of an economy and its potential output (the maximum amount of goods and
services an economy can turn out when it is most efficient - that is, at full
capacity).
18
Eggertsson, Gauti B. and Neil R. Mehrotra (2014), “A model of secular
stagnation”, mimeo, Brown University, July 4. (op.cit. note 8).
19
An increase in income inequality redistributes income from those with
less wealth to those with more, and as the latter have an increased
propensity to save, this will raise the level of savings in the economy,
driving the natural rate of interest lower.
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ECONOTE | N°28 – MARCH 2015
past five years have also experienced a slowdown in
population growth, a tightening of borrowing
constraints, and an increase in inequality.
The secular stagnation hypothesis is a demand-side,
not a supply-side framework20. In this framework, there
is no self-correcting force back to full employment and,
unless offsetting policies are implemented, economies
are stuck in a low output trap. As the Japanese have
discovered, an economy caught in a liquidity trap does
not automatically return to a potential growth path.
The Taylor rule21 would suggest negative policy rates
for most of Europe but the problem, of course, is that
central banks are unable to drop nominal interest rates
below zero.
Against this backdrop, the market has been pricing in
many years of stagnant economies with very low
inflation, as reflected in record low core government
bond yields.
THE CRISIS IN INVESTMENT IN THE EURO
ZONE
STUCK IN A LOW-GROWTH EQUILIBRIUM?
The euro zone economy has weathered six years since
the beginning of the Great Recession without remotely
approaching a full recovery, prompting concerns that
Europe may face a Japan-style lost decade (now in its
23rd year). Despite essentially zero short-term nominal
interest rates, spending remains well below what the
economy can produce, leaving a large output gap
which keeps pulling inflation down. So the expected
inflation which would be necessary to bring down real
interest rates has not been forthcoming.
To boost flagging growth and ward off deflation, the
European Central Bank (ECB), on January 22,
committed to embark on a QE programme worth at
least €1.140bn, which will run from March 2015 to at
least September 2016. The ECB president pledged to
buy €60bn-worth of private and public sector bonds
per month until inflation returns to near its 2% target.
21
20
See Krugman, Paul (2014), “What secular stagnation isn’t”, The New York
Times blog, October 27.
The Taylor rule (named after John B. Taylor who was the first to describe
these mechanisms) relates the nominal policy interest rate to, (1) the gap
between actual inflation and the inflation target, (2) the output gap, and (3)
the purely random residual from the equation (called 'economic policy
shock').
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ECONOTE | N°28 – MARCH 2015
recorded since the global financial crisis has had a
huge impact on short-term economic growth through
its effect on aggregate demand, but it also has major
consequences for longer-term growth potential
because of its adverse effect on capital stock and thus
on productivity growth.
Behind the euro zone’s economic downturn is a
historically unprecedented collapse in investment. The
global financial crisis set the stage for a 15% drop in
capital investment volumes - a loss that is twice as
large as that seen in the USA and in Japan. The Berlinbased German Institute for Economic Research
calculates that the euro zone’s investment gap is
equivalent to 2% of GDP (that is, about €200bn
annually) with the shortfall being particularly large in the
peripheral countries and the biggest gap being found in
Ireland22. But, to different degrees, the fall in investment
has affected nearly all euro zone countries and most of
their sectors.
There are several reasons behind the collapse in
investment in the euro zone including:
-
-
-
-
In 2013, six years after the beginning of the crisis,
private investment volumes in the euro zone was
almost one-fifth below pre-crisis levels. Admittedly,
2007 may not be the best benchmark to use for
desirable investment levels today, as that was the year
of the peak of the credit bubble which caused a lot of
misplaced investment. But while using 1995-2007 as
the sample period, we still find that there exists a large
investment gap in the euro zone. Indeed, in 2013, the
investment share in GDP of the European Union as a
whole was 2 percentage points below its average for
the 1995-2007 period. The marked fall in investment
the end of large capital inflows to peripheral
Europe in 2008 that implied a return of
investment to the level of the pre-boom years;
the correction that followed the bursting of the
credit and real estate bubbles which had
developed in the 2000s in some peripheral
countries, leading to a lot of wasteful
investment;
weak growth (or expectations of growth) via
the traditional accelerator effect23;
financial fragmentation, which has resulted in
elevated financing costs in peripheral Europe,
especially for SMEs24;
heightened political uncertainty25;
cuts in public capital spending in the context
of fiscal consolidation programmes since
2010.
Some of these factors are structural in nature and are
thus here to stay for the long-term. Specifically, there
are two trends of particular importance which are
23
See Chirinko, R. (1993), “Business fixed investment spending: Modeling
strategies, empirical results, and policy implications”, Journal of Economic
Literature, 31(4): 1875-1911.
24
Financial fragmentation has been reduced since its peak in 2012 after
Mario Draghi pledged that he will do “whatever it takes” to save the euro,
and is expected to ease further as the building blocks of the Banking Union
(most notably common bank supervision and resolution rules) are put in
place. Financial fragmentation, however, will not end, given the differences
in the creditworthiness of the various euro zone countries, as reflected in
various credit premia.
25
22
See Baldi, G., et al. (2014), “Weak investment dampens Europe’s
growth”, DIW Economic Bulletin (2014), DIW Berlin, German Institute for
Economic Research, 4(7): 8-21, July. See also IMF (2014), “Investment in
the euro area, why has it been weak?”, IMF Country Report No 14/199.
As emphasised by Mian, Sufi and Trebbi (2012), financial crises are
typically followed by heightened political polarisation which often leads to
policy paralysis that can hold back investment and growth. See Mian, Atif
R., Amir Sufi and Francesco Trebbi (2012), “Resolving debt overhang:
Political constraints in the aftermath of financial crises”, NBER Working
Paper, no 17831.
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ECONOTE | N°28 – MARCH 2015
bound to shape investment prospects in the euro zone
for the foreseeable future, namely:
1)
2)
the falling rate of growth in the working-age
population;
the multi-year, possibly multi-decade process
of private sector deleveraging following the
sudden stop of capital flows into peripheral
Europe.
Both of these trends will have long-lasting drag effects
on investment demand in the euro zone which will cast
a long shadow over growth in these economies.
SHRINKING WORKING-AGE POPULATION
Just like Japan, many euro zone countries are plagued
by a stagnant or shrinking working-age population
(aged 15 to 64 years). In Japan, the working-age
population started to shrink in 1997, leading to a fall in
the proportion of the active population in the total
population26. In the European Union, working-age
populations began to decline in the years between
2009 and 2012. So Europe is now about where Japan
was in the late 1990s. In 2012, people considered to be
of working age accounted for 66.5 % of the EU-28’s
population, a percentage which is set to decline
steadily over the next 50 years, thanks mainly to an
ageing population.
TIGHTENED BORROWING CONSTRAINTS
Again, just like Japan in the aftermath of the bursting of
its asset price bubble in 1989-91, much of the euro
zone has been forced to undergo a broad private
sector deleveraging process after the bursting of its big
capital-flow bubble in 2008. Deleveraging, however, is
always a lengthy and protracted process that takes
years, if not decades28.
26
Prior to the 2008 crisis, large private capital inflows to
European peripheral countries fuelled a decade-long
domestic demand boom in those countries, along with
large private asset bubbles in some of them (Ireland,
Spain), which left a legacy of large private debt
overhang (mortgage debt in Ireland and Spain,
corporate debt in Portugal and again in Spain). The
boom ended with the financial panic that gripped
capital markets worldwide after the collapse of Lehman
Brothers. The private capital flows to the periphery
came to a sudden halt and then reversed, triggering the
unwinding of the large macroeconomic imbalances
which had accumulated in the euro zone prior to the
crisis. Following the sudden stop in private capital
inflows in 2007-8, the overstretched European private
27
Slowing working-age population also creates supply-side constraints on
growth. Specifically, a shrinking workforce leads to excessive capital stock,
hence a reduced return on capital, which leads corporations to reduce
capital investment.
28
The European Commission (2014) reckons that corporations and
households in peripheral countries may need to cut their debt-to-GDP
ratios by at least 30 percentage points, which will act as a major drag on
investment over the medium-term. See European Commission (2014),
“Private sector deleveraging: Where do we stand?”, Quarterly Report on the
Euro Area, 13(3), October.
A shrinking labour force, however, means a slowergrowth economy and, thanks to the accelerator effect,
a decline in investment demand. Less investment is
indeed required to increase capacity to meet demand,
since a falling labour force means lower demand for
new houses, new office buildings, new materials to
equip workers, etc.27.
Japan has the world’s oldest population, with a median age of 46 years.
Many researchers argue that demographic shifts have been a driving force
underlying Japan’s lost decade. For a discussion of this literature, see
Shirakawa, Masaaki (2012), “Demographic changes and macroeconomic
performance: Japanese experiences”, BOJ-IMES conference, mimeo.
10
ECONOTE | N°28 – MARCH 2015
sector (households, businesses and banks) was left
with no choice but to deleverage and rebuild savings.
Flow of funds data for the euro zone show a large shift
away from borrowing to saving by the corporate sector
following the outbreak of the global financial crisis in
2007-8. The euro zone’s corporate sector went from a
net borrower of funds to the tune of 11.8% of GDP in
Q3 2008, to a net saver of funds to the tune of 3.4% of
GDP in Q3 2014. Over the same period, the household
sector raised savings from around 7.9% of GDP to
12.5% of GDP. This means that, between Q3 2008 and
Q3 2014, the euro zone’s economy lost private sector
demand (household and corporate combined)
equivalent to 19.8% of GDP. This represents a major
contractionary blow to the economy.
The increase in private sector savings observed in the
euro zone since the global financial crisis has been
driven by substantial deleveraging in Spain and Ireland.
But the private sector in Germany has also noticeably
not been borrowing; instead it (both households and
corporate) has actually been deleveraging since the
early 2000s. Since its peak in 2001, the private sector
debt-to-GDP ratio in Germany has fallen by about
22%. So, today, private sectors in most of Europe
(including in Germany) are all increasing savings or
paying down debt and the sole remaining borrower is
the public sector.
Flow of funds data for the euro zone also show that the
increase in private savings has exceeded public dissavings (that is, public borrowing), which indicates that
for the euro zone as a whole, governments - which are
also facing too much debt (partly because of the
private debt that they had been forced to take over) have not borrowed and spent money sufficiently to
keep the economy going in the face of the large private
sector deleveraging shock. This has been especially
pronounced in the aftermath of Europe’s sovereign
debt crisis in 2010, which prompted the imposition of
severe austerity packages in peripheral countries,
along with budgetary restrictions in all the others.
Capital spending has been the main target for fiscal
consolidation in most of Europe, as reflected in a
strong decline in public investment since 2010, with
cuts reaching 60% in some euro zone countries. In
2013, public investment in the euro zone amounted to
2.1% of GDP, to be compared to 2.7% of GDP at its
2009 peak. Germany, which can now borrow money
almost for free, had a public investment ratio of only
1.4% of GDP in 2013, that is, one of the lowest ratios in
the euro zone.
11
ECONOTE | N°28 – MARCH 2015
lenders either, given the high credit risk of borrowers (in
particular SMEs), and as banks need to fix their own
balance sheet as well – hence, banks’ preference for
safe assets, such as government bonds.
Balance sheet recession
When households, businesses and banks are all
deleveraging at the same time, the impact on the
investment rate and the macro-economy is severe [see
notably Cuerpo et al. (2013)]29. The economy then falls
into a form of recession which is often described as
'balance sheet recession', a term coined by the
economist Richard Koo [see Koo (2008, 2011, 2013)]30.
A balance sheet recession occurs after the bursting of
a credit bubble, which leaves an overhang of debt on
the private sector balance sheets. These recessions are
usually deeper than a business cycle downturn, while
recoveries are typically muted and take a long time.
This is because the key priority for the private sector is
balance sheet repair, so that it becomes more
concerned with rebuilding savings and eliminating debt
than with expanding investment. In this type of
recession, even a zero interest rate is not enough to
stimulate borrowing and spending, hence monetary
policy loses its effectiveness. There are not many
The most notable examples of balance sheet
recessions are the Great Depression in the United
States in the 1930s and Japan's lost decade in the
1990s. As Koo (2011) emphasised, Japan skirted a
1930s-style depression only because of the
government’s borrowing and spending which
compensated for the drop in private spending.
Although Japanese fiscal policy was barely
expansionary in the 1990s, the authorities managed to
keep GDP above the bubble peak throughout the postbubble period, ensuring that mass unemployment
didn’t become an issue in Japan.
If, however, both the private and the public sectors try
to deleverage at the same time, the economy is set to
fall into a protracted recession. Since the 2008 financial
crisis, Spain, Ireland and Portugal have all been in
severe balance sheet recessions with considerable
fallouts on investment. Italy has also seen an especially
sharp drop in capital spending. In fact, all euro zone
countries, to varying degrees, have experienced
investment shortfalls, with the effects of the large drop
in private investment being compounded by cuts in
public investment since 2010.
29
Cuerpo, C., et al. (2013), “Indebtedness, deleveraging dynamics and
macroeconomic adjustment”, European Economy Economic European
Commission, Papers 477.
30
Koo, Richard (2008), “The Holy Grail of macroeconomics: Lessons from
Japan’s Great Recession”, John Wiley; Koo, Richard C. (2011), “The world
in balance sheet recession: Causes, cure, and politics”, Real-World
Economics Reviews, Issue no 58, Nomura Research Institute, Tokyo; Koo,
Richard C. (2013), “Balance sheet recession as the other-half of
macroeconomics”, European Journal of Economics and Economic Policies:
Intervention, 10(2): 136-157.
12
ECONOTE | N°28 – MARCH 2015
In a balance sheet recession, the absence of borrowing
and spending from private economic agents means
that the economy is continuously losing aggregate
demand by an amount equivalent to the sum of savings
and net debt repayments31. When an economy falls into
this type of recession, it does not enter self-sustaining
growth until private economic agents have finished
repairing their balance sheets.
It is critically important that such a situation does not
turn into a deflationary spiral because, as Irving Fisher
already pointed out in 1933, falling prices in a highly
leveraged economy can set off a highly destabilising
process. Deflation, Fisher (1933) emphasised, worsens
the balance sheets of debtors by increasing the real
burden of their debt, which generally prompts them to
cut their spending, leading in turn to further falls in
prices causing a worsening of debt ratios leading to
even more spending cuts - a vicious circle that can turn
into a Great Depression32. This perverse loop of debt
and deflation - which is also at work with very low
levels of inflation [see IMF (2014)]33 - is a key reason
behind Europe’s difficulties in reducing its debt
overhang. Fisherian debt deflation mechanisms have
been at work in the euro zone’s periphery, contributing
to prolonging the time to recovery.
AN ENDURING LACK OF AGGREGATE DEMAND
The spectre of debt-deflation
Although since 2008, substantial balance sheet
adjustment has taken place in the euro zone through
rises in gross savings and/or falls in gross investment,
the private-sector debt burden has barely fallen from
its pre-crisis peak. The non-financial private sector in
Spain, Ireland and Portugal is still today over 200% of
GDP (over 300% in Ireland), and corporate debt
overhang in Italy remains stubbornly high. Yet if the
euro zone’s recovery is to strengthen, this burden of
private debt must be scaled down. But to varying
degrees in different countries, the private sector’s
deleveraging efforts have been impeded by the
combination of economic contraction and low inflation
that has characterised the post-2008 crisis period. At
the end of 2014, inflation in the euro zone fell into
negative territory mainly because of the fall in energy
prices (inflation excluding energy and food remained
slightly positive).
So, since the outbreak of the global financial crisis, the
euro zone has been in the grip of a broad private sector
deleveraging dynamic, which has subtracted a major
source of aggregate demand. Admittedly, the severe
tightening of borrowing limits triggered by the global
financial crisis, coupled with Europe’s declining
working-age population, implies changes in both
saving and investment behaviour that have implications
for the level of real interest rates. Along these lines,
there is a case to be made that the euro zone may now
find itself in a situation in which the natural rate of
interest has become negative, owing to an excess of
desired savings over desired investment.
In total, there appears to be evidence that there is a
substantial shortfall in aggregate demand in the euro
zone, in part driven by factors emphasised by the
secular stagnation hypothesis. Of course, this does not
prove that the secular stagnation hypothesis in the
euro zone is correct, because other factors can be at
play. But if this hypothesis is correct, we should expect
32
Fisher, Irving (1933), “The debt-deflation theory of Great Depressions”,
Econometrica, 1(4).
33
31
See Koo, Richard C. (2011), (op. cit. note 30).
See Moghadam, Reza, Ranjit Teja and Pelin Berkmen (2014), “Euro area –
'Deflation' versus 'Lowflation'", IMF Direct, March 4.
13
ECONOTE | N°28 – MARCH 2015
that GDP under-performance will last for a very long
time. This does not imply though, that the euro zone
will never have growth, as now and then the economy
will expand, but growth will never be strong enough to
bring the economy back to full employment. Unlike
what happens in conventional economic models, the
problem of the excess of desired savings cannot solve
itself through falling interest rates, because the zero
lower bound on interest rates prevents nominal interest
rates from falling below zero. As forces that normally
tend to restore the usual or normal equilibrium do not
apply at the zero lower bound, the economy remains
stuck in a low-level equilibrium trap.
THE RULES OF ECONOMICS CHANGE
WHEN POLICY INTEREST RATES HIT THE
ZERO LOWER BOUND
THE PARADOX OF THRIFT
Once nominal interest rates hit the zero lower bound,
the economy enters a world in which, as Krugman likes
to put it: “virtue is vice and prudence is folly”34. This is
the paradox of thrift popularised by Keynes. This
paradox35 states that if everyone tries to increase
saving simultaneously, then aggregate demand will fall,
which will depress the economy leading eventually to a
flattening or diminishing of the total savings rate
because of lower output. Lower output, in turn, makes
it harder to reduce debt burdens. So, although
individual savings can be beneficial for the individuals
who save more, collective saving behaviour can have
harmful effects on the economy. Note that a fall in
prices, which raises the real interest rate, only makes
matters worse.
While none of the spontaneous forces for restoring fullemployment equilibrium apply under circumstances of
secular stagnation, there is scope for policy
intervention in order to help the economy gain traction.
Two types of policy intervention can be envisaged. The
first one is a commitment to generate expectations of
inflation in order to reduce real interest rates. The
second one is expansionary fiscal policy designed to
boost demand and reduce saving. Of note, as
remedies to address secular stagnation lie in
‘unconventional’ policy measures which, in addition,
need to be implemented in an aggressive fashion to
stand a chance of being effective, there is a high risk
that policymakers get into what Krugman calls the
‘timidity trap’, that is, policymakers will remain far too
timid in unwinding the ‘extraordinary’ policy measures
that a situation of secular stagnation calls for36.
THE CHALLENGE OF BRINGING DOWN REAL RATES
OF INTEREST
The secular stagnation analysis suggests that if full
employment is to be restored in the years ahead, real
interest rates will have to decline further. This is,
however, impossible in an environment of falling prices,
where interest rates are constrained by the zero lower
bound. The only way to bring down real interest rates
when the zero bound on nominal interest rates binds is
to generate a rise in the expected rate of inflation. In
order to achieve this, the central bank can raise its
inflation target and commit to future policy in a way
that lifts current inflation expectations [see, notably,
Krugman (1998)37]. The vast bond-buying program
undertaken by the ECB is intended to raise inflation
expectations. But success is not guaranteed, and this
policy is not without its downsides.
Success is not guaranteed, as central banks, which
have in the past built a reputation for consistent lowinflation policy, may find it difficult to convince the
public that they now want sustained higher inflation (a
policy which has traditionally been regarded as
irresponsible). Eggertsson and Mehrotra (2014) show
that monetary policy can help boost the economy in a
period of secular stagnation only if the central bank
credibly commits to a higher inflation target38. But, as
emphasised by Summers (2013), this strategy is not
without its downsides, as lower real rates of interest
push investors to look for riskier assets with higher
yields, thereby raising the risk of bubbles, which in turn
may have detrimental effects on output.
34
See, for example, Krugman, Paul (2013), “Secular stagnation,
coalmines, bubbles, and Larry Summers”, (op.cit. note 4). To cite
Krugman: “in a liquidity trap saving may be a personal virtue, but
it’s a social vice”.
35
This is a 'paradox' because of a moralistic perception of saving
as a virtue. As Samuelson (1958) put it: “[…] in kindergarten we
are all taught that thrift is always a good thing”. See Samuelson,
Paul A.(1958). "Economics". 4th ed. New York: McGraw-Hill, p.
237.
36
See Krugman, Paul (2014), “The timidity trap”, The New York Times blog,
March 20.
37
Krugman, Paui (1998), “It’s baaack: Japan’s slump and the return of the
liquidity trap”, (op.cit. note 16).
38
See Eggertsson, Gauti B. and Neil R. Mehrotra (2014), “A model of
secular stagnation” (op.cit. note 8).
14
ECONOTE | N°28 – MARCH 2015
THE CHALLENGE OF PROVIDING FISCAL STIMULUS
The alternative policy approach to address secular
stagnation is to have the government absorb ample
private saving through deficit-financed public
spending, for instance by investing in infrastructure and
education. For Summers (2013), increased public
investment in infrastructure, education, or research and
development is the first-best strategy to address
secular stagnation39. Eggertsson and Mehrotra (2014)
also find that fiscal policy is particularly effective in an
era of secular stagnation, though admittedly, the
empirical evidence on magnitudes is limited. Likewise,
the analysis that builds on literature on policy at the
zero bound on nominal interest rates generally finds
that the optimal policy intervention is expansionary
fiscal policy, which provides some positive aggregate
demand shock from the government40. In the same
vein, research by Summers and DeLong (2012) shows
that under depressed conditions, increasing public
spending might actually reduce, rather than increase
the fiscal deficit, owing to a higher-than-usual fiscal
'multiplier'41. The IMF also finds that, under current
depressed conditions in advanced economies, the
fiscal multiplier is significantly larger than previously
thought42.
As to the exact form of the fiscal stimulus, Eggertsson
(2010)43 shows that with interest rates at zero it will be
most effective via a temporary increase in government
spending and some forms of tax cuts, such as a
reduction in sales taxes and investment tax credits.
This author emphasises, however, that this only holds
for a temporary fiscal stimulus, as an increase in public
spending that is expected to be permanent could turn
out to have contractionary effects. Along these latter
lines, Nickel and Tudyka (2013)44 show that when
39
See Summers, Lawrence H. (2013), IMF Fourteenth Annual Research
Conference in Honor of Stanley Fisher, Washington DC, November 8
(op.cit. note 1).
40
See Eggertsson, Gauti B. and Paul Krugman (2012), “Debt, deleveraging,
and the liquidity trap: A Fisher-Minsky-Koo approach”, Quarterly Journal of
Economics, 127(3): 1469-1513, August. For further discussion and
references, see Eggertsson, Gauti B. (2010), “What fiscal policy is effective
at zero interest rates?”, NBER Macroeconomic Annual, 25(1): 59-112;
Delong, J. Bradford and Lawrence H. Summers (2012), “Fiscal policy in a
depressed economy”, Brookings Papers on Economic Activity, Spring; and
Koo, Richard C. (2013), “Balance sheet recession as the other-half of
macroeconomics”, (op.cit. note 30).
41
The fiscal multiplier is the percentage change in GDP on a 1% change in
government spending or taxes. It is difficult to determine the size of the
fiscal multiplier which, moreover, varies both across countries and time.
42
See Baum, Anja, Poplawski-Ribeiro, Marcos, and Anke Weber (2012),
“Fiscal multipliers and the state of the economy”, IMF Working Paper,
WP/12/286, December. See also Blanchard, Olivier and Daniel Leigh (2013),
“Growth forecast errors and fiscal multipliers”, IMF Working Paper,
WP/13/1, January.
43
Eggertsson, Gauti B. (2010), “What fiscal policy is effective at zero
interest rates?” (op.cit. note 39).
44
Nickel, Christiane and Andreas Tudyka (2013), “Fiscal stimulus in times of
high debt: Reconsidering multipliers and twin deficits”, ECB Working Paper
No 1513.
public debt is high, the overall effect on real GDP of an
expansionary fiscal policy can turn negative, as the
crowding-out of private investment increases
significantly.
Although there is no consensus among economists
about optimal fiscal policy, there is general agreement
that fiscal stimuli are particularly effective if there are
idle resources in the economy (involuntary
unemployment and excess capacity) and if nominal
interest rates do not rise to such an extent that the
expansionary effect of the fiscal stimulus is annihilated
by the crowding-out of private investment45. In the euro
zone as a whole there are currently plenty of idle
resources, core governments face historically low longterm interest rates, and the situation of ample supply of
private savings virtually excludes the risk that increased
public sector borrowing crowds out private sector
credit demand or generates an overheating of the
economy. This explains why calls for coordinated
fiscal action in the euro zone have stepped up.
THE EURO ZONE IS NOT WELL EQUIPPED TO
MANAGE THE CHALLENGE
Yet the provision of coordinated fiscal stimulus in the
19-member euro zone is far more complex than in a
normal country, for at least two reasons. The first
reason is that unlike monetary policy, the responsibility
for fiscal policy remains in the hands of each national
member government. Fiscal policy coordination within
the currency union is essentially restricted to a
common set of fiscal rules (including, most notably, the
Stability and Growth Pact (SGP) and the 'six-pack').
There is no supranational fiscal authority similar to the
ECB with regard to monetary policy, which means that
there is no euro zone fiscal capacity in the form of its
own budget. The second reason is that the size and
severity of challenges in each country is different,
hence, national member governments may have
different policy capacity and objectives. At present,
45
Fiscal policy, however, can fail to stimulate aggregate demand if there is
Ricardian equivalence, so that tax cuts financed by new issues of
government debt have no effect on private consumption (debt being just
deferred taxes). It may also be the case that the government cannot borrow
because of poor creditworthiness.
15
ECONOTE | N°28 – MARCH 2015
several euro zone governments lack fiscal space to
initiate stimulus, due to their excessively high public
debt burden.
However, some key countries in the euro zone have the
fiscal capacity to undertake an expansionary policy.
Germany, for example, now has a cyclically adjusted
budget surplus of 1.7% of GDP. Its net public debt is
about 40% of GDP, and the country is running a
current account surplus of around 7% of GDP,
meaning that it saves much more than it invests. If the
German government, which can now borrow money
virtually for free, were to take steps to use its existing
fiscal capacity to expand government spending, this
would make a material contribution to addressing the
shortfall in aggregate demand that now plagues the
euro zone economy46. Another approach is to boost
investment at the European level, which is the aim of
the Juncker plan that was unveiled on November 25,
2014 (see Box 2).
overriding concerns about a loss of confidence in
government solvency, notwithstanding the fact that
solvency is not a problem for a number of European
countries, such as Germany, and that the risk that
investors would lose confidence in sovereign debt has
receded considerably since the ECB introduced
mechanisms to intervene in the government bond
market.
At this point, the debate takes up one of the oldest
questions in macroeconomics, that is, the issue of the
balance of risks. On the one hand, there is the risk that
Europe may fall victim to a full-blown crisis of
confidence over its debt; on the other, there is the
danger for Europe of falling into a protracted stagnation
and a debt deflation spiral.
WHERE DO POLICY MAKERS WANT TO TAKE RISKS?
But the fact remains that calls for increased public
investment have not secured widespread agreement in
European policy-making circles. This is, of course,
because as in everything, there is a counter case. At
present, European policy remains dominated by
46
Simulation analyses made by the IMF (2013) suggest, however, that fiscal
stimulus in Germany is likely to have a relatively small impact on the rest of
the euro zone, either because of weak trade links (Greece, Portugal) or due
to the large size of the countries (Italy, Spain). See IMF (2013), “Germany
Article IV Consultation”, August.
16
ECONOTE | N°28 – MARCH 2015
BOX 2. THE JUNCKER’S INVESTMENT PLAN AND THE MULTIPLER EFFECT
On November 25, the European Commission unveiled the mechanism for its plan to support investment
projects totalling at least €315bn over the next three years. It is, on the surface, an ambitious plan to
address the drastic lack of investment in EU countries. The idea of the Juncker plan is that €21 billion of
initial public money will be leveraged to attract private investment worth 15 times the original amount. The
Commission hopes that guarantees and seed money will encourage private finance into strategic
investments in a range of infrastructure projects across the EU, from transport to energy to internet
broadband.
The Juncker plan provides for the creation of a new European Fund for Strategic Investments (EFSI), which
will rely on €16bn of funding in the form of guarantees drawn from the EU’s budget (of which, €8bn will
come from existing unused EU funds) and €5bn of equity funding from the European Investment Bank (EIB).
The resulting EFSI totalling €21bn is set to be operational in June 2015. Individual member states will be
able to provide additional capital to the Fund, and their contribution will not be taken into account for the
Stability and Growth Pact assessment. The plan also provides for the establishment of 'a project pipeline' of
proposals for investors, backed by a technical assistance programme to channel investments where they
are most needed.
The EFSI will serve as credit protection for new, potentially risky projects. These guarantees will allow the
EIB to provide €63bn financing (multiplier of 1:3) in the form of subordinated debt. This safety buffer is then
expected to catalyse private investment in the senior tranches of the same projects, with a multiplier effect
of 1:5. Under this mechanism, the Fund could thus eventually yield €315bn of additional finance (multiplier of
1:15), of which €240bn would be directed to strategic investments and €75bn to SMEs and midcap
companies.
The €315bn plan would amount to 2.4% of the EU’s GDP over the next three years which, even if it were to
materialise, would make a small dent in the massive investment challenge facing Europe. The main question,
however, is how such a narrowly financed scheme can generate an increment to private investment of the
scale being targeted. While a leverage ratio of 15 to 1 seems overly optimistic, the focus on investment is a
welcome step in the right direction.
17
ECONOTE | N°28 – MARCH 2015
18
ECONOTE | N°28 – MARCH 2015
PREVIOUS ISSUES ECONOTE
N°27 Emerging oil producing countries: Which are the most vulnerable to the decline in oil prices?
Régis GALLAND (February 2015)
N°26 Germany: Not a “bazaar” but a factory!
Benoît HEITZ (January 2015)
N°25 Eurozone: is the crisis over?
Marie-Hélène DUPRAT (September 2014)
N°24 Eurozone: corporate financing via market: an uneven development within the eurozone
Clémentine GALLÈS, Antoine VALLAS (May 2014)
N°23 Ireland: The aid plan is ending - Now what?
Benoît HEITZ (January 2014)
N°22 The euro zone: Falling into a liquidity trap?
Marie-Hélène DUPRAT (November 2013)
N°21 Rising public debt in Japan: how far is too far?
Audrey GASTEUIL (November 2013)
N°20 Netherlands: at the periphery of core countries
Benoît HEITZ (September 2013)
N°19 US: Becoming a LNG exporter
Marc-Antoine COLLARD (June 2013)
N°18 France: Why has the current account balance deteriorated for more than 20 years?
Benoît HEITZ (June 2013)
N°17 US energy independence
Marc-Antoine COLLARD (May 2013)
N°16 Developed countries: who holds public debt?
Audrey GASTEUIL-ROUGIER (April 2013)
N°15 China: The growth debate
Olivier DE BOYSSON, Sopanha SA (April 2013)
N°14 China: Housing Property Prices: failing to see the forest for the trees
Sopanha SA (April 2013)
N°13 Financing governments debt: a vehicle for the (dis)integration of the Eurozone?
Léa DAUPHAS, Clémentine GALLÈS (February 2013)
N°12 Germany’s export performance: comparative analysis with its European peers
Marc FRISO (December 2012)
N°11 The Eurozone: a unique crisis
Marie-Hélène DUPRAT (September 2012)
N°10 Housing market and macroprudential policies: is Canada a success story?
Marc-Antoine COLLARD (August 2012)
N°9
UK Quantitative Easing: More inflation but not more activity?
Benoît HEITZ (July 2012)
N°8
Turkey: An atypical but dependent monetary policy
Régis GALLAND (July 2012)
N°7
China: Foreign direct investment outflows— much ado about nothing
Sopanha SA, Meno MIYAKE (May 2012)
19
ECONOTE | N°28 – MARCH 2015
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All opinions and estimations included in the report represent the judgment of the sole Economics Department of Societe Generale and do
not necessary reflect the opinion of the Societe Generale itself or any of its subsidiaries and affiliates. These opinions are subject to
change without notice. It does not constitute a commercial solicitation, a personal recommendation or take into account the particular
investment objectives, financial situations.
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or completeness. Neither Societe Generale nor its subsidiaries/affiliates accept any responsibility for liability arising from the use of all or
any part of this document.
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Additional note to readers outside France: The securities that may be discussed in this report, as well as the material itself, may not be
available in every country or to every category of investors.
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