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The euro area and its role in the global economy

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Remarks by Jean-Claude Trichet, President of the ECB,
upon reception of the 2011 Global Economy Prize,
Kiel
It is a privilege to receive this Global Prize today. I would like to thank the jury for this distinction, which honours the ECB and its staff.
Kiel has a long tradition of openness. It has forged close ties with the rest of the world, ever since it joined the Hanseatic League in 1283. Seven centuries later, Kiel is today part of the euro area, a vast economic continent, which is itself globally open and linked in many ways to the rest of the world. It is about the euro area and of its role in the global economy that I would like to share with you some thoughts in receiving this Prize today.
How can we characterize the salient features of the euro area and of its role in the global economy? And what are the challenges that need to be addressed in this context?
Three key aspects deserve attention in my view.

First, the euro area is amongst the most open of large economies in the world.
The euro area’s trade relations with the rest of the world have grown appreciably since 1999, which underscores that the euro area is not a closed shop. The euro area’s trade openness has increased by about 9 percentage points over the first years of the euro, from roughly one-quarter to one-third of output, notably as a result of rapidly growing trade with vibrant economies, such as the new EU Member States or China.
The euro area is the world’s largest trading partner, after the European Union itself, accounting for about 14% of global exports and imports in 2010. Economic and Monetary Union has fostered trade. Not only inside the euro area (+50% increase in trade volumes over the first years of the euro), but even more so with the European Union as a whole and the rest of the world (+80% over the same period).
The euro area is also very open financially, and increasingly so. Its international assets and liabilities averaged each around 170% of GDP in 2009, compared with roughly 140% of GDP for the US and 90% of GDP for Japan. As financial globalisation unfolded in the last decade, the euro area’s external assets and liabilities have grown in tandem, by roughly 80 percentage points of GDP between 1999 and 2009.
The euro area is a vast continent of more than 331 million citizens. By population size, it is comparable with the other large economiy of the developed world, namely the United States, with a population of 310 million.
In terms of economic output, the euro area is second only to the United States. It accounted for about 20% of world output in 2010, twice the share of Japan (about 10% of world output), and somewhat less than the United States (about one-quarter of world output).

Second, the euro is a stable and credible currency.
For over 12 years now, the European Central Bank –together with all national central banks– has been delivering what it is expected to deliver: price stability in the euro area as a whole over the medium-term, with an average annual inflation of less than 2%, but close to 2%. Since we are in Kiel, let me add that in Germany the average yearly inflation has been 1.5%, which is a better result than for any such 12 year period over the last 50 years.
We have thereby been safeguarding the euro’s purchasing power. This has been achieved despite several headwinds to the European economy: oil prices went up; the internet bubble burst; violence and wars have raged in some parts of the world; and starting in mid-2007 we had to cope with the most severe global financial crisis in over 60 years.
Taken as a whole, the euro area performed soundly also when looking at other macroeconomic indicators, or comparing with other large developed economies.

  • Adjusted for differences in population growth, per capita GDP growth in the euro area over the last decade has been almost the same as in the United States, at about 1% per year.
  • The dispersion of real GDP growth rates across euro area countries is comparable with the equivalent dispersion across U.S. states. For instance, the difference between the fastest and slowest-growing U.S. states is not of a markedly different order of magnitude as that between euro area countries.
  • Overall employment in the euro area increased by 14 million during the first twelve years, compared with a rise of about 8 million in the United States.
  • And the overall yearly public finance deficit in the euro area is presently about half that in the United States or in Japan. The IMF projects indeed the euro area’s fiscal deficit to reach 4.4% of GDP this year, against 10.8% of GDP in the U.S. and 10.0% in Japan.

The euro’s international status is the outcome of market forces. But one of the particular characteristics of the euro’s international role is to be markedly regional and strongest in economies with close geographical and institutional links to the euro area.
The euro’s international role also displays a high degree of stability. And the available factual evidence suggests that it has remained broadly unchanged since the outbreak of the global financial crisis, in particular.
For instance, the euro accounted in 2010 for about one-quarter of disclosed foreign exchange reserves globally (against around 60% for the US dollar and 4% for the yen). It also accounted for about one-quarter of the stock of international debt securities and for roughly 20% of foreign exchange turnover.
Third, the euro area has a balanced current account.
As such, the euro area does not contribute to global imbalances, one of the main challenges facing the global economy and the world community.
It is worth stressing that the euro area is the relevant dimension to consider for a vast single currency and economic area with a common exchange rate and monetary policy. And there, the numbers are clear: the euro area current account balance averaged less than 0.1% of GDP over 2005-2007 before the global crisis broke out, according to IMF figures. Moreover, the euro area current account is still projected by the Fund to be broadly balanced this year and the next up to 2015. The picture is very different in other parts of the world.
A concern is that after some partial reduction induced by the crisis, global imbalances are starting to widen again. This raises challenges for international monetary and financial cooperation. The euro area has a significant stake in effective global re-balancing, notably through sounder domestic policies worldwide which, in turn, would contribute to global external stability. The global economy has a lot of homework to do if it is to address these challenges.
People of goodwill, inspired by the desire to keep the global economy “open, market-based, just and protective” will surely be needed to that end. Credit should therefore be given to initiatives such as the Global Economy Prize to encourage them to press ahead in that direction.

Copyright © for the entire content of this website: European Central Bank, Frankfurt am Main, Germany.
 

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19 1

Organizations in the Middle East have had to take immediate actions in reaction to the COVID-19 pandemic, such as shifting to remote and virtual work, implementing new ways of working and redirecting the workforce on critical activities. According to Deloitte’s 10th annual 2020 Middle East Human Capital Trends report, “The social enterprise at work: Paradox as a path forward,” organizations now need to think about how to sustain these actions by embedding them into their organizational culture.

“COVID-19 has created a clarifying moment for work and the workforce. Organizations that expand their focus on worker well-being, from programs adjacent to work to designing well-being into the work itself, will help their workers not only feel their best but perform at their best. Doing so will strengthen the tie between well-being and organizational outcomes, drive meaningful work, and foster a greater sense of belonging overall,” said Ghassan Turqieh, Consulting Partner, Human Capital, Deloitte Middle East.

According to the Deloitte report, many organizations in the Middle East made quick arrangements to engage with employees in the wake of the pandemic through frequent communications, multiple webinars where senior leaders addressed employee concerns, virtual employee events, manager check-ins, periodic calls and other targeted interactions with the workforce.

The report also discussed how UAE and KSA governments have reexamined work policies and practices, amended regulations and introduced COVID-19 initiatives to support companies and the workforce in the public and private sectors. Flexible and remote working, team-building and engagement activities, well-ness programs, recognition awards and modern workspaces are among the many things that are now adding to the employee experience.

Key findings from the Deloitte global report include:

  • Only 17% of respondents are making significant investments in reskilling to support their AI strategy with only 12% using AI primarily to replace workers;
  • 27% of respondents have clear policies and practices to manage the ethical challenges resulting from the future of work despite 85% of respondents saying the future of work raises ethical challenges;
  • Three-quarters of leaders are expecting to source new skills and capabilities through reskilling, but only 45% are rewarding workers for the development of new skills; and
  • Only 45% of respondents are prepared or very prepared to take advantage of the alternative workforce to access key capabilities despite gig workers being likely to comprise 43% of the U.S. workforce this year according to the Bureau of Labor Statistics.

“Worker well-being is a top priority today, and similarly to the rest of the world, companies in the Middle East are focusing their efforts to redesign work around well-being by understanding workforce well-being needs,” said Rania Abu Shukur, Director, Human Capital, Consulting, Deloitte Middle East.

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One in five insurance customers saw an improvement in customer service over lockdown, research shows

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SAS research reveals that insurers improved their customer experience during lockdown

One in five insurance customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics. This far outweighed the 11% of customers who felt it had deteriorated over the same period.

This is positive news for insurers during such challenging times, with 59% of customers also saying that they would pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.

The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of insurance customers using a digital service or app has grown by 10%. Three-fifths (60%) of new users plan to continue using these digital services moving forward.

However, while the number of digital users grew over lockdown, half of the insurance customer base has not yet chosen to move to digital insurance apps or services.

Paul Ridge, Head of Insurance at SAS UK & Ireland, said:

“It’s impressive that there was a net improvement in customer experience during lockdown, despite the challenges the industry was facing with a transition to remote working and increased claims for things like cancelled holidays. While many were forced to wait on customer help lines for long periods, part of the improvement may be explained by even a small (10%) increase in the number of digital users.

“However, it’s clear that a huge number of customers are still yet to make the move online. It’s vital that insurers provide the most accurate, timely and relevant offerings to customers, and this is best achieved by having additional insight into online customer journeys so they can understand them better. Using analytics and AI, insurers can seize this opportunity to digitalise their customer experience and offer a more personalised approach.”

Meanwhile, for insurers that fail to offer a consistently satisfactory customer experience, the price could be severe. A third (33%) of customers claimed that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service.

For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer? 

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The power of superstar firms amid the pandemic: should regulators intervene?

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The power of superstar firms amid the pandemic: should regulators intervene? 3

By Professor Anton Korinek, Darden School of Business and Research Associate at the Oxford Future of Humanity Institute. Gosia Glinska, associate director of research impact, Batten Institute for Entrepreneurship and Innovation, Darden School of Business

Recent news that Apple hit a market cap of USD2 trillion highlights an extraordinary success story: A once struggling computer-maker on the verge of bankruptcy innovates its way to becoming the most valuable publicly traded company in the United States.

Apple’s 13-figure valuation is indicative of a larger trend that is not entirely benign — the rise of a handful of superstar firms that dominate the economy. Over the past three decades, advances in information technology, mainly the Internet, have supercharged the superstar phenomenon, allowing a small number of entrepreneurs and firms to serve a large market and reap outsize rewards. And COVID-19 has greatly accelerated the phenomenon by pushing us all into a more virtual world.

Apple — along with Amazon, Facebook, Google, Microsoft and Netflix — is a case in point. The combined market value of those six companies exceeds USD7 trillion, which accounts for more than a quarter of the entire S&P 500 index. Even amid the pandemic’s economic wreckage, these megacompanies continue to prosper. The combined share price for Apple and its five peers was up more than 43 percent this year, while the rest of the companies in the S&P 500 collectively lost about 4 percent.[1]

Superstar firms can be found in almost every sector of the economy, including tech, management, finance, sports and the music industry. They command increasing market power, which has consequences for technological, social and economic progress. It is, therefore, critical to understand how their advantages arose in the first place.

THE FORCES BEHIND THE SUPERSTAR PHENOMENON

The “economics of superstars” was first studied by the late University of Chicago economist Sherwin Rosen. Forty years ago, Rosen argued that certain new technologies would significantly enhance the productivity of talented workers, enabling superstars in any industry to greatly expand the scope of their market, while reducing market opportunities for everyone else.[2] Digital innovations, including advances in the collection, processing and transmission of information, is what Rosen envisioned would lead to the superstar phenomenon.

Digital technologies are information goods, which are different from the traditional, physical goods in the economy. What it means is that fundamentally different economic considerations apply. Unlike physical goods — a loaf of bread or a car — information goods have two key properties: They are non-rival and excludable. Non-rival means that something can be used without being used up. Excludability means that an owner of digital innovation can prevent others from using it, by protecting it with patents, for example. These two fundamental properties of information goods are what give rise to the superstar phenomenon.

In a working paper I co-authored with Professor Ding Xuan Ng at Johns Hopkins University[3], we described superstars as arising from digital innovations that require upfront fixed costs that allow firms to reduce the marginal costs of serving additional customers.[4] For example, once an online travel agency has programmed its website at a fixed cost, it can easily displace thousands of traditional travel agents without much additional effort, scaling at near-zero cost.

Because a firm can exclude others from using its digital innovation, it automatically gains market power. The innovator then uses that power to charge a mark-up and earn a monopoly rent — basically, a price superstars charge in excess of what it costs them to provide the good — which we call the ‘superstar profit share’.

THE POLICYMAKER’S DILEMMA

In a vibrant free market economy, businesses compete for customers by innovating and improving their offerings while keeping prices low; otherwise, they are displaced by more innovative rivals entering the market. Unfortunately, the increasing monopolization of the economy by technology superstars is weakening the competitive environment around the world.

Monopoly power is the main inefficiency from the emergence of superstar firms, because superstars can exclude others from using the innovation that they have developed.

So, what policy measures can be employed to mitigate the inefficiencies arising from the superstar phenomenon?

We do have antitrust policies designed to promote competition and hence economic efficiency. Authorities could take a drastic measure and break up monopolies. Or they could tax all those excess profits megacompanies make.

Another policy to consider involves giving consumers control rights over their data. Right now, only companies have that data, and they are selling it. If you free it up and don’t allow them to sell it anymore, it reduces their monopoly profits. And if you give consumers more freedom over their data, they could, for example, share it with the latest start-up and create a more competitive landscape.

However, such policy remedies can be a double-edged sword. On the one hand, they reduce monopoly rents. On the other hand, they can also reduce innovation.

Innovation requires investments in R&D, which represent a significant sunk cost that only large firms can afford. Government regulations can easily backfire, discouraging large firms from making long-term R&D investments.

What, then, is the best policy intervention? Professor Ding Xuan Ng and I believe that basic research should be public. Digital innovations should be financed by public investments and should be provided as free public goods to all. This would make the superstar phenomenon disappear, and the effects of digital innovation would simply show up as productivity increases.[5]

We live in a brave new world that is increasingly based on information. Because the information economy is different from the traditional economy, antitrust policy should be revamped to reflect that. Instead of worrying about the economy being eaten up by these gigantic monopolies, policymakers need to focus on the question ‘What specific actions can we pursue to make the economy more competitive and efficient?’

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