Transcript CEEC – Transition and Enlargement

Theorie und Politik der
Europäischen Integration
Theory and Politics of
European Integration
Lecture 8
Fiscal Policy and the Stability Pact
The EURO Crisis
Prof. Dr. Herbert Brücker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
This Lecture
Fiscal Policy and the Stability Pact
• Fiscal policy in the monetary union
· More and more important?
· Borrowing instead of transfers
· Automatic stabilizers and discretionary policy actions
•
Fiscal policy externalities
·
·
·
·
·
Spillovers and coordination
Cyclical income spillovers
Borrowing cost spillovers
Excessive deficit and the no-bailout clause
Collective discipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Fiscal Policy and the Stability Pact
Fiscal Policy and the Stability Pact
• Fiscal policy in the monetary union
· More and more important?
· Borrowing instead of transfers
· Automatic stabilizers and discretionary policy actions
•
Fiscal policy externalities
·
·
·
·
·
Spillovers and coordination
Cyclical income spillovers
Borrowing cost spillovers
Excessive deficit and the no-bailout clause
Collective discipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The fiscal policy instrument
•
In a monetary union, the fiscal instrument
assumes greater importance
· The only macroeconomic policy instrument left at the
national level
· Its effectiveness is increased (a result from the MundellFleming model)
· Heavily used in 2008 financial crisis and subsequent period
•
A subsitute to transfers
•
Yet, many questions arise regarding its
effectiveness and use
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Limits on effectiveness
•
The crucial role of private expectations
· A deficit today but a debt tomorrow: who will pay?
· A tax cut, but how permanent?
•
Slow implementation
·
·
·
·
•
Agreement within government
Agreement within parliament
Spending carried out by bureaucracy
Taxes not retroactive
Result: countercyclical moves can become
procyclical actions and in extreme cases create
fiscal crisis (default of government bonds)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
A crucial distinction: automatic vs. discretionary
•
Automatic stabilizers
· Tax receipts decline when the economy slows down,
and conversely
· Welfare spending rise when the economy slows down,
and conversely
· No decision, no lag: nicely countercyclical
· Rule of thumb: deficit worsen by 0.5% of GDP when
GDP growth declines by 1%
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Public debt and automatic stabilizers in Europe
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
A crucial distinction : automatic vs. discretionary
• Discretionary actions: a voluntary decision to
change tax rates or spending
• Technically: a change in the structural budget
balance
• But no automatic correction of deficits, so a
problem of discipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Should instrument be subject to some form of collective control?
• Yes, if national fiscal policies are a source of
several externalities
• (Positive) income externalities via trade
• Important and strengthened by monetary union
• A case for some coordination
• Borrowing cost externalities
• One common interest rate
• But EURO area integrated in world financial markets
• Sovereign debt default risk put other EMU
members or ECB under bail-out pressure
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Income spillovers, 1972 -2005
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Fiscal Policy and Stability Pact
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
What is the problem with the deficit bias?
• Fiscal indiscipline in parts of the EURO area might
concern financial markets and:
• Raise borrowing costs for all countries:
unlikely, markets can distinguish among countries
• More serious is the risk of sovereign debt default
in one member country
• capital outflows and a weak EURO
• pressure on other governments to help out
• pressure on the Eurosystem (European Central Bank)
to help out
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The answer to default risk: the no-bailout clause
• The no-bailout clause:
Overdraft facilities or any other type of credit facility
with the ECB or with the central banks of the
Member States (hereinafter referred to as ‘national
central banks’) in favour of Community institutions
or bodies, central governments, regional, local or
other public authorities, other bodies governed by
public law, or public undertakings of Member States
shall be prohibited, as shall the purchase directly
from them by the ECB or national central banks of
debt instruments. (Art. 101)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The answer to default risk: the no-bailout clause
• The no-bailout clause: Question of credibility
• Ex post the world looks different: See the Draghistatement of the ECB on debt default
• Thus, fears remain
• Informal pressure
• Impact on EURO
• Prevention is better, especially given a tradition of
indiscipline
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
In the end, should fiscal policy independence be limited?
• The arguments for:
• Serious externalities
• A bad track record, anyway
• The arguments against:
• The only remaining macroeconomic instrument
• National governments know better the home scene
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The general principles
• Two general arguments for collective action
• Externalities
• Increasing returns
• Two general arguments against collective action
• Heterogeneity of preferences
• Information asymmetries
• And a caveat
• Governments may pursue own interests
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
How to restrain fiscal policies?
• Distinction No.1
• Micro/structural aspects (tax and spending levels and
structure)
• Macro aspects (the balance between tax revenues and
spending)
• Distinction No.2
• Coordination: voluntary and flexible efforts at taking into
account each other’s action
• Binding commitments or rules
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The Stability and Growth Pact
• Formally, the implementation of the Excessive
Deficit Procedure (EDP) mandated by the
Maastricht Treaty
• The EDP aims at preventing a relapse into fiscal
indiscipline following entry in euro area
• The EDP makes permanent the 3% deficit and
60% debt ceilings and foresees fines
• The Pact codifies and formalizes the EDP
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
How the Pact works
• Emphasis on the 3% deficit ceiling
• Recognition that the budget balance worsens with
recessions:
• Exceptional circumstances when GDP falls by 2% or
more: automatic suspension of the EDP
• When GDP falls by more than 0.75%, country may apply
for suspension
• Precise procedure that goes from warnings to
fining
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The procedure
• When the 3% ceiling is not respected
• The Commission submits a report to ECOFIN
• ECOFIN decides whether the deficit is excessive
• If so, ECOFIN issues recommendations with an associated
deadline
• The country must then take corrective action
• Failure to do so and return the deficit below 3% triggers a
recommendation by the Commission
• ECOFIN decides whether to impose a fine
• The whole procedure takes about two years
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The fine schedule
• The fine starts at 0.2% of GDP and rises by 0.1%
for each 1% of excess deficit
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
How is the fine levied
• The sum is retained from payments from the EU to
the country (CAP, Structural and Cohesion Funds)
• The fine is imposed every year when the deficit
exceeds 3%
• The fine is initially considered as a deposit
• If the deficit is corrected within two years, the deposit is
returned
• If it is not corrected within two years, the deposit is
considered as a fine
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The Broad Economic Policy Guidelines (BEPG)
• Emphasis on precautionary measures to avoid
warnings and fines
• The stability programmes are embedded in the
wider BEPG, a peer-monitoring process that
includes the Lisbon strategy
• Each year, each country presents its planned
budget for the next three years, along with its
growth assumptions
• The Commission evaluates whether the submission
is compatible with the Pact
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Issues raised by the Pact (1)
• The BEPG shift the focus to ex ante commitments
• Led to the Irish warning (2001)
• Decisions are taken by the ECOFIN, a political
grouping
• France and Germany treated leniently in 2003-4
• Imposition of a fine can trigger deep resentment
• Are fines credible?
• If not, what is left?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Issues raised by the Pact (2)
• Does the Pact impose procyclical fiscal policies?
• Budgets deteriorate during economic slowdowns
• Reducing the deficit in a slowdown may further deepen
the slowdown
• A fine both worsens the deficit and has a procyclical effect
• The solution: a budget close to balance or in
surplus in normal years
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Issues raised by the Pact (3)
• What room left for fiscal policy?
• Room left for automatic
stabilizers
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Room left for discretionary
fiscal policies
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Issues raised by the Pact (3)
• What room left for fiscal policy?
• If budget in balance or surplus in normal years, plenty of
room left for automatic stabilizers
• Some limited room left for discretion action
• In practice, the Pact encourages
• Aiming at surpluses
• Giving up discretionary policy
• At first glance, the early years seems to be
hardest
• Takes time to bring budgets to surplus
• Today we know, it is even harder after a shock
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Further controversies
•
Discipline imposed from outside
· A further erosion of sovereignty?
•
Arbitrary limits
· Why 3%?
· What about the debt celing of 60%?
•
•
•
Asymmetry
The Pact binds in bad years only
A budget forever close to balance or in surplus
would drive debt/GDP ratio to 0
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Outline
Diagnosis
•
What is the EURO crisis? What are the questions?
•
Monetary policies, assymmetric shocks and internal imbalances
•
Public vs. private debts
•
Has the ECB monetary policy triggered the real estate bubble?
•
Why are public debts in a currency union more serious than with
national currencies?
•
Debt financing via the TARGET2 facility of the EURO System
Therapy
•
Banking regulation
•
ECB: Buying governmental bonds
•
Creating a Transfer Union
•
State Bankruptcy within Eurozone
•
Leaving the Eurozone
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The EURO crisis: what are we talking about? (I/II)
• The EURO crisis is no currency crisis in
traditional sense
• No (dramatic) depreciation of EURO
• No capital flight out of EURO zone
• No balance of payments crisis of EURO zone
• No inflation
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Exchange rate USD/EURO
Source: OECD STAT database, own calculations.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Inflation (Consumer price index, change p.a. in %)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The EURO crisis: what are we talking about? (II/II)
• But:
• Burst of real estate bubbles in many Member States
• High risks of bank failures in private sector
• Sovereign debt crisis of some members of EURO zone
(Greece, Ireland, Portugal, Spain, Italy?, others?)
• High spread of interest rates within EURO zone
• Zero growth in the Eurozone and serious recessions in
some Member States with high unemployment
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Real GDP growth rate in %, 2001-2014
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Fiscal Policy and Stability Pact
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Harmonized unemployment rates (ILO norm) in %, 20012014
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
What are the questions? (I/II)
• Is the ‘one-fits-all’ monetary policy in the
Eurozone the cause of the crisis? What about
asymmetric shocks?
• Have soft monetary policies of the ECB triggered
the financial crisis, e.g. the real estate bubble?
• Or is banking regulation the problem, i.e. the
Eurozone in the same way affectd as, e.g., the US?
• Has the Eurozone created incentives for moral
hazard in fiscal policies? Has the Stability and
Growth Pact failed?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
What are the questions? (II/II)
• Is the risk of a sovereign debt crisis and capital
flight higher in a Currency Union rather than in the
case of national currencies?
• Creates the EURO System additional opportunities
to raise unsustainable debts? TARGET2 debt
stocks?
• Is state bankruptcy possible in the Eurozone?
• Is it better to move to a transfer union? How?
• Would it help countries to leave the Eurozone?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Monetary policies and asymmetric shocks
• Recall: Optimal currency area theory focuses on
asymmetric shocks
• Economic structures between the North and the
South might be diverse (manufacturing vs.
tourism), but are affected by business cycle
shocks in similar way
• The ‘Great Recession’ 2008-09 affected therefore
countries with strong manufacturing sectors
(export demand shock) as least as much as
countries with strong tourism
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Wages and current account imbalances in the Eurozone
• If prices and wages are not flexible, different
(productivity adjusted) wage developments can
create imbalances in current account, which have
to be matched by capital inflows
• In theory, Hume’s mechanism would guarantee a
balance of payments equilibrium and in long-term
also equilibrium in current account
• In practice, this need not necessarily be the case,
since current account imbalances are financed by
public transfers in one way or another (see below)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Real Earnings (change in %: 2008 vs. 2000)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Real wage index (2007 = 100), 2001-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Current account balance in % of GDP, 2001-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Current account balance in % of GDP, 2001-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The bottomline
• Wage growth has been unbalanced in Eurozone, but
(productivity adjusted) real unit labour costs have been
much less unbalanced. This suggests that different rates of
wage growth reflect different productivity growth patterns
• But: current account surplus of Germany tended to increase
persistantly and substantially, while current account of
Greece, Portugal and Spain deteriorated substantially in the
first place. Meanwhile, under the pressure of structural
adjustment, the current account improves there. Still, the
development of the current account is a first hint for
imbalances within the Eurozone.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Public vs. private debt
• Conventional wisdom explains EURO crisis by
moral hazard of governments in Eurozone
• But: With the notable exception of Greece,
(i) public debt has fallen and not increased in
Eurozone before the crisis, and (ii) private debt
has increased dramatically before the crisis
• Bank debt has increased more than corporate debt
• Thus, banking regulation and moral hazard in
private sector might be more underrated in the
debate (DeGrauwe 2010)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Government and private debt in the Eurozone before the
crisis, 1999-2008
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Government debt in % of GDP, 2001-2013
pre –crisis development
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
post –crisis development
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Bank liabilities and corporate debt, 1999-2008
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Growth of bank loans in the Eurozone, 2003-2009
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
The bottomline II
• With exception of Greece, the dramatic increase of
private debts (real estate loans) are the first cause
of financial crisis
• The crisis of the banking sector forced governments to take-over private debts to avoid systemic
failure of financial sector
• This increased dramatically public debts in some
countries which had low public debts before
• ‘Great Recession’ increased public debt further
through automatic stabilizers and fiscal packages
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Has ECB monetary policies triggered the financial crisis?
• Hypothesis: low and ‘one-fits-all’ interest rate
policies have triggered financial crisis, i.e. real
estate bubble
• Interest rates indeed substantially declined in
some countries (e.g. Greece, Italy)
• But: A deeper analysis suggests that the ECB
interest rate policies followed closely what we
expect in case of a strict application of ‘Taylor’s
rule’
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Long-term interest rates (10 year government bonds)
before the crisis …
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
… and after
crisis phase
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Did the ECB violate Taylor‘s rule? (I/III)
• Taylor’s Rule: Central Banks policies can be
explained by the following simple formula:
it = 2 + pt + a(pt – p*) + b(yt –yt*)
(1)
• where i is the interest rate, pt the current inflation,
p* the inflation target (2%), and yt the output gap
as a percentage of potential output yt*.
• a is the weight assigned by Central bank to price
stability, b the weight assigned to economic
stability and growth.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Did the ECB violate Taylor‘s rule? (II/III)
• Taylor’s rule helps to stabilize expectations of
market participants.
• It explains usually Central Banks monetary policies
pretty well.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Did the ECB violate Taylor‘s rule? (III/III)
• To check whether a Central Bank follows Taylor’s
rule is therefore a good indicator whether
monetary policies has deviated from standard path
under given economic conditions
• The answer is, the ECB has not. The interest rate
was only slightly below the rate predicted by
Taylor’s rule. And less below than the US rate
(Dokko et al., 2011)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Do low interest rates explain real estate bubble?
• More importantly, we cannot explain the boost in
housing prices by national interest rates in most
Euro countries empirically (Dokko et al., 2011)
• But we can explain the boost by inprudent banking
regulation and the subsequent financial packages
like subprime mortages.
• Thus, the right policy response is to reform
banking regulation not monetary policies.
• Bottomline: Housing price bubble is a key reason
for public debt problem in Eurozone today.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Spain: Real estate prices (EURO per qm)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Ireland: Real estate prices (Index: 2003 = 100)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Construction production index (2007 = 100)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Construction production index (2007 = 100)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Why are governmental debts different in a CU?
• So far we know that (i) public debts of EURO
countries have substantially increased in course of
crisis, and (ii) this has started as a debt crisis in
the private (financial sector) –- with the notable
exception of Greece.
• Ok, that happens to other countries as well, e.g.
Japan, the US and UK. But these countries are so
far not affected by a currency crisis. Why?
• And why are the US, UK and Japan with a higher
debt-to-GDP ratio than many crisis countries in
Eurozone not affected?
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
General Government Debt in % of GDP, 2001-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
General Government Debt in % of GDP, 2007-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Budget saldo in % of GDP, 2001-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Fiscal Policy and Stability Pact
Theory and Politics of European Integration
Budget saldo in % of GDP, 2001-2013
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Fiscal Policy and Stability Pact
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
10-year goverment bond yields in %, 2001-2014
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Why are governmental debts different in a CU?
• Let’s consider two cases. Case 1: Investors fear debt default
in country with a national currency:
• sells government bonds
• sells the currency on exchange market
• exchange rate drops
• but money stocks remains unchanged
• eventually Central Bank buys government bonds
• this generates inflation and exchange rate depreciation,
but no liquidity risk. Only for countries which cannot
issue bonds in national currencies.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Why are governmental debts different in a CU?
• Case 2: Investors fear debt default of country in Currency
Union:
• sells e.g. Greek government bonds
• buys e.g. German government bonds
• EUROs leave Greece, monetary stock contracts there
• Government faces liquidity crisis, i.e. cannot lend money
at reasonable interest rate
• There is no channel to create liquidity
• Unless the ECB buys Greek goverment bonds
(This is what it announced to do in 2012, see below.)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Why are governmental debts different in a CU?
• Thus, the government debts are different in a CU
• Why? Without a Central Bank you can’t generate
liquidity by printing money
• The role of expectations about sovereign debt
default become increasingly important
• Multiple equilbria and self-fullfilling prophecies
can emerge (De Grauwe 2011)
• This need not to be the case in Greece, but in
other countries such as Spain or Italy
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Another problem: The TARGET2 debts
• Theory: In a CU the balance of payments balance
is always guanteed by the influx or outflow of
money, such that the current account
surplus/deficit exactly matches the capital
account deficit/surplus
• Recall Hume’s price-specie-mechanism
• This is not entirely true in EURO System
• The «Trans-European-Automatic-Real-time GrossSettlement Express Transfer» (TARGET2) system
allows for balance-of-payments-imbalances
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
How does the TARGET2 system work?
• The TARGET2 system allows (theoretcially) short-term
debts of Central Banks and private actors at a Central
Bank
• E.g. real estate credits are accepted as collateral
• Debits and credits cancel out exactly
• 2012 TARGET2 debts of Greece, Ireland, Spain and
Portugal numbered 340 billion Euros, Bundesbank held
326 billion Euros of these (ifo)
• Basically, current account deficits of PIGS are largely
financed by TARGET2 system
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
What are the implications?
• Risk of default is difficult to assess
• There might be bad collaterals in portfolio of
Bundesbank and other Central Banks
• Deficits in current account are no longer financed by
capital account surpluses, such that equilibriating
forces are distorted
• Long-run disequilibria may emerge
• Actually, Target saldos have declines. Equilibrium
might be achieved automatically
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Solutions to the EURO crisis
• Abandoning no-bailout policies
• Financial Transfers
• Change of TARGET2 transfers
• Eurobonds
• Leaving the Eurozone («Grexit»)
• Banking regulation
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Fiscal Policy and Stability Pact
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Abandoning the no-bailout policies
• The treaties rule out (i) buying governmental bonds by
the ECB for deficit financing (but allows it in other
cases) and (ii) financial transfers by ECB
• Note that Optimal Currency Area theory suggests that
transfers are needed
• Actually, we see two developments in practice: First,
the ECB announced to buy governmental bonds if
needed (but did not do so until recently) from crisis
countries, and, second, the ESM and ESFM actually
create a transfer union (but is not called so)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Bail-out by ECB (I/II)
• We have seen, that expectations of debt default can
generate vicious circle which result in liquidity crisis
and eventually debt default
• Buying governmental bonds (or announcing to do so)
can break this expectations similar to national Central
Bank policies
• Two problems: Moral hazard of governments and
credibility of Central Bank
• Solution: difficult, since conditionality can be hardly
imposed by ECB (time limits)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Bail-out by ECB (II/II)
• Announcing that Central Bank buys government is
a strong commitment, since they can print money
• Fast to implement
• ECB President Draghi‘s famous announcement
stabilized expectations of financial markets after
fiscal transfer committments failed
• Moral hazard problem remains
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Long-term interest rates (10 years government bonds)
Draghi‘s
Announcement
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Transfer Union
• The European Financial Stability Funds (EFSF) and
the later European Stabilization Mechanism (ESM)
create a transfer union de facto
• Carrot and stick principles: support and
conditionality
• Zero structural debt ceiling (« Schuldenbremse »)
• The problems lie in the details
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Transfer Union (II)
• The (EFSF) requests higher interest rates above the
market rate (e.g. 6% for Ireland)
• This high risk premium (i) creates further financial
difficulties and (ii) signals, more importantly, that
EFSF does not belief in success
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Transfer Union (III)
• The ESM took over debts from ESF, but requested
that private actors participate in debt restructuring
• This seems to be a good idea at first glance, but
markets will anticipate this and require additional
risk premium in first instance
• Volume: 750 billion EUROs
• Establishment was not sufficient to calm down
markets. Complementary measures from ECB
were needed
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Eurobonds
• Would ease refinancing for governments, but
creates (i) moral hazard problem and (ii) higher
interest rates for ‘good’ countries
• BRUEGEL model: blue and red bonds: Blue Bonds
up to debt of 60% of GDP, Red Bonds for
remaining debts. This would create higher interest
rates for high debt countries, and low ones for low
debt countries (Delpha/von Weizsäcker, 2010)
• Combining this models with different fees for Blue
Bonds (De Grauwe/Moesen, 2009)
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Government Bankruptcy in Eurozone
• In principle, there is no reason why goverments of
Euro members could not go bankrupt. Similar to
private actors
• Risks: Contagion to other countries by forming
vicious circle of bad expectations
• Systemic risk by breakdown of banking sector, at
least in affected country
• Moderate version: the so-called ‘hair-cut’
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Leaving the Eurozone (Grexit)
• Would allow to depreciate currency
• Would not allow solving debt problem by printing
money, since debts are issued in EUROs
• Debt default is unavoidable. Risk of systemic
failure of financial system and of contagion
• High risk of new default, since it is likely that new
debts are not accepted in new currency
• Note that currency depreciation cannot solve longrun structural problems
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Banking regulation
• It is largely uncontroversial that the regulation of
banks has to be reformed
• But not much is done
• Higher capital demands for banking sector
• Better regulation of derivatives
• ECB branch is in charge of regulation. This is
conroversial
• Is complex and beyond this lecture
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Literature
Baldwin, Richard und Daniel Gros (2010): The euro in crisis - What to do? In: Baldwin,
Richard, Daniel Gros und Luc Laeven (Hrsg.): Completing the Eurozone Rescue: What
more needs to be done? London, VoxEU, 1-24.
Corden, W. Max (1972): Monetary Integration. Essays in International Finance. (93).
Clarida, Richard, Jordi Gali und Mark Gertler (2002): A Simple Framework for International
Monetary Policy Analysis. Journal of Monetary Economics. 49 (5), 879-904.
Ingram, J. (1969): Comment : The Optimum Currency Problem. In: Mundell, Robert und A
Swoboda (Hrsg.): Monetary Problems of the International Economy. Chicago and London.
Ishiyama, Yoshihide (1975): The Theory of Optimum Currency Areas: A Survey. International
Monetary Fund Staff Papers. 22 (2), 344-383.
Mayer, Thomas (2010): What more do European governments need to do to save the
Eurozone in the medium run? In: Baldwin, Richard, Daniel Gros und Luc Laeven (Hrsg.):
Completing the Eurozone Rescue: What more needs to be done? London, VoxEU, 1-24.
Persaud, Avinash D. (2010): The european bicycle must accelerate. In: Baldwin, Richard,
Daniel Gros und Luc Laeven (Hrsg.): Completing the Eurozone Rescue: What more needs
to be done? London, VoxEU, 1-24.
Kenen, Peter B. (1969): The Theory of Optimum Currency Areas: An Eclectic View. In:
Mundell, Robert und A Swoboda (Hrsg.): Monetary Problems of the International
Economy. Chicago, London, 41-59.
Wyplosz, Charles (2007): Debt Sustainability Assessment: The IMF Approach and
Alternatives. HEI Working Paper 03/2007, Geneva.
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker
Theory and Politics of European Integration
Fiscal Policy and Stability Pact
Exam
•
•
•
•
•
•
•
•
•
•
Trade and trade policy
Preferential trade liberalization
Integration and increasing returns to scale
(BECOMP)
Trade and competition policies
Fiscal federalism
Dynamic effects of integration
Factor mobility (capital, labour)
Optimum currency areas
Euro, growth and stability pact and the crisis
Good luck!
Prof. Dr. Herbert Brücker
Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte
Universität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker