Transcript Golden Rule - ander europa

The Golden Rule:
“He who has the gold
makes the rules”
Discourse on the Political Economy of the Eurozone
29March 2012
Agenda
Part I. Politics - New economic governance in the EU
• The “Sixpack”
• The “Fiscal Compact” (“Begrotingspact”/”Pacte Budgétaire”)
Part II. Economics – Separating truth from fiction
• The myth of excessive public spending
• The myth of competitiveness
Part III. What to do?
• The democratic deficit
• Proposals
PART I : POLITICS
The Sixpack
• Five regulations and one directive introduce a new framework for economic
governance, greatly extending the powers of the Commission and the Council
• Approved in 2011 by the Member States and the European Parliament
• Entered into force on 13th of December 2011
• Includes the “European Semester” (recent policy initiatives frequently overlap)
• Reinforces the Stability and Growth Pact of 1997 (rules on public debt and
deficit)
• The Commission determines and monitors macro-economic variables and makes
binding recommendations to Member States
• Visbility and peer pressure is created through the “scoreboard”
• In case of non-compliance the Commission may trigger:
1.
Excessive Deficit Procedure (EDP)
• As of March 2012 only four Member States are NOT in EDP
2.
Excessive Imbalances Procedure (EIP)
• Penalties in case of non-compliance
• Between 0,2 and 0,5% of GDP for violations of the EDP
• 0,1% of GDP for violations of the EIP
• Only the Council may block the fine(s) through Reversed QMV (almost 75% of
the votes needed)
Example Scoreboard
The Scoreboard
• Reflect the real priorities of the EU
• No social (except unemployment) or ecological variables
• Nominal ULC
• No lower limit
• No academic references proving this variable to be problematic
• Unemployment
• Constant unemployment levels of 9% are not a problem?
The Fiscal Compact
• Is an Intergovernmental Treaty
• Ratification is ongoing, will enter into force 1 January 2013 if by then at
least 12 Member States have ratified it
• … hence a referendum in Ireland can not halt adoption (although the political
implications of a “no” would be substantial)
• The United Kingdom and Czech Republic haven’t signed it (yet)
• Perhaps a novelty: the Treaty is opposed by the European Trade Union
Federation (ETUC)
• The Treaty reinforces the Sixpack:
• Stresses the “Golden Rule”: structural deficit must be lower than 0,5% of GDP
• Only those who agreed to the Fiscal Compact will be able to draw funds from
the European Stability Mechanism (ESM), the permanent “rescue fund”
• Compulsory anchoring of provisions in the Constitution of Member States
• Penalties (European Court of Justice decision):
• 0,1% of GDP if the Treaty is not embedded in the Constitution or equivalent
PART II. ECONOMICS
The Golden Rule
• The Golden Rule: the structural deficit must be lower than
0,5% of GDP, but this policy goal raises a number of questions
1.
The Golden Rule relies on “Potential GDP”, an elusive figure
• “As a measure of fiscal rectitude, [the Golden Rule] mandates use of
a statistic that is unobservable and can be estimated only with a
plethora of assumptions about cyclically adjusted revenues,
expenditures and output.” – Prof. David R. Cameron (Yale University)
• Example: in 2007 the IMF estimated that Ireland had a structural
deficit 0,1% of GDP, a number which was revised in October of last
year to 8,4% of GDP
2.
Public debt will be forced below 60%
• The structural deficit limit is raised to 1% of GDP when debt is below
60%
• According to Prof. Karl Whelan (University College Dublin) it follows
that in the long run, given a nominal GDP growth of 4%, public debt
will tend towards 25% of GDP (one unit of debt for four units of
growth)
Public Debt: Ireland
Public Debt of Ireland (1991-2011)
120
110
100
90
80
70
60
50
40
30
20
10
0
Public Debt: Greece
Public Debt of Greece (1991-2011)
180
170
160
150
140
130
120
110
100
90
80
70
60
Public Debt: Italy
Public Debt of Italy (1991-2011)
130
120
110
100
90
80
Public Debt: Portugal
Public Debt of Portugal (1991-2011)
110
100
90
80
70
60
50
40
Public Debt: Spain
Public Debt of Spain (1991-2011)
70
60
50
40
30
Comparing Government Debt
Comparing Gross Government Debt
Economy
Absolute
debt increase
(2000->2011)
120%
120%
115%
115%
110%
110%
73%
76%
86%
176%
105%
105%
100%
100%
95%
95%
90%
90%
85%
85%
80%
80%
75%
75%
70%
70%
65%
65%
60%
60%
55%
55%
AAA eurozone
Periphery
AA eurozone
US
From 2000 until 2007 the
combined periphery was
steadily decreasing its
debt level. Increasing
debt was clearly a
consequence , not a cause
of the crisis.
50%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
AAA rated eurozone countries
58%
56%
58%
61%
62%
63%
62%
59%
62%
69%
78%
77%
77%
AA rated eurozone countries
65%
64%
65%
68%
69%
70%
67%
66%
70%
80%
83%
86%
88%
Periphery
87%
86%
83%
80%
79%
79%
78%
75%
79%
91%
98%
105%
108%
United States
55%
55%
57%
60%
61%
62%
61%
62%
72%
85%
94%
100%
105%
50%
Private Sector Debt
Private sector debt (as a percentage of GDP)
350
300
Percentage of GDP
250
200
150
100
50
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Greece
49.4
58.0
65.0
68.2
72.0
78.6
90.2
98.0
107.6
119.3
122.7
124.1
Spain
97.2
122.3
132.5
139.5
147.8
159.9
176.6
200.4
215.1
221.1
227.2
227.3
149.4
160.1
153.5
170.9
192.3
205.3
215.3
284.0
336.1
341.3
Ireland
Italy
74.9
79.5
84.0
86.7
90.8
94.5
101.0
107.5
114.9
119.3
125.6
126.4
Portugal
161.4
173.0
186.7
191.0
196.3
197.4
205.1
209.4
223.1
240.4
252.0
248.5
Household debt
Household debt-to-income ratio
220%
200%
180%
160%
140%
120%
100%
80%
60%
40%
20%
1995
1996
1997
1998
1999
Spain
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
69%
72%
79%
88%
99%
111%
124%
130%
127%
125%
128%
111%
125%
144%
168%
187%
197%
196%
206%
203%
Ireland
Portugal
35%
42%
57%
67%
77%
84%
89%
96%
102%
108%
114%
122%
127%
128%
131%
130%
Italy
24%
24%
25%
27%
31%
34%
35%
38%
40%
44%
48%
53%
57%
58%
63%
65%
Conclusions on the Deficit
• The claim that “soaring government debt” caused the crisis:
•
•
•
Has no validity for any of the peripheral countries
… although the persistently high level of debt made it more difficult for Greece to react
Overlooks the important fact that rising private debt was far more problematic
• The macro-economic scoreboard does not take into account different levels of economic
development of the member states and imposes a one-size-fits-all framework
• During the run-up to the crisis the ECB kept interest rates low, which was helpful for the struggling
German economy, but caused overheating in the peripheral countries
• Soaring yields on government bonds in peripheral countries have a lot to do with the fact that
Eurozone members borrow in a currency they do not control (“original sin” syndrome), not with
the fact that the overall public debt level is high
• The United States currently borrows at 2%, despite debt and deficits levels that are higher than in
a lot of Eurozone countries that are currently in trouble
• Reliance on fiscal policy alone in times of financial turmoil significanly increases risk of default and
investors (speculators) know it
• Recent decreases in bond yields are a consequence of the LTRO rounds more than anything else
• Austerity has proven deadly to Greece while the economies of other peripheral countries have
also taken a dive and are currentely stalling
• The “golden rule” depends on an estimate of Potential GDP which is an elusive figure
• If applied consistently the “golden rule” implies the debt-to-gdp ratio will fall way below 60%
Current Account Imbalances
10
5
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-5
-10
-15
Germany
Greece
Ireland
Netherlands
Portugal
Spain
2010
Wages in Germany
Germany – Sources of NCO
Germany - Potential sources of increasing Net Capital Outflow since 2000
The blue line represents capital
that became available as a
consequence of reduced gross
fixed capital formation (i.e.
reduced domestic investment)
since 2000.
250.000
200.000
The red line represents the "extra"
exploitation
surplus
as
a
consequence of wage repression,
especially since the "Hartz
reforms" that started under the
Schröder-Fischer coalition in 2003.
150.000
The purple line adds up the blue
and the red line.
100.000
The green line represents the
increased Net Capital Outflow
since 2000.
50.000
Source: Ameco Online
0.000
Surplus capital available from disinvestment
2000
0.000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
29.488 65.933 79.068 89.575 93.076 78.920 73.462 70.327 100.489 98.131 80.664 76.756
Surplus capital available from wage repression 0.000
8.054
Total surplus capital
0.000
37.542 83.084 98.448 136.579 162.370 183.476 199.450 173.017 127.813 162.830 131.197 118.440
Net differential Capital Outflow
0.000
25.510 71.490 69.930 131.680 141.840 179.380 212.350 182.710 166.080 172.650 160.024 145.627
17.150 19.380 47.004 69.293 104.556 125.988 102.690 27.324 64.699 50.534 41.684
Competitiveness problem?
Exports of Goods & Services: the Periphery vs the AA(A)s
200
190
180
170
160
150
140
130
120
110
100
90
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
AA(A) rated countries
100
103
105
104
113
122
137
146
151
127
146
161
169
Periphery
100
106
107
107
115
122
134
146
147
125
141
155
164
Current Account Imbalances
•
•
•
•
•
•
•
•
•
Scoreboard thresholds: -4% < CA/GDP < +6%
The Netherlands and Germany were both above 6%
CA imbalances are a zero-sum game !
… but according to the Commission surplus issues are to be dealt with in
the mid-term while deficits require immediate attention, hence all the
burden is on the deficit countries
The debate is not new; for example at Bretton Woods in 1944 J.M.
Keynes argued that both deficit and surplus countries ought to change
policies in case of imbalances
According to the International Labour Organization (ILO), wage
repression in Germany is one of the main causes of the current crisis
… but competitiveness as such is not the main channel through which
trade imbalances came about, because
… if salary increases in the peripheral countries were such a problem,
how come their export volume grew faster than in many core countries?
Liberalization of capital markets and high savings in Germany as a
consequence of disinvestment and wage repression lead to the Current
Account imbalances and overfinancing of peripheral countries
PART III. WHAT TO DO?
The Democratic Deficit
• The new treaties, regulations and directives leave the European Parliament
(EP) completely out of the picture
• The EP can not determine what macro-economic variables are monitored,
what the thresholds are, what the recommendations to the Member States
will be or whether a Member State will receive a fine
• Everything is in the hands of the Commission with limited power to the
Council to block a fine (Reversed QMV, almost 75% of the votes)
• The EP still has no right of initiative:
• This renders elections meaningless because the EP can’t overturn any of the
new regulations or directives
• The European Parliament can not pass any directive the Commission doesn’t
agree with
• Motion of censure by the EP against the Commission requires a two third
majority
• The European Council is the most powerful of EU institutions, but this is
the seat of European “realpolitik” (large member states are in control)
• When push comes to shove the European Council moves around the
treaties at will (cfr. the “no bail-out clause” or the Fiscal Compact)
Proposals
• On Current Account Imbalances:
• Monitor debt-driven growth
• Have surplus countries carry the burden
• Re-introduce capital controls to alter the composition of capital flows
• Minimum stay requirements
• Prefer Foreign Direct Investment (FDI) over debt
• To reduce dependency on volatile financial markets, keep 75% of
public debt national, even if that implies higher interest rates
• On financial stability:
•
•
•
•
Keep banks small, have public and support cooperative banks
Separate savings from investment banks
Let the EU take responsibility for systemic risk
Have an EU system for orderly bankruptcy of financial institutions
• Have a macro-economic scoreboard that monitors social and
ecological variables: inequality, poverty, carbon emissions, etc.
The Confidence Fairy
Off-topic: the 1%
US Federal Income Tax & Share of Income for the 1% (1913-2010)
100%
8%
90%
10%
80%
12%
70%
14%
60%
16%
50%
18%
40%
20%
30%
22%
20%
10%
24%
0%
26%
Federal Income Tax (highest bracket)
Share of income for the 1%