Eurozone Crisis – slides June 22012

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Transcript Eurozone Crisis – slides June 22012

Eurozone Crisis
Banking Crisis, Break Up, Depression..
....or United States of Europe?
The Global Economy Context
• 1. Limits to Growth Constraints – experienced
as high energy, food and materials costs so
that growth is flagging anyway and millions
struggle to find enough purchasing power
Limits to Growth Constraints:
Liquid Fuels
The Global Economy Context
• 1. Limits to Growth Constraints – experienced
as high energy, food and materials costs so
that growth is flagging anyway and millions
struggle to find enough purchasing power
• 2. The growing power of the global finance
sector/casino – and its effects in politics and
financial speculation – huge sums of money
slosh around the world into and out of
countries and banks looking for safe havens
and gambling on outcomes of crises –
making these crises worse..
The Global Economy Context
• 1. Limits to Growth Constraints – experienced as high
energy, food and materials costs so that growth is
flagging anyway and millions struggle to find enough
purchasing power
• 2. The growing power of the global finance
sector/casino – and its effects in politics and financial
speculation – huge sums of money slosh around the
world into and out of countries and banks looking for
safe havens and gambling on outcomes of crises –
making these crises worse..
• 3. Uneven development between nations reaching
their outer limits and unbalancing the global
economy - e.g. The BRICS, particularly China, vs USA
and Europe....and the eurozone crisis within Europe
The Global Economy Context
• 1. Limits to Growth Constraints – experienced as high
energy, food and materials costs so that growth is flagging
anyway and millions struggle to find enough purchasing
power
• 2. The growing power of the global finance sector/casino –
and its effects in politics and financial speculation – huge
sums of money slosh around the world into and out of
countries and banks looking for safe havens and gambling
on outcomes of crises – making these crises worse..
• 3. Uneven development between nations reaching their
outer limits and unbalancing the global economy - e.g. The
BRICS, particularly China, vs USA and Europe....and the
eurozone crisis within Europe
• (4. Ageing society in “developed” countries – more and
more elderly people dependent on pensions from the
finance sector....)
What is “the problem”
in the Eurozone really?
• Current austerity policies treat “the problem” as if it
were due to inadequate financial discipline by states.
i.e. States have spent too much and not taxed enough
so they need to borrow too much.. In this narrative
created to bamboozle ordinary people states need to
adopt policies which cut expenditure, raise taxes and
privatise assets instead of spending and borrowing so
much...
• Only those countries that sign the sado-monetarist
fiscal pact can expect to receive aid from the European
Stability Mechanism (ESM), the permanent euro rescue
fund which will be launched this summer with €700
billion available.....
From 2001 to 2007 fiscal deficits were not high
There were however considerable trade
imbalances
Germany undermined its competitors
• Germany outcompeted the peripheral
countries – in the eurozone they could no
longer devalue
• Before the common currency countries that
could not compete with German (and
other)imports in their markets retained
competitiveness because their separate
currencies could be devalued.
Inability to devalue inside eurozone...
• For example, if Italy was importing more goods from Germany than it
was exporting back the lira depreciated against the deutschmark. So, for
Italians to continue buying German goods meant more lira had be
offered for DM and German goods became more expensive to Italian
importers.
• By contrast Germans buying in Italy (eg on holiday) got more lira for a
DM and so spent more in Italy. Imports of German goods would fall and
exports to Germany would rise.
• In the common currency zone this adjustment can no longer happen. The
peripheral countries are probably 30% overvalued compared to Germany
but cannot devalue. Greece is probably 60% overvalued.
• For a time the peripheral countries borrowed from eurozone banks to
pay for their import surpluses. However that is a temporary solution.
• The German economy is undermining the economies of its competitors
who are also its customers. This had knock on effects on the property
markets and then on state finances in the eurozone
Import Surpluses are Deflationary – purchasing
power leaks out of the economy abroad
•
An import surplus (trade deficit) is deflationary,
tending to force down income and prices. More
purchasing power is being spent abroad to buy
imports than foreigners are bringing in to pay for
exports and their holidays.
•
A leakage of purchasing power out of an
economy caused by imports can be offset for a
time by people borrowing new bank credit
money, particularly if bank credit is cheap, as it
was in the first few years of the eurozone. It also
helps if households or firms have savings to run
down to pay for more than they are earning.
•
After the 2007 crunch that was no longer
possible. Companies and individuals saved to pay
off debts instead so incomes fell as people spent
less at home and abroad.
After 2007 – the global crash morphed
into a problem of state finances
• Falling incomes created government deficits as taxes
fell and welfare and unemployment benefits rose.
• The import surplus made state funding even more of a
problem. Healthy domestic businesses from which tax
revenues could be raised are less while welfare and
unemployment benefits tend to rise.
• This added to the fact that over the last decades most
countries had reduced taxes on the rich, on property
and real estate and put taxes on ordinary people and
labour instead.
• At the same time broken banks passed their property
market losses over to governments.
Governments inherit the debts of banks
broken when a property bubble crashed
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In several countries (eg Ireland and
Spain) a real estate bubble developed up
to 2007 because there was still money to
be made in building houses,
infrastructure and to some extent
holiday homes. Migration was high and
credit in the new eurozone was cheap.
EU funds were available for the
infrastructure.
Local government often encouraged
land development because their
revenues were then higher.
If rising land values had been taxed away
this would have discouraged speculation
and helped resolve the fiscal crisis but
property taxes were reduced and taxes
put on labour income instead.
Cheap euros borrowed from the banks
pumped up real estate and land prices.
Governments Bail Out the Banks
• When the property
bubble burst many
banks were left with
bad debts.
• Governments bailed out
the banking system.
• Taxpayers were then on
the hook for the debts even though they were
struggling because of
their own debts
The Debt Deflation Spiral
• 1. Credit rating agencies downgrade
countries throwing doubt over
whether they will repay their debts.
The Debt Deflation Spiral
• 1. Credit rating agencies downgrade
countries throwing doubt over
whether they will repay their debts.
• 2. The financial markets demand
higher interest rates for more risky
lending.
The Debt Deflation Spiral
• 1. Credit rating agencies downgrade
countries throwing doubt over
whether they will repay their debts.
• 2. The financial markets demand
higher interest rates for more risky
lending.
• 3. Higher interest rates have to be
financed out of state budgets so lead
to more tax raises on ordinary people
(though not on elites), cuts in services
and privatisations.
The Debt Deflation Spiral
• 1. Credit rating agencies downgrade countries
throwing doubt over whether they will repay
their debts.
• 2. The financial markets demand higher
interest rates for more risky lending.
• 3. Higher interest rates have to be financed
out of state budgets so lead to more tax
raises on ordinary people (though not on
elites), cuts in services and privatisations.
• 4. These austerity measures reduce income
and spending as people and companies cut
back more, reducing tax takes while elites
take their money to Switzerland..
The Debt Deflation Spiral
• 1. Credit rating agencies downgrade countries
throwing doubt over whether they will repay
their debts.
• 2. The financial markets demand higher
interest rates for more risky lending.
• 3. Higher interest rates have to be financed
out of state budgets so lead to more tax
raises on ordinary people (though not on
elites), cuts in services and privatisations.
• 4. These austerity measures reduce income
and spending as people and companies cut
back more, reducing tax takes while elites
take their money to Switzerland..
• 5. Government deficits get worse.
The Debt Deflation Spiral
• 1. Credit rating agencies downgrade countries
throwing doubt over whether they will repay their
debts.
• 2. The financial markets demand higher interest rates
for more risky lending.
• 3. Higher interest rates have to be financed out of state
budgets so lead to more tax raises on ordinary people
(though not on elites), cuts in services and
privatisations.
• 4. These austerity measures reduce income and
spending as people and companies cut back more,
reducing tax takes while elites take their money to
Switzerland..
• 5. Government deficits get worse.
• 6. Rating agencies downgrade country debt ratings
again.....
The Debt Deflation Spiral
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1. Credit rating agencies downgrade countries throwing
doubt over whether they will repay their debts.
2. The financial markets demand higher interest rates for
more risky lending.
3. Higher interest rates have to be financed out of state
budgets so lead to more tax raises on ordinary people
(though not on elites), cuts in services and privatisations.
4. These austerity measures reduce income and spending as
people and companies cut back more, reducing tax takes
while elites take their money to Switzerland..
5. Government deficits get worse.
6. Rating agencies downgrade country debt ratings again.....
7. Riots, strikes and protests eventually means that
governments fall
The Debt Deflation Spiral
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1. Credit rating agencies downgrade countries throwing
doubt over whether they will repay their debts.
2. The financial markets demand higher interest rates for
more risky lending.
3. Higher interest rates have to be financed out of state
budgets so lead to more tax raises on ordinary people
(though not on elites), cuts in services and privatisations.
4. These austerity measures reduce income and spending as
people and companies cut back more, reducing tax takes
while elites take their money to Switzerland..
5. Government deficits get worse.
6. Rating agencies downgrade country debt ratings again.....
7. Riots, strikes and protests eventually means that
governments fall
8. European Union imposes "technocratic" - i.e. Unelected
rulers - usually former bankers and their associates..
The Debt Deflation Spiral
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1. Credit rating agencies downgrade countries throwing
doubt over whether they will repay their debts.
2. The financial markets demand higher interest rates for
more risky lending.
3. Higher interest rates have to be financed out of state
budgets so lead to more tax raises on ordinary people
(though not on elites), cuts in services and privatisations.
4. These austerity measures reduce income and spending as
people and companies cut back more, reducing tax takes
while elites take their money to Switzerland..
5. Government deficits get worse.
6. Rating agencies downgrade country debt ratings again.....
7. Riots, strikes and protests eventually means that
governments fall
8. European Union imposes "technocratic" - i.e. Unelected
rulers - usually former bankers and their associates..
9. Bankers who have “insured debt” against default lean on
politicians behind the scenes lest they have to pay out and
pressure for further austerity on the people
The Debt Deflation Spiral
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•
•
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•
•
•
•
•
1. Credit rating agencies downgrade countries throwing doubt over
whether they will repay their debts.
2. The financial markets demand higher interest rates for more risky
lending.
3. Higher interest rates have to be financed out of state budgets so lead
to more tax raises on ordinary people (though not on elites), cuts in
services and privatisations.
4. These austerity measures reduce income and spending as people and
companies cut back more, reducing tax takes while elites take their
money to Switzerland..
5. Government deficits get worse.
6. Rating agencies downgrade country debt ratings again.....
7. Riots, strikes and protests eventually means that governments fall
8. European Union imposes "technocratic" - i.e. Unelected rulers - usually
former bankers and their associates..
9. Bankers who have “insured debt” against default lean on politicians
behind the scenes lest they have to pay out and pressure for further
austerity on the people
10. People who cannot pay don't pay – so the prospect of default looms
anyway.
The Debt Deflation Spiral
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•
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•
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•
•
•
•
•
1. Credit rating agencies downgrade countries throwing doubt over
whether they will repay their debts.
2. The financial markets demand higher interest rates for more risky
lending.
3. Higher interest rates have to be financed out of state budgets so lead
to more tax raises on ordinary people (though not on elites), cuts in
services and privatisations.
4. These austerity measures reduce income and spending as people and
companies cut back more, reducing tax takes while elites take their
money to Switzerland..
5. Government deficits get worse.
6. Rating agencies downgrade country debt ratings again.....
7. Riots, strikes and protests eventually means that governments fall
8. European Union imposes "technocratic" - i.e. Unelected rulers - usually
former bankers and their associates..
9. Bankers who have “insured debt” against default lean on politicians
behind the scenes lest they have to pay out and pressure for further
austerity on the people
10. People who cannot pay don't pay – so the prospect of default looms
anyway.
11.Banks fear bankruptcy and a domino chain of failures as state bonds
are downgraded and their assets lose value
Deflationary Spiral
Sovereign Debt Crises
• A state that has debts but which
issues its own money supply can
always print enough money to repay
its debts. (Or get its central bank to
print money and then make the
money available to the government)
• But that cannot happen in the
Eurozone and indeed the Treaty of
Maastricht outlaws central banks
creating euros and making them
available to states...
• So states that get in this deflationary
spiral can run out of money and need
to borrow – and not have the money
to bail out their banks....
The Sovereign Debt Crisis then
exacerbates the banking crisis
• Another vicious circle:
• States bailing out banks by taking on bank bad debts
themselves become financially vulnerable so that their own
debts become default risks
• Then banks still holding state debt (bonds) find their assets
are no longer safe and means, in turn, that defaulting states
would mean defaulting banks
• The sovereign debt problem may also be passed through
credit default swap markets back to banks (though the
biggest players find ways to wriggle out of their obligations)
The supposed rescue policies
European Financial Stability
Mechanism
• In return for loans from
the EFSF countries must
adopt German dictated
strict austerity
measures which will
reduce incomes thus
making state and
banking sector finances
worse – an exercise in
futility...
Techniques for rescuing the Eurozone
ECB and the Long Term Refinancing Operation (LTRO)
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What is LTRO?
The long term refinancing operation (LTRO) is a cheap loan scheme for European
banks that was announced by the European Central Bank (ECB) towards the end of
2011 in a bid to help ease the eurozone crisis
Why are banks signing up for LTRO?
Eurozone banks are strapped for cash, and with the ongoing crisis in the region,
investors have become slow to back them up. As the money starts to dry up banks
face a potential funding, or 'liquidity', problem.
The biggest strain on eurozone banks is repaying their debts to bondholders –
these redemptions are 'absolutely massive' in 2012.
How does LTRO work?
Banks in Europe ask the ECB for the loan. The loan is then backed up by collateral
through the bank’s own national central bank, meaning each country vets the
collateral for the loans given to banks.
The loans differ from the ECB’s previous monthly, longer-term lending programme,
which allowed banks to take money for a three-month term at low rates.
European Banking Crisis – The Spanish
Government doesn’t want to use the ESFS
• Spanish banks are sitting on roughly €1 trillion ($1.3
trillion) in shaky loans related to the ailing real
estate sector -- and urgently need fresh capital as a
risk buffer. The estimates for the cash shortfall
range from €50 billion to €200 billion.
• Since such sums of money would overburden both
the banks and the government budget, experts
believe that the Spanish government should
urgently seek help from the EFSF.
• But Spanish Prime Minister Mariano Rajoy is
resisting this move, not just because the euro
partners would basically have a say in governing the
country, but also because his entire nation would
then be branded as high risk -- and would probably
find itself cut off from the international financial
markets.
Unemployment
• Euro zone unemployment has hit a record
high, and job losses are likely to keep climbing
as the bloc’s devastating debt crisis eats away
at businesses’ ability to hire workers while
indebted governments continue to cut staff.
• Around 17.4 million people were out of work
in the 17-nation euro zone in April, or 11
percent of the working population, the
highest level since records began in 1995.
The Break Up Scenario...
Leaving the euro and devaluing might
solve the trade imbalances for counries
like Greece and Spain but...
• The value of Euro denominated debt owed to
external creditors would soar relative to GDP
denominated in a weakening currency....
• Countries would be forced to default on their
debts....which are largely to Germany....
• Currently creditors are shifting the entire burden of
adjustment onto debtors, while the "centre" avoids
its own responsibility for the imbalances but this
would rebound on Germany if it leads to a break
up....
“Too much success is not an advantage”
Lao Tzu “Tao te Ching”
Germany’s export success becomes
its Achilles Heel
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The exports to southern europe
exceeded imports so Germany
earned more from exports than it
paid for imports. This money
balance was used for loans to
southern europe through the banking
system so that they could buy the
imports from Germany
A wave of defaults in southern
europe would mean Germany’s own
banks would need to be bailed out
At the same time export demand
generates a huge proportion of
German GDP – if/when this crashes
so too will German export markets
and thus the German economy.....
Germany’s economy is thus very
vulnerable if and when the euro
crashes...
What would a collapse feel like? No money/credit =
no goods...E.g. Energy and pharmaceuticals in Greece
• 1. “Greece's power regulator RAE told Reuters on Friday it was
calling an emergency meeting next week to avert a collapse of the
debt-stricken country's electricity and natural gas system. RAE took
the decision after receiving a letter from Greece's natural gas
company DEPA, which threatened to cut supplies to electricity
producers if they failed to settle their arrears with the company.”
• 2. “The country's pharmacies are owed 500m euros by the statebacked healthcare insurer, according to reports. From next week
patients will have to stump up the cash for their medicines upfront,
and then claim a reimbursement from the National Organization for
Healthcare Provision (EOPYY). It doesn't take a genius to figure out
that a) medicines tend to be very expensive, b) so paying for them
may be very difficult for a lot of people, especially pensioners. And
c) if the EOPYY is having trouble paying the pharmacists, it's unlikely
to find it any easier to reimburse individuals.
Trade Insurance dries up and thus imported
components cease to be available
• Trade insurers have been reviewing their Greek
exposure ahead of the country's June 17 general
election, seen as a potential trigger for a euro exit if
victory goes to parties that oppose spending cuts
agreed under a European bailout deal......
• Reduced availability of insurance cover for exports to
Greece will likely make it harder for manufacturers
there to source imported components and materials,
said Vincent McCue, trade credit client team leader at
insurance broker Marsh.
In Summary
• In the context of an unstable and fragile global economy
loaded down with debt and rising energy and materials
costs..
• Intra European trade imbalances were deflationary in
peripheral countries and after 2007 created a state and
banking finance crisis made worse by property market
collapses which undermined the banks
• Austerity policies are combined with loans to states and
banks but make the situation worse creating a vicious spiral
• The aim of the banks and finance houses in all of this are to
be left standing after everyone else is ruined and state and
other assets have been transferred to them
United States of Europe?
(or a German takeover of Europe)
“The plan could see vast national debt and banking liabilities
pooled – and then backed by the financial strength of Germany
– in return for eurozone governments surrendering sovereignty
over their budgets and fiscal policies to a central eurozone
authority.
A "gang of four" – the European council president, the
commission chief, the president of the European Central Bank
and the head of the eurogroup of 17 finance ministers – has
been charged with drafting the proposals for a deeper eurozone
fiscal union, to be presented to an EU summit at the end of the
month.”