Transcript Refining the growth model to support sustainable convergence

Reinvigorating Economic
Growth: Focus on Europe
Zsolt Darvas
Bruegel, Corvinus University, IE HAS
’THINK-20 Meeting’
11 December 2012, Moscow
Advanced and emerging economies:
two different worlds
Growth outlook at different dates (2007= 100)
Emerging and developing economies
Advanced economies
180
180
160
160
140
140
120
120
100
100
80
80
06
08
10
12
14
16
06
September 2011
April 2008
Source: IMF World Economic Outlooks
08
10
12
October 2012
14
16
2
Outline
1. Global outlook
2. Why does Europe lag behind?
3. Specific problems of Sothern Europe
4. The EU’s policy response
5. What should be done?
3
BRIC: only Russia was hit hard
Growth outlook at different dates (2007= 100)
Brazil
China
India
Russia
240
240
240
240
200
200
200
200
160
160
160
160
120
120
120
120
80
80
80
80
05
10
15
05
10
April 2008
15
05
10
15
05
September 2011
October 2012
Source: IMF World Economic Outlooks
10
15
4
Advanced economies: Euro area was hit harder
Growth outlook at different dates (2007= 100)
Euro Area
USA
120
120
115
115
110
110
105
105
100
100
95
95
06
08
10
12
14
16
06
April 2008
September 2011
Source: IMF World Economic Outlooks
08
10
12
14
October 2012
16
5
Euro area: drammatic collapse of Greece
Growth outlook at different dates (2007= 100)
Germany
Greece
130
130
120
120
110
110
100
100
90
90
80
80
06
08
10
12
14
16
06
April 2008
September 2011
Source: IMF World Economic Outlooks
08
10
12
14
October 2012
16
6
The change in outlook (two measures)
•
•
Downward revision of the 2013 output level from April
2008 to October 2012
Years lost: the number of years needed after 2013 to
reach the April 2008 forecast output level for 2013
Downward
revision of
2013 GDP
Downward
revision of
2013 GDP
Years
lost
Advanced economies
-10%
5
United States
Australia
Canada
Japan
United Kingdom
Euro area
Germany
France
Italy
Spain
Portugal
Greece
-9%
-5%
-8%
-9%
-16%
-12%
-6%
-12%
-12%
-21%
-17%
-36%
3
2
4
9
7
9
5
8
10
15
11
15
Emerging market and
developing economies
Brazil
China
India
Russia
South Africa
Korea
Saudi Arabia
Turkey
Mexico
Indonesia
Argentina
Sub-Saharan Africa
Years
lost
-7%
2
-4%
-4%
-7%
-20%
-12%
-8%
-6%
-8%
-10%
-3%
8%
-6%
2
1
2
6
4
3
2
3
4
1
0
2
7
Some real exchange rates started to adjust the
right way, but more is needed, esp. for the euro
CPI-based real effective exchange rate (Dec 2007= 100)
Euro area
Japan
Switzerland
United Kingdom
United States
200
130
120
110
100
130
120
110
100
140
90
90
120
120
80
80
70
70
100
100
60
Brazil
60
China
India
50
Russia
South Africa
40
2010
180
160
140
200
180
160
80
80
60
1995
60
2000
2005
2010
50
40
1995
2000
2005
Note: REERs are calculated against 138 trading partners
Source: updated database of Darvas, Zsolt (2012) ‘Real effective exchange rates
for 178 countries: A new database’, Working Paper 2012/06, Bruegel
8
2. Why does Europe lag behind?
•
Macro
•
•
•
Micro
•
•
Europe: less flexible economies; less cross-country adjustment
capacity; these impediments became clearer when the precrisis demand driven booms collapsed
Euro exit fears
•
•
US: severe bank stress early on; restoring confidence in the
banking sector; giving time to households to deleverage by
fiscal expansion
Europe: delayed and weak stress tests prolonged banking
woes; strong focus on fiscal consolidation since 2010 when
banks and the private sector wish to deleverage; some parts of
Europe lost competitiveness during the pre-crisis boom
Exit would be a catastrophe; fear of exit deter investment
Executive power
•
US: strong; Europe: fragmented and inefficient
9
Euro area: strong focus on consolidation even though
the aggregate fiscal position of the Euro area is better
General government balance (% GDP) Gen. gov. gross debt
2
140
0
130
Euro Area
120
United States
-2
110
-4
100
-6
90
-8
80
-10
Euro Area
70
-12
United States
60
-14
1990
50
1995
2000
2005
2010
2015
1990
1995
2000
2005
2010
Note: US general gov debt also includes the debt of states and local governments
(IMF and EU data only include federal debt)
2015
10
Euro area banks are riskier, even after the
ECB’s LTROs & OMT
Bank Credit Default Swap Spreads (basis points)
1 Jan 2007 – 7 Dec 2012
600
Euro-area banks
UK banks
US banks
500
400
300
200
100
Source: Datastream
0
1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
1/1/2012
11
But Europe is heterogeneous: accelerated
divergence in southern Europe
GDP per capita at PPP (US = 100), 1950-2017
90
West
80
70
North
60
South
Central
Central: Czech
Rep., Hungary,
Poland, Slovakia,
Slovenia
30
East
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
20
North: Denmark,
Finland, Sweden,
Ireland, UK
South: Greece,
Italy, Portugal,
Spain
50
40
West: Austria,
Belgium, France,
Germany,
Netherlands
East: Estonia,
Latvia, Lithuania,
Bulgaria,
Romania
Source: Author’s calculation using data from the IMF’s World Economic Outlook
October 2012, PENN World Tables and EBRD. Note: median values are shown.
12
3. Specific problems of Sothern Europe
•
The triple crises of balance of payments, banking and
sovereign debt led to output collapse and unemployment
•
Balance of payments crisis: pre-crisis accumulation of large
external debts partly due to excess demand, party due to
too-fast wage increases; private capital outflow during the
crisis
Banking crisis: significant asset deterioration due to output
loss and asset price decline
Sovereign debt crisis: permanent loss in previous booming
sectors (e.g. construction) reduces tax revenue and output;
bank rescue costs
•
•
•
Euro-area membership constraints policy tools, which is 13
not
adequately compensated by help from Europe
Slow adjustment in Southern current account
deficits due to ECB financing
Current account balance (% GDP) 1995-2017
5
West: Austria,
Belgium, France,
Germany,
Netherlands
0
North: Denmark,
Finland, Sweden,
Ireland, UK
-5
South: Greece,
Italy, Portugal,
Spain
West
-10
North
Central: Czech
Rep., Hungary,
Poland, Slovakia,
Slovenia
South
-15
Central
Note: median values.
East
Source: IMF World Economic Outlook October 2012
2016
2013
2010
2007
2004
2001
1998
1995
-20
East: Estonia,
Latvia, Lithuania,
Bulgaria,
Romania
14
• East: sudden adjustment in the absence sizeable official money inflow
Major divergence in external liabilities
80
Net International Investment Position(% GDP) 1995-2017
60
40
West
North
South
Central
West: Austria,
Belgium, France,
Germany,
Netherlands
East
20
North: Denmark,
Finland, Sweden,
Ireland, UK
0
South: Greece,
Italy, Portugal,
Spain
-20
-40
Central: Czech
Rep., Hungary,
Poland, Slovakia,
Slovenia
-60
Liabilities of
South are
mostly debt
-80
-100
2016
2013
2010
2007
2004
2001
1998
-120
Note: median values. Source: Eurostat up to 2011. For 2012-2017, we used World Economic Outlook
October 2012 projections for nominal GDP and current account balance and assumed that the change in
the nominal value of the net IIP equals the current account balance.
East: Estonia,
Latvia, Lithuania,
Bulgaria,
Romania
15
Structural reform gaps: South ranks badly
Scoreboard, 2003/05 (left column) vs 2009/10 (right
column)
dark green=best, red=worst
France
Germany
Netherlands
Denmark
Finland
Ireland
Sweden
UK
Greece
Italy
Portugal
Spain
Czech Rep.
Hungary
Poland
Slovakia
Slovenia
Estonia
Latvia
Lithuania
Bulgaria
Romania
United States
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
old
new
East
Belgium
Central
old
new
South
Austria
North
old
new
West
Medium Term
Labor market inefficiency
Business regulation
Network regulation
Retail sector regulation
Professional services regulation
Long Term
Institutions and contracts
Human Capital
Infrastructure
Innovation
Source: Darvas, Zsolt and Jean Pisani-Ferry (2011), Europe's growth emergency, Bruegel Policy Contribution, 19 October
2011, http://www.bruegel.org/publications/publication-detail/publication/623-europes-growth-emergency/
Southern countries rank badly, but also have the potential to improve the
non-price dimensions of competitiveness (it will take a very long time)
16
Greek structural reforms: more deterioration
than improvement from 2008/09 to 2012/13
Greece
2008-2009
Rank Score
Basic requirements
subindex
1. Institutions
2. Infrastructure
3. Macroeconomic environment
4. Health and primary education
Efficiency enhancers
subindex
5. Higher education and training
6. Goods market efficiency
7. Labor market efficiency
8. Financial market development
9. Technological readiness
10. Market size
Innovation and sophistication
factors subindex
11. Business sophistication
12. Innovation
2012-13
Rank Score
change
Rank Score
51
4.7
98
4.1
47
-0.5
58
45
106
40
4.1
4.3
4.4
5.9
111
43
144
41
3.4
4.7
2.4
6.0
53
-2
38
1
-0.7
0.4
-2.0
0.2
57
4.2
69
4.1
12
-0.1
38
64
116
67
59
33
4.5
4.2
3.9
4.3
3.5
4.5
43
108
133
132
43
46
4.7
3.9
3.6
3.1
4.5
4.4
5
44
17
65
-16
13
0.2
-0.3
-0.3
-1.2
1.0
-0.1
68
3.7
85
3.4
17
-0.3
66
63
4.1
3.2
85
87
3.7
3.0
19
24
-0.4
-0.2
Light red:
worsened
rank or
score
Light
green:
improved
rank or
score
Source: World Economic Forum, Global Competitiveness Report 2008/09 and 2012/13.
Note: Ranks out of 134 economies in 2008-09 and 144 economies in 2012-13 and scores measured on a 1-to-7 scale.
17
Spanish structural reforms: more deterioration
than improvement from 2008/09 to 2012/13
Spain
2008-2009
Rank Score
Basic requirements
subindex
1. Institutions
2. Infrastructure
3. Macroeconomic environment
4. Health and primary education
Efficiency enhancers
subindex
5. Higher education and training
6. Goods market efficiency
7. Labor market efficiency
8. Financial market development
9. Technological readiness
10. Market size
Innovation and sophistication
factors subindex
11. Business sophistication
12. Innovation
2012-13
Rank Score
change
Rank Score
27
5.3
36
5.1
9
-0.2
43
22
30
35
4.6
5.3
5.5
6.0
48
10
104
36
4.3
5.9
4.2
6.1
5
-12
74
1
-0.3
0.6
-1.4
0.1
25
4.8
29
4.7
4
-0.1
30
41
96
36
29
12
4.8
4.6
4.1
4.9
4.6
5.5
29
55
108
82
26
14
5.0
4.4
4.0
3.9
5.3
5.5
-1
14
12
46
-3
2
0.3
-0.3
-0.1
-1.0
0.7
0.0
29
4.3
31
4.1
2
-0.1
24
39
4.9
3.6
32
35
4.5
3.8
8
-4
-0.4
0.2
Light red:
worsened
rank or
score
Light
green:
improved
rank or
score
Source: World Economic Forum, Global Competitiveness Report 2008/09 and 2012/13.
Note: Ranks out of 134 economies in 2008-09 and 144 economies in 2012-13 and scores measured on a 1-to-7 scale.
18
The Greek downward spiral
GDP outlook for Greece five years ahead, as projected
by the IMF at different dates (2007=100)
130
120
110
100
90
April 2008
October 2008
April 2009
October 2009
April 2010
October 2010
April 2011
September 2011
April 2012
October 2012
80
•
06 08 10 12 14 16
The Greek outlook has worsened in every update of the IMF
World Economic Outlook since April 2008
19
The Greek downward spiral, cont’d
Employment outlook for Greece two years ahead, as
projected by the IMF at different dates (2007=100)
104
April 2008
October 2008
April 2009
October 2009
April 2010
October 2010
April 2011
September 2011
April 2012
October 2012
100
96
92
88
84
80
06
08
10
12
20
•
Employment is expected to fall by 21% from 2008 to 2013
Negative feedback between public debt GDP
•
There is negative feedback loop between high public debt and the
collapse in GDP, which loop is especially strong when there are
widespread expectations of a euro exit (ie Greece)
•
The prospect of euro exit discourages private investments and
increases incentives for tax evasion and capital flight, thereby
dragging growth down and worsening the fiscal situation
•
With the larger budget deficit and the increased debt ratio, the EU
demands additional fiscal consolation measures, which further
drag output
21
Mounting challenges in South Europe
•
Unit labour costs have declined in some countries, but largely due
to a faster collapse of employment than output
•
Despite high unemployment rate (eg about 25% in Greece and
Spain), wages have not adjusted downward (except a small
adjustment in Greece and Ireland). How will the competitiveness
problem be solved?
•
Private sector is indebted and deleverages
•
External debt is high and even increases as a share of GDP
•
Compromised bank balance sheets of domestic banks & financial
fragmentation → limited access to finance
22
Consequences of southern economic misery
•
Already spillovers from economically weaker to stronger countries
•
•
The Bundesbank Monthly Report on 7 December 2012 revised
downward 2013 German growth outlook from 1.6 percent to 0.4
percent: ”Germany, given its high degree of openness and
specialisation, cannot proper alone. … It has a particular interest in
the welfare of its partners.”
The single most pressing threat to the integrity, and perhaps also
to the existence, of the euro is the depth of the recession in
southern European member states, and their bleak economic
outlook
•
•
Weak growth  social tensions  political uncertainty  collapse of
the Greek government  euro exit
Euro exit of a country  capital outflow accelerates from other
economically weaker countries  could culminate in additional euro
exits and a deep financial crisis
23
4. The EU’s policy response
•
Balance of payments crisis: intensified policy coordination and
advice (Macroeconomic imbalances procedure, European
Semester)
•
Banking crisis: ECB measures (liquidity to banks & sovereign
bond purchases (OMT)); stress tests; European Systemic Risk
Board (ESRB); European Banking Authority (EBA); Banking
union project
•
Sovereign debt crisis: many pacts (6-pack, Euro-plus pact, Fiscal
Compact, 2-pack) aiming stronger fiscal rules and institutions and
sanctions; conditional loans to sovereigns
•
Specifically for growth: "Compact for Growth and Jobs" agreed at
the 29 June 2012 summit; the ’good old’ EU2020; discussion
24
started on euro-area ‚fiscal capacity’
A ray of hope: Italian non-financial corporation can
borrow cheaper since the OMT (if they get credit)
Italian sovereign, 5 major banks and 5 major nonfinancial corporations: Credit Default Swap spreads
(basis points), 1 Jan 2008 – 7 Dec 2012
Italy 5Y CDSs
700
Sovereign
Non-Financial
Financial
600
500
400
300
200
100
0
1/1/2008
Source: Datastream
1/1/2009
Source: Datastream
1/1/2010
1/1/2011
1/1/2012
25
5. What to do?
•
Address:
•
•
•
•
•
•
Euro exit fears
Balance of payments crisis
Banking crisis
Sovereign debt crisis
Specific EU-wide measures for growth
Executive and democratic deficits
26
Options for Sothern Europe
1. Exit (I disagree)
2. Adjust inside the euro area
• Hope:
•
•
•
Since 2008 Spanish exports are performing the best among the EU15
countries
World Bank (2012): large and internationalised firms in southern Europe
are as productive as large firms in western and northern Europe; the
main issue is that there are much fewer large firms in southern Europe
Disastrous exit:
•
•
•
•
“Mother of all financial crises” (Eichengreen 2007)
UBS (2012): a weak country leaving the euro area would lose about one
half of its GDP in the first year
Low credibility of the newly stand-alone central bank of a weak country
 much higher real interest rates and high inflation for many years
Would open Pandora's box: heavy contagion to other weak countries
27
South: Firms with a foreign presence are more
productive and grow faster
Productivity levels 2008 and growth of value added, 2003 to 2008
Productivity level
1,000 USD per employee; 2008
70
France
3.7
137
47
4.8
-0.9
111
79
3.4
1.0
110
71
2.0
0.9
103
3.5
75
Sweden
Finland
3.6
68
Belgium
Italy
Domestic
International
0.9
149
Norway
Spain
Annual value add growth
%; 2003-2008
3.2
102
63
4.4
2.2
87
4.8
Source: World
Bank - Restoring
the Luster of
European Growth
28
What to do?
•
Euro exit fears
•
•
•
Balance of payments crisis
•
•
•
•
•
Restore Greek public debt sustainability
Progress with banking union
Improve structural issues in South, including wages rigidities
Wage increases in North
Fiscal expansion in North
A weaker euro
Banking crisis
•
•
Clean-up the banks
Banking union
29
What to do? cont’d
•
Sovereign debt crisis
•
•
•
•
•
Specific EU-wide measures for growth
•
•
•
•
ECB’s OMT
Restoring Greek public debt sustainability
Eurobonds (’Blue’ and ’Red’ bonds)
Support growth
European investments programme
Fiscal capacity
Euro-area-wide fiscal policy
Executive and democratic deficits
30