An assessment of the economic

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Transcript An assessment of the economic

Studium Generale
The euro area sovereign debt
crisis: causes and consequences
Prof. Dr. Olaf Sleijpen
Maastricht, 3 November 2011
School of Business and Economics
Agenda
1) A short (conceptual) history of
European monetary integration
2) Fiscal discipline in the Treaty
3) Evidence of fiscal discipline in the euro
area
4) Lessons to be drawn: the inconsistent
triangle revisited
5) A new perspective on nominal and real
convergence in the euro area
6) An assessment of the euro area summit
of 23 October
7) Concluding remarks
School of Business and Economics
A short (conceptual) history of
European monetary integration
Maastricht Treaty
“Big Bang”
approach
-Nominal convergence required;
No real convergence
-Strongly embedded monetary
policy structure in place
-Intergovernmental framework
to impose fiscal
discipline; no framework to
impose real convergence
-Convergence will
follow automatically after
Start monetary union
-Discipline imposed by
fixed exchange rates will
trigger nominal and real
economic discipline
Economic and Monetary Union
School of Business and Economics
Convergence
approach
-Inspired by Optimal
Currency Area theory
-Full nominal and real
convergence required
-Appropriate adjustment
mechanisms in place in
case of (asymmetric) shocks
-Monetary union is the “crown”
on convergence process
Why fiscal discipline matters in a
monetary union
•
•
•
•
•
Preventing spillovers from fiscal to
monetary policy
Preventing spillovers from national
fiscal policies to other Member States
Absorption of asymmetric shocks
at the national level
Market discipline flawed
Macro-economic and financial stability
School of Business and Economics
Fiscal discipline in the Maastricht
Treaty
•
•
•
•
Multilateral surveillance procedure
Excessive deficit procedure
Prohibition of priviliged access
No bail-out clause
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The Stability and Growth Pact
Revisited
• Adopted in 1997
(Amsterdam European Council)
• Reform in 2004
• Preventive arm
– Strengthening of the surveillance of
budgetary positions and the surveillance
and coordination of economic policies
• Corrective arm
– Speeding up and clarifying the
implementation of the excessive deficit procedure
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Insufficient compliance …
% GDP
2
00
0
99
-2
01
02
98
07
03 04
06
08
05
-4
09
-6
-8
97
99
Programme year
01
03
Realisation
05
07
09
Spring Forecast
Source: European Commission, Spring Forecasts 2010 and budgetary plans according to national budgets.
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11
…became apparent during the crisis
Budget deficit
% of GDP
5
0
-5
-10
-15
96
98
Germany
Netherlands
00
02
France
Greece
04
Italy
Portugal
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Source: European Commission, Spring Forecasts, 2010.
06
08
Spain
Ireland
10
Increase in debt…
Gross public debt euro area
% of GDP
90
80
70
60
94
99
04
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Source: European Commission, Spring Forecasts 2010.
09
…and late market reaction
Interest rate spread with German government debt
(10-year maturity) % points
10
8
6
4
2
0
-2
96
98
00
02
04
06
France
Italy
Spain
Greece
Portugal
Ireland
School of Business and Economics
Source: Thomson Financial.
08
10
Netherlands
Consequence: financial stability risk
in EMU
Government debt held by non-residents
(% of total)
DE
FR
IT
ES
NL
GR
PT
IE
1998
33.8
50.9
26.9
24.2
19.5
29.3
37.9
na
2004
42.7
46.0
38.6
47.3
52.9
53.4
56.4
58.7
2008
49.6
55.6
42.3
45.9
65.5
na
77.1
72.7
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Source: Eurostat and CBS (for The Netherlands).
The (new) inconsistent triangle
• The inconsistent triangle (Padoa-Schioppa, 1985)
– Incompatibility between fixed but adjustable
exchange rates, full capital mobility and
independent monetary policies
– This inconsistent triangle prooved to be true
in the EMS Crisis (1992-1993)
• The new inconsistent triangle
– Incompatibility between single monetary policy,
full capital mobility and independent fiscal policies
– Reflected by the current crisis in the euro area
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What doe this inconsistent triangle
imply?
• Fiscal consolidation is necessary, but will take time
– And will not reassure financial markets
in the short term
• If the (new) inconsistent triangle is true,
a major overhaul of the institutional set-up
of the euro area is necessary
• A major reform of the institutional set-up may
not sooth financial markets
– Enlarged and flexible EFSF as temporary solution
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Strengthening economic governance
– the view of the EU
•
•
•
•
•
Towards greater fiscal discipline
Broadening economic surveillance: a new
surveillance mechanism
Deeper and broader coordination:
the “European Semester”
Robust framework for crisis management
Stronger institutions for more effective economic
governance
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The importance of enhancing national fiscal rules
and frameworks
1.50
FI
Error Surplus Adjustment
1.00
SE
DK
0.50
ES
IE
AT
0.00
0.00
0.20
-0.50
NL
BE
0.40
IT
0.60
FR
0.80
1.00
1.20
DE
UK
PT
EL
-1.00
FISRUL
Relationship between plausibility of projections stability programmes and national fiscal
rules, after taking into account other explanatory variables.
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Source: Beetsma, Giuliodori and Wierts (2009, Economic Policy)
More focus on debt financing
800
Short-term government debt outstanding (central
government)
14
700
12
600
10
500
8
400
6
300
4
200
2
99
Bn euro
01
03
% GDP (right scale)
05
07
% Share in total debt (right scale)
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Source: Hoogduin, Öztürk and Wierts (2010).
09
An assessment of the economic
(fiscal) governance
• Excessive deficit and follow-up
should be called by Community
institution
– Framework should become less
intergovernmental
• Sanctions should be efficient and
effective
– Value-added of fines, etc. is limited
• Financial support limited to strong
conditionality
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Economic convergence revisited
•
Nominal convergence
(interest rate, inflation, public finance)
•
Real convergence
 (labour) market flexibility
 (assymetric) shock absorption by national
budgets (automatic stabilisers)
School of Business and Economics
Inflation euro area: low and stable…
Inflation euro area
% changes (y-o-y)
5
4
3
2
1
0
-1
91
96
01
School of Business and Economics
Source: Thomson Financial.
06
…but inflation differentials persistent
Inflation (HICP)
% changes (y-o-y)
6
3
0
-3
99
01
Germany
03
France
Netherlands
Greece
05
Italy
Portugal
School of Business and Economics
Source: Thomson Financial.
07
09
Spain
Ireland
Imbalances have increased
Current account balance
% euro area or world GDP
6
3
4
2
2
1
0
0
-2
-1
-4
-2
91
93
95
97
99
01
03
05
Deficit countries euro area
Surplus countries euro area
Deficit countries - global (right-hand axis)
Surplus countries - global (right-hand axis)
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Source: IMF.
07
09
Causes imbalances
% GDP and % changes
20
10
0
-10
-20
LUX
NL
D
FI
BE
AT
EMU
IT
FR
IRL
PT
Current account balance
Average increase house prices 2000 -2007
Change real effective exchange rate 1997-2007 (GDP deflator)
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Source: European Commission.
SP
GR
Budget periphery more affected
Average deterioration of the budgetary position
A. Other EMU countries
Before crisis
After crisis
4 (Autumn 2007) (Spring 2010)
4
0
0
-4
-4
-8
-8
-12
-12
2007
2009
Actual deficit
2007
B. Portugal, Ireland, Italy,
Greece and Spain
Before crisis
After crisis
(Autumn 2007) (Spring 2010)
2009
Structural deficit
2007
Actual deficit
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Source: European Commission, Economic forecasts.
2009
2007
2009
Structural deficit
Crisis reveals relationship imbalances and
budgetary position
Structural budget deficit 2007
5
0
-5
-10
R2 = 0,1647
-15
-20 -15 -10 -5
0
5
10 15
After crisis (Spring 2010)
Structurak budget deficit 2009
Before crisis (Autumn 2007)
5
0
-5
-10
R2 = 0,6034
-15
-20 -15 -10 -5
Current account balance 2007
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Source: European Commission, Economic forecasts.
0
5 10 15
Current account balance 2007
What has been agreed on 23
October?
European Council
• Banking package
Euro Summit
• Sustainable public finances and structural reform
• Refining the Greek programme
– Monitoring
– PSI and credit enhancement
• EFSF
– Leverage resources of the EFSF
• Economic governance
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Assessment of the 23 October
package
Pro’s
• Increase in “fire
power” of the
EFSF
• Package necessary
to sooth markets
• Further
enhancement of
economic
governance
Con’s
• PSI not clear
• Leverage: will it
work?
• Enhanced
economic
convergence: not
enough?
• Implementation
lag
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Concluding remarks
• Financial crisis has revealed weak
compliance with and enforcement
of fiscal and economic policy rules in EMU
• Insufficient fiscal discipline; insufficient real
convergence
• “Every cloud has a silver lining”: broadening
and deepening of policy framework necessary
– But more ambition necessary
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