Home > Uncategorized > Exchange rate regimes do matter: some European facts.10 graphs.

Exchange rate regimes do matter: some European facts.10 graphs.

There is a discussion going on about differences (or not) in economic performance between countries with more flexible and countries with more rigid exchange rate regimes, the Euro being the most rigid regime and floating rates, like those of the UK and the USA, the most flexible one. Look here for an article by Andy Rose which states that differences do not matter, here for comments from Krugman and here for comments from Matthew O’Brien.

Rose makes a statistical comparison between over 160 countries (inflation, unemployment, growth). This is of course dangerous: even when there is no difference between the height of French and German people French men might still be taller than German women while comparing Dutch women with men from the USA might, however, lead you to the conclusion that men are not, statistically significant, longer than women (when your sample is not too large). Is Rose making the right comparison between homogenous groups? For one thing: Euro countries are not included in his sample! And, let’s be true, n=160 is a rather small sample, when it comes to statistics! I though therefore that it might be interesting to make a country to country comparison for a number of rather comparable European countries (for the sample: see below). This is of course much less than the 160 of Rose – but they are surely a more homogenous sample. The result: different regimes do matter. A lot. Remarkable: Poland and Sweden are the only countries with a 2012 level of GDP which is higher than in 2008…

The main take away: the countries with more flexible regimes are doing better. A lot better. Or are starting to do so. Poland may be the most succesful example but remember that already before 2008 capital markets in Poland were much less dysfunctional and better organized and regulated than in the Baltics, which led to more prudent economic development.

In the unemployment graphs the Baltics area added for comparison as these countries are by some still supposed to be excellent examples of succesful neo-liberal dystopia policies (even before 2008!).

1a SwedenDenmark










This effect is probably not caused by export booms enabled by devaluation as this connection seems to be surprisingly low, which leads to the idea that more flexible exchange rates simply enable countries to prioritize domestic priorities instead of foreign creditors and to pursue contra cyclical instead of pro cyclical policies.

Some special points:

* surprisingly low unemployment in (small) Iceland, surprisingly low growth in Denmark.

* Bulgaria has the lowest wages of the EU, if low wages (engineered by either external or internal devaluation) were the solution Bulgaria should be growing much faster.

* It might seem strange to some that I classify the Netherlands as an austerity country and the UK implicitly as a country with more expansive policies, don’t forget however that the exchange rate of the pound decreased with about 20%!

The comparison is partly based upon countries mentioned by Rose in the first sentences of his ‘conclusions’ and partly on reasons which will given below. Andy Rose states:

Bulgaria is a small open emerging market, with membership in the EU, reasonable and improving institutions and GDP per capita of around $12,000. Its neighbor Romania is roughly comparable in size, income, institutions, and openness. Bulgaria prides itself on having rigorously maintained a fixed nominal exchange rate since 1997 through its currency board arrangement. Romania, on the other hand has operated an inflation targeting regime with a flexible exchange rate since 2005. Manifestly, similar economies choose different approaches to monetary policy. Denmark has stayed fixed to the Euro (earlier, the Deutschemark) at the same rate since 1987; Sweden has changed its regime a number of times since then, and installed an inflation targeting regime with a flexible exchange rate in 1993. Yet Denmark and Sweden are broadly comparable in size, income, institutions, and openness. Next to these I chose to take some austerity darlings and to compare them with a neighbouring country. The next ountries were chosen:

Poland and the Baltic countries (weighted average, Lithuania = 3, Latvia = 2, Estonia = 1 and rigid Euro peg vs. more flexible arrangements), Iceland and Ireland (bubble prone small Atlantic island countries which used to have oversized financial sectors but very different reactions to the financial crisis, i.e. the sanctifying of debts vs. defaulting on debt, Euro vs. non-Euro) and the UK and the Netherlands (large financial sector, house price booms and busts but due to strict zoning laws no building boom and Euro vs. non-Euro). Together, these countries cover the larger part of the North Sea and Baltic part of Europe as well as of Eastern Europe.

  1. Mike Hall
    October 22, 2013 at 9:51 am

    You might be interested to know why Ireland’s unemployment seemed to go down after late 2011. Much of the reduction has been due to an ‘internship’ scheme which pays €50/wk higher than Jobseekers Allowance (by govt) but excludes participants from the unemployment statistics.

    Roughly, by late 2012 there were ~ 12,000 on the scheme, about 0.7% of the whole workforce. The government have just raised the target to 20,000 participants. There’s an ‘Indecon’ report on it, with very dubious conclusions imo, here:

    Click to access Indecon-Report-on-Evaluation-of-JobBridge.pdf

    Also, there is a 19hrs/wk community work program, again €50 + benefits, called ‘TUS’ which began around the same time. Again, whilst still paid under the welfare dept. these are classed officially as ’employed’, so excluded from unemployment stats. I believe the target initially was for about 5,000 participants.

    So, if we add these numbers together, we have approx an entire 1 percentage point of unemployment removed from the statistics, and in fact placed in the ’employed’ category.

    A very Irish solution to unemployment – just hide it. Otherwise, blame the victims.

    • Mike Hall
      October 22, 2013 at 4:50 pm

      Sorry, by ‘Irish solution’, I mean by the political establishment, not the wider public :)

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