Sluggish Business Investment in the Euro Area: The Roles of Small and Medium Enterprises and Debt

By John C. Bluedorn and Christian Ebeke

Small businesses could be the lifeblood of Europe’s economy, but their size and high debt are two of the factors holding back the investment recovery in the euro area. The solution partly lies in policies to help firms grow and reduce debt.

Our new study, part of the IMF’s annual economic health check of the euro area, takes a novel bottom-up look at the problem. We analyze the drivers of investment using a large dataset of over six million observations in eight euro area countries, from 2003 to 2013: Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain. Continue reading

Growing Older: Germany Needs Reforms

By Enrica Detragiache, Jean-Marc Natal, and Joana Pereira

Version in Deutsch (German)

Germany, a champion of structural reform prescriptions within the European Union, needs a large dose of the same medicine at home, too. Beyond public investment in transport and telecommunications, and more competition in services, dealing with an aging population needs urgent attention. With the right policies, Germany can bring more people into the workforce—and for longer—to counter the demographic trend, argues a recent study accompanying the regular health check of the German economy by the International Monetary Fund.

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Greece: Toward a Workable Program

poul-thomsen1By Poul M. Thomsen

Versions in عربي (Arabic), EspañolFrançais, and ελληνικά (Greek)

Having successfully pulled Greece from the brink last summer and subsequently stabilized the economy, the government of Alexis Tsipras is now discussing with its European partners and the IMF a comprehensive multi-year program that can secure a lasting recovery and make debt sustainable. While discussions continue, there have been some misperceptions about the International Monetary Fund’s views and role in the process. I thought it would be useful to clarify issues.

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Empowering Women, Tackling Income Inequality

By Sonali Jain-Chandra, Kalpana Kochhar, and Monique Newiak

(Versions in عربي中文Français日本語Русский, and Español)

Despite progress, wide gaps between women and men’s economic empowerment and opportunity remain, which policymakers need to tackle urgently. In most countries, more men than women work, and they get paid more for similar work. Also, there are considerable gender gaps in access to education, health and finance in a number of countries. There is mounting evidence that the lack of gender equity imposes large economic costs as it hampers productivity and weighs on growth.

Our new study analyzes the links between these two phenomena—inequality of income and that of gender.  We find that gender inequality is strongly associated with income inequality across time and countries of all income groups.

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From Taper Tantrum to Bund Bedlam

By Yingyuan Chen, David Jones and Sanjay Hazarika

(Versions in 中文 and deutsch)

Global financial markets traditionally take their cue from the United States. Unexpected Fed rate hikes have unsettled global markets in the past. The entire global financial system threw a tantrum when then Fed Chairman Ben Bernanke merely suggested in May 2013 that the end to bond-buying and other policies could soon begin. However for the past year, the gears of global markets seem to have been thrown into reverse — it is German government bonds, known as Bunds, rather than U.S. bonds, known as Treasuries, that appear to be driving prices in global bond markets. This role reversal could add a new layer of complexity to investor calculations as they prepare for the beginning of Fed interest rate hikes, which are expected later in 2015. Also, as developments in Greece lead to rises and falls in Bund and Treasury yields, this is a trend worth keeping an eye on.

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Securitization: Restore Credit Flow to Revive Europe’s Small Businesses

By Shekhar Aiyar, Bergljot Barkbu, and Andreas (Andy) Jobst

If financing is the lifeblood of European small businesses, then the effect of the financial crisis was similar to a cardiac arrest. The flow of affordable credit from banks was choked off and small and medium-sized enterprises (SMEs) were hit hardest. Today, with bank lending still recovering from that shock, smart policy actions could open up securitization as a source of financing to help small businesses start up, flourish and grow.

SMEs are vital to the European economy. They account for 99 out of every 100 businesses, two in every three employees, and 58 cents of each euro of value added of the business sector in Europe. Improving access to finance would therefore not only revive small businesses, but also support a strong and lasting recovery for Europe as a whole.

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European Life Insurers: Unsustainable Business Model

By Reinout De Bock, Andrea Maechler, and Nobuyasu Sugimoto

(Versions in Français and deutsch)

Low interest rates in the euro area pose substantial challenges to the life insurance industry. Insurers—particularly in Germany and Sweden—offer their clients long-term policies, sometimes more than 30 years, without holding assets of a correspondingly long duration. Moreover, many policies contain generous return guarantees, which are unsustainable in today’s low interest rate environment.

In 2014, stress tests showed European life insurers are vulnerable to a “Japanese-like” scenario.

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