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Europe – the lost continent? Howard Davies Director, LSE European Union Chamber of Commerce in China Beijing, 27 July 2010 The European Union: 500 million people – 27 countries EU population, million people, 1986 – 2010 600.0 500.0 400.0 EU27 EU25 300.0 EU15 EU12 200.0 100.0 0.0 1986 Source: Eurostat. 1995 2004 2007 The Euro: A single currency for Europeans EU countries using the euro EU countries not using the euro Source: http://europa.eu/ How rich is the EU compared to the US, China and India? GDP per capita*, current prices (US dollars), 2009 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 *Numbers for China and India are estimates. Source: IMF World Economic Outlook, April 2010. US EU China India The EU economy is close in size to that of the US GDP, current prices (Billion US dollars), 2009 EU (16,447 Billion USD) US (14,256 Billion USD) Source: IMF World Economic Outlook, April 2010. Europe’s post-crisis growth rates likely to be sluggish Gross domestic product forecast (% change), constant prices, 2007-2015 14 12 10 8 China France Germany 6 4 India United Kingdom 2 United States 0 -2 2007 2008 2009 2010 2011 2012 2013 2014 2015 -4 -6 Source: IMF World Economic Outlook, April 2010. The World’s Economic Centre of Gravity is moving eastwards Projection of the World’s Economic and Geographic Centre of Gravity Source: Grether JM, Mathys N (2008): Is the World’s Economic Center of Gravity Already in Asia? EU is losing its share in global economic governance G8 Source: www.g20.org. G20 Costs of borrowing in the Eurozone have been growing apart 10-year Greek government-bond spreads over German bunds, percentage points, 2001 - 2010 Source: The Economist, 9 April 2010. Unit labour costs in Greece and Spain have been growing more rapidly than in Germany or France Quarterly unit labour cost*, index (2005 = 100.0), 2006 Q3 – 2010 Q1 120 115 110 France Germany Greece Spain 105 100 95 90 85 2005 Q42006 Q22007 Q42007 Q22008 Q42008 Q22009 Q42009 * Unit labour costs measure the average cost of labour per unit of output and are calculated as the ratio of total labour costs to real output, seasonally adjusted. Source: OECD Data, 22 July 2010. There has been a remarkable divergence in competitiveness Real exchange rate* and relative export performance, cumulative change between 1999 and 2008 *Real exchange rates are based on unit labour costs. Source: Bruegel Policy Brief, March 2010. Greece is by far the most vulnerable European country Estimates of cumulative budget deficit (%), 2009 – 2011, and debt to GDP ratio (%), 2011 Source: IMF, Morgan Stanley Research Estimates. Steps towards a resolution of the crisis • Fiscal consolidation • European Central Bank buys sovereign debt • European Financial Stability Facility • Bank Stress Tests • New Regulatory System Source: De Larosière Report, February 2009. But is this enough? • German fiscal retrenchment makes life harder for the PIGS • Still no ‘economic government’ • No fiscal transfer mechanism Europe – the lost continent? Howard Davies Director, LSE European Union Chamber of Commerce in China Beijing, 27 July 2010