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The Trader's Guide to the Euro Area: Economic Indicators, the ECB and the Euro Crisis



The Trader's Guide to the Euro Area: Economic Indicators, the ECB and the Euro Crisis

David J. Powell

ISBN: 978-1-118-44004-9 August 2013 216 Pages


The euro area remains in a state of flux and appears to be unsustainable in its present form. The outcome of the crisis may be unknown for years and a judgement on the project’s success or failure may be out of reach for decades.

In the meantime, analysts, portfolio managers and traders will still have daily, weekly, quarterly and annual benchmarks. They will have to analyze economic developments in the euro area and their impacts on financial assets. The objective of this book is to provide a framework for that analysis that is comprehensible to most financial market participants.

The book begins with a focus on coincident and leading economic indicators for the euro area. The following section looks at euro-area institutions. The next chapter focuses on the euro crisis. It attempts to provide an explanation of its origins and a glimpse of the potential outcomes. In addition, the tools needed to analyze the crisis as it evolves are presented.  The last sections provide information unique to the economies of Germany, France, the U.K., Switzerland, Sweden and Norway.

Acknowledgements ix


Introduction 1


Gross Domestic Product 5

The Expenditure Approach 5

The Output Method 10

The Income Method 11

GNP vs. GDP 11

Release Schedule 12

Trend Growth 15

The Business Cycle 16

Monetary Conditions Index 19

Effects of Monetary Policy on GDP 19

Effects of the Exchange Rate on GDP 21

Exchange-Rate Defl ators 23


Coincident Indicators 27

PMI Surveys 27

Industrial Production 31


Leading Indicators 35

Financial Conditions Index 35

The U.S. Business Cycle 38

ZEW Survey 39

Ifo Survey 41

M1 Money Supply Growth 52


Inflation Measures 57

Consumer Price Index 57

Producer Price Index 63

Labor Costs 65

Money Supply 68

Inflation Expectations 76


The European Central Bank 83

Traffic Light System 86

Mandate 88

Two-Pillar Strategy 90

Monetary Policy Implementation 91

Intervention in the Currency Markets 93

Taylor Rule 95


Other Institutions 101

Council of the European Union 101

European Parliament 102

European Commission 102

Ecofin 103

Eurogroup 103

European Council 104


Euro Crisis 105

Origins 105

Optimal Currency Area Th eory 109

Fiscal Consolidation 111

Quantitative and Qualitative Easing 112

Government Bond Purchases 115

Measures of National Solvency 117

Target2 Balances 121

Resolution 123

Departure from the Euro Area 127

Tools for Analyzing Debt Sustainability 127


Germany 133

Labor Market 133

Political Institutions 137

Political Parties 139


France 143


United Kingdom 145

The Bank of England 145

Quantitative Easing 153

GDP 155

Inflation Measures 157

House Prices 158

Political Institutions 164


Switzerland 167

The Swiss National Bank 167

KOF Leading Indicator 168


Sweden 171


Norway 175

Bibliography 179

Index 197

ChapterPageDetailsDatePrint Run

Author's note: Previous versions of the table titled "Euro area economic and financial data" are unavailable on the ECB's website. The author is therefore unable to verify whether the following changes are required because of his own oversight or a clarification by the ECB of its definition of a non-resident holder of euro-area debt. In any case, paragraph three on page 120 and footnote 33 should read:
"The euro area lacks the luxury of Japan. Of euro-area government bonds, 51.1% are held by non-residents.33 The numbers for non-resident holdings of government debt are broadly similar throughout the monetary union, with a few exceptions (Table 8.1).34"

33 The ECB reported general government debt held by non-residents stood at 44.6% of GDP and gross outstanding general government debt stood at 87.3% of GDP, as of February 18, 2013. (44.6/87.3 = 51.1). The ECB refers to non-residents as "other creditors" and indicates this category "includes residents of euro area countries other than the country who government has issued the debt." For example, a German holder - as well as an American or British holder - of Spanish government debt is considered a non-resident creditor. For the latest data, see: