Mr. Herman Z Bennett, Mr. Julio Escolano, Ms. Stefania Fabrizio, Eva Gutiérrez, Mr. Iryna V. Ivaschenko, Mr. Bogdan Lissovolik, Marialuz Moreno-Badia, Mr. Werner Schule, Mr. Stephen Tokarick, Mr. Yuan Xiao, and Ziga Zarnic
This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This collection of studies analyzes developments in nonprice external competitiveness of France, Greece, Italy, Portugal, and Spain. While France, Italy, and Portugal have experienced substantial export market share losses, Greece and Spain performed relatively well. Export market share losses appear associated with rigidities in resource allocation (sectoral, geographical, technological) relative to peers and lower productivity gains in high value-added sectors. Disaggregated analysis of goods and services export markets provides insights on aspects such as quality, market concentration, growth of destination markets, and geographical and sectoral diversification. Also, increased import penetration, offshoring and FDI could improve productivity and export performance.
The consensus view of the literature is that foreign direct investment (FDI) in general has a favorable impact on productivity and exports.2 FDI can be resource-seeking or market-seeking, and the former type boosts exports directly. But both types of FDI also have indirect impacts through positive externalities and spillover effects: they may bring capital and knowhow to domestic industries, have positive externalities on domestic companies through competition and reduced costs of inputs, and help host country exporters to gain access to foreign market. Although in theory FDI could adversely affect domestic producers by competing for markets and skilled employees, empirical evidence tends to support that the benefits of FDI significantly outweigh its costs for host countries.
As a result of globalization, firms in countries around the world have been engaged in a “fragmentation” of the production process, i.e., breaking the production process into smaller tasks and carrying them out where they can be accomplished most cheaply. This process has been referred to as “outsourcing” and it can take a variety of forms. Outsourcing can take place domestically, as when a firm procures the services of an supplier who is located in the same country, or internationally, as when a foreign firm provides the service. When the latter occurs, it is termed “offshoring” and this practice has received a great deal of press attention in recent years because it is sometimes alleged that it leads to job losses in the home economy. Both domestic outsourcing and foreign outsourcing give rise to trade, either domestically between firms or internationally.
Imports increase consumer choices, exert competitive pressures on domestic producers, and facilitate industrial restructuring. In studies of cross-country differences in external performance, imports have drawn considerably less attention than exports, and typically have been assigned a passive role. For example, Allard, et al (2005) found imports to be largely determined by final demand while competitiveness has been playing a minor role. However, the benefits of imports are well known: they increase the supply of goods and services available to meet final demand, enable a national economy to bring forward consumption and investment, offer an enlarged product variety, and facilitate the global division of labor. This chapter looks at the role of imports in restructuring the economies of the five southern euro area (SEA-5) countries—France, Greece, Italy, Portugal, and Spain—and, for the purpose of comparison, the euro area average and Germany.
Ireland’s major property bubble burst at the same time as the global financial crisis erupted, plunging the country into a severe recession in 2008–10. Public debt climbed rapidly as revenues collapsed and as banks’ rising loan losses increasingly required public support. Following the Greek crisis in spring 2010 and emerging tensions in the euro area, the last act in the process saw the operation of the “sovereign-bank loop”—a vicious cycle where uncertainty about banks’ health fed into doubts around the sustainability of public debt, which only added to fears about the banks. The government lost access to market financing at manageable interest rates, and Ireland entered into a three-year program supported by €67.5 billion of financial assistance from the European Union (EU) and IMF in late 2010.
Ireland’s program therefore had three main goals: restoring the viability of the banking system; putting the public finances on a sustainable path and returning to market funding; and restarting economic recovery including by improving growth potential. A large bank recapitalization in early 2011 helped stabilize deposits and other bank funding. The government’s access to market financing was progressively regained from mid 2012, enabling Ireland to exit the program at the end of 2013 and rely fully on market financing at highly favorable terms. The first signs of recovery were seen in strong job creation starting in the second half of 2012, and Ireland’s recent economic figures have surpassed even the most optimistic expectations, with growth of about 5 percent in 2014.
Seeking to draw lessons for Ireland, the EU, and the IMF, as well as other countries facing similar challenges, the Central Bank of Ireland (CBI), the Centre for Economic Policy and Research (CEPR), and the IMF organized a conference titled “Ireland—Lessons from Its Recovery from the Bank-Sovereign Loop.” Held on January 19, 2015, at the historic Dublin Castle, it brought together Irish government representatives, European officials, academics, journalists, private sector representatives, and other stakeholders, as well as the IMF’s Managing Director. The conference discussions were anchored by three papers by leading international academics and moderated by journalists familiar with the issues. The event concluded with a high-level panel discussion by senior policymakers.
This Selected Issues paper assesses the youth unemployment problem in advanced European economies, especially the euro area. Youth unemployment rates increased sharply in the euro area after the crisis. Much of these increases can be explained by output dynamics and the greater sensitivity of youth unemployment to economic activity compared with adult unemployment. Labor market institutions also play an important role, especially the tax wedge, minimum wages, and spending on active labor market policies. The paper highlights that policies to address youth unemployment should be comprehensive and country specific, focusing on reviving growth and implementing structural reforms.