Among the biggest coffee drinkers in the world, euro-zone consumers are cutting back.
As one Milan café owner explained, “Since the beginning of the year most of our regulars cut their coffees from around four to two a day. Sometimes, instead of getting a cappuccino or other types of more expensive coffees, they just have an espresso. This is the effect of the crisis.”
Meanwhile, in Brazil, partially because of good weather, supply is up for the highest quality beans (arabica) that the Italians and Spanish prefer. In addition, not only have some Europeans begun to switch to cheaper robusta beans but also growers who had withheld their beans awaiting higher prices are now facing a decline that might mean they will sell at a lower price.
It all adds up to classic demand and supply. Because of declining income, the demand curve for troubled euro-zone economies shifted to the left. Meanwhile, with bountiful crops, supply shifted to the right. The result? Price tumbled. And indeed, arabica coffee prices are down 30 percent from a year ago.
Sources and Resources: While I discovered the current status of coffee beans in a Barron’s column, my coffee prices, here, and consumption, here (source of table below), this August WSJ article tells more about European demand and was the source of the above quote. Also, for a nice combination of stats and stories, you might enjoy this Reuters video.
Per Capita Coffee Consumption: 2006/2007
Posted by: adminEcon
Tags: arabica coffee beans, coffee drinkers, coffee prices, demand, equilibrium, espresso, euro zone, euro-zone recession, Finland, Italy, Spain, supply, UK, US
Are Germans thinking, “We did it and now it’s your turn?”
Ten years ago, Germany’s unemployment rate averaged more than 9% and economic growth was close to zero. Jobless workers, depending on their family status, were receiving 60-67% of their former wage for 32 months and 53-57% thereafter. Not only were the payments expensive but so too was the army of government employees needed to calculate them. In addition, because government regulations made it difficult to fire anyone, businesses avoided expansion.
With structural reform the solution, the German political leadership asked a Volkswagen executive, Peter Hartz, to lead a commission. In the economically depressed eastern half of the country, thousands of unhappy German workers protested in the streets.
The Hartz Commission targeted workers, businesses and government.
- Hoping to diminish work disincentives, they lowered unemployment benefits. Workers would receive basic welfare after 12 months with a rent and utility subsidy.
- Knowing that the right to fire made hiring more attractive, businesses could create temporary, low paying mini-jobs.
- And finally, lower unemployment benefits and more business activity meant lower deficits.
Perhaps we could call it tough love.
Now, the German economy is healthy. In his Boomerang chapter on Germany, Michael Lewis says, that either the weaker euro states must join in a German funded fiscal union (sort of like the connection between Indiana and Mississippi) or the weaker nations must endure structural reform. “The first solution is pleasant for the Greeks [and the other peripheral states]. The second solution is pleasant for Germans but painful, possibly even suicidal, for Greeks.” (p. 141)
Knowing about German austerity, do you think Germans can accept less from their euro zone relatives?
This Planet Money podcast does a good job of briefly explaining German austerity and the Hartz Commission while these 2002-2005 news articles, here and here provide the ongoing narrative.
Posted by: adminEcon
Tags: austerity, France, Germany, Greece, Hartz Commission, Italy, mini-jobs, Spain, structural reform, temporary employment, unemployment benefits
Tomorrow is Euro Day and it reminds me of aspirin.
On May 9, 62 years ago, the French foreign minister proposed a limited economic partnership with West Germany. By the time the treaty was signed in 1951, the Netherlands, Luxembourg, Belgium and Italy had joined also to form a 6-nation coal and steel free trade zone. With people, services, goods and capital moving ever more effortlessly across European borders, that free trade zone grew and became a monetary union. Here, I would usually say that 19th century free trade advocate David Ricardo would be smiling.
Instead, aspirin comes to mind.
Imagine for a moment, a country with a sick economy. Lenders know it is ill so they ask for relatively high interest payments when that country borrows. Then though, the country joins the euro zone. Rather like taking aspirin for a fever, being a euro zone member makes it look healthier than it really is. As a result, lenders let the country borrow more easily. But really, it was still sick. It needed an economic antibiotic to attack the disease rather than just an aspirin for the symptoms.
That country is Greece. And now, with its illness having resurfaced, Greece has been prescribed fiscal medicine that includes 11 billion euros of spending cuts. Based on current political turmoil, they believe it was the wrong prescription.
Our Bottom Line: Can euro zone monetary union work without nations being required to take fiscal–spending, taxing, borrowing– medicine?
The Economist has a superb series of maps that display, country by country, different euro zone debt, growth, unemployment in which Greece, Portugal and Italy stand out for their massive debt. This Chicago Tribune story from Reuters tells more about Greek political turmoil. And here, in a NY Times Magazine article, Paul Krugman clearly and logically talks about euro zone history and challenges.
Reading about why people have a tough time delaying gratification, I started to think about countries.
A part of your brain–the insula–becomes more active when faced with an unpleasant task like dieting or seeing your team lose. Two MIT professors discovered that you can add paying with cash to the “unpleasant list” but not credit cards. As one of them said, “The nature of credit cards ensures that your brain is anesthetized against the pain of payment.” The result? You buy a lot more when you postpone payment (and pain) by charging it.
Countries also have been postponing payment and pain. Greek and Spanish pension obligations will soar during the next 40 years. Currently averaging between 20-30 percent of GDP for most euro zone countries, entitlement spending on public pensions, health care, and unemployment insurance is rising. Like cash vs. credit, aren’t overextended entitlement programs examples of current pleasure that will generate considerable future pain?
The Bottom Line: Will it ever be politically viable to realign incentives so that current gratification can be delayed in favor of future economic growth?
My facts about the insula and our shopping decisions, and my quotes, came from Jonah Lehrer in Wired and his book, How We Decide (p. 86). For the graphs and analysis of overextended entitlements, I consulted this NBER working paper. You might also want to look at economist Allan Meltzer’s new book, Why Capitalism.