Transcript 3.- The politics to overcome the crisis

The economic crisis in the European Monetary Union:
Conceptual and terminological issues
Nacho Álvarez
Department of Applied Economics
University of Valladolid (Spain)
Contents
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
1.- The starting point: some methodological issues
•A first methodological warning:
Economic approach vs. linguistic approach
Metaphors
Neologisms
Concepts
Causes
Politics
Assessment
1.- The starting point: some methodological issues
•A second methodological warning:
A Political Economy approach: interdisciplinary
analysis drawing upon economics, sociology
and political science 
Political
institutions
Welfare state
institutions
Economic
system
1.- The starting point: some methodological issues
•A third methodological warning:
Concept of “periphery”: the weaker economies
of the euro area
-
Lower GDP per capita
Prevalence of low-tech manufacturing
Lower productivity
Structural external imbalances
Tendency to over-indebtedness
 PIIGS (Portugal, Ireland, Italy, Greece and Spain)
1.- The starting point: some methodological issues
Peripheral countries
latecomers in
building up the
Welfare State
GR
ES
PT
IT
FR
LU
BE
DE
NL
EE
AU
FI
EE
DK
HU
SK
PL
NO
CZ
IE
UK
AU
CA
US
Source: Soede et al.
Contents
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
2.- The crisis in peripheral countries
• Causes of the crisis in the euro zone:
Financialization
and credit
growth
Increasing
inequalities
Institutional
specificities of
the EMU
↓Internal demand
↑External demand
↑External surplus
CENTER
Export-led
growth
Debt-led
growth
↑ Internal demand
↑ Debt
↑External deficit
PERIPHERY
2.- The crisis in peripheral countries
• Increasing inequalities
Average annual growth rates for the period (%),
euro zone
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1960-1980
1981-2007
Real wages
Source: AMECO
Productivity
2.- The crisis in peripheral countries
• Increasing inequalities
Wage share (% GDP), euro zone
75
70
65
60
Source: AMECO
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
55
2.- The crisis in peripheral countries
• Increasing inequalities
Wage growth, contribution of private consumption
to GDP and wage share (% GDP), euro zone
5
74
4.5
4
72
3.5
70
3
68
2.5
2
66
1.5
64
1
62
0.5
0
60
1970-1979
1980-1989
Real wages
Source: AMECO
1990-1999
Consumption
2000-2007
Wages/GDP
2.- The crisis in peripheral countries
• Financing and credit growth
Annual growth rate of financial transactions vs. GDP
growth, euro zone
60%
Bonds and securities
Loans
Shares and equity
GDP
50%
40%
30%
20%
10%
0%
-10%
-20%
1996-1999
Source: BIS, WSE.
2000-2003
2004-2007
2.- The crisis in peripheral countries
DE
FR
IT
AT
FI
EMU-12
GR
BE
NL
PT
ES
IE
• Financing and credit growth
2.- The crisis in peripheral countries
• Institutional specificities of the EMU
1. Same monetary policy for very different economies
(with diverse industrial sectors and patterns of growth)
2. Free movement of capitals without any restriction
3. Lack of mechanisms to correct external imbalances
4. Lack of mechanisms to make converge the different
productive sectors
“Incomplete” economic union
Tremendous external imbalances (possible thanks to the
existence of the euro)
2.- The crisis in peripheral countries
•Institutional specificities of the EMU
15
10
5
0
-5
-10
Deficit countries
Source: Eurostat.
Surplus countries
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-15
2.- The crisis in peripheral countries
Peripheral variety (debt-led growth)
Center variety (export-led growth)
2.- The crisis in peripheral countries
External and internal demand contributions to GDP growth (%)
Peripheral variety (debt-led growth)
Center variety (export-led growth)
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
Ireland
Greece
Internal demand
GDP growth
Spain
External demand
Belgium
Germany Netherlands
Internal demand
GDP growth
Austria
External demand
2.- The crisis in peripheral countries
Main concepts
Export-led growth vs.
Debt-led growth
Financialization
Shadow banking
CDO, CDS…
Leverage
Sovereign debt
Unit labor costs
Capital outflows
Credit crunch
Zombie banks
Institutional specificities
Monetary policy
Fiscal policy
External imbalances
Contents
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
3.- The politics to overcome the crisis
What is the situation of the peripheral economies when the
crisis explodes?  dramatic situation
•Huge external deficits
•Tremendous accumulation of debt by the private sector
•Gradual increase in public sector debt (due to initial rescue plans)
•Without access to international financial markets
•“Zombie” banks
•Unable to devalue national currencies
3.- The politics to overcome the crisis
First phase of the crisis (2008-2009)  rapid increase in public debt due
to 3 types of measures:
•The functioning of the automatic stabilizers (unemployment benefits....)
•“Light” fiscal stimulus
•Aid to the financial system
 Investors fear that the euro will break, and they start attacking the sovereign
debt of the peripheral countries
Source: ECB
02/04/2013
02/01/2013
02/10/2012
02/07/2012
02/04/2012
Portugal
02/01/2012
Italy
02/10/2011
30
02/07/2011
Ireland
02/04/2011
Greece
02/01/2011
35
02/10/2010
Spain
02/07/2010
Germany
02/04/2010
40
02/01/2010
02/10/2009
02/07/2009
02/04/2009
02/01/2009
02/10/2008
02/07/2008
02/04/2008
02/01/2008
3.- The politics to overcome the crisis
10 year bond yield of sovereign debt (%)
45
25
20
15
10
5
0
3.- The politics to overcome the crisis
Second phase of the crisis (2010-2014)  radical change, back to
neoliberal economic policy
•Fiscal austerity
•Reform in public pension systems
•Privatization of public services
•Internal devaluation
•Restructuring of the banking sector
•Liquidity injections by the ECB
3.- The politics to overcome the crisis
The Troika strategy with peripheral countries
Troika
€
€
Foreign banks
€
PIIGS
Conditionality
↑ Financial
stability
•Fiscal austerity
•Reform pensions
•Privatization
•Internal devaluation
↓ Internal demand and
government surplus
↑ Competitiveness
↑ Capital inflows
↑ Payout
debt
↑ External
demand
↑ GDP
3.- The politics to overcome the crisis
1. Fiscal austerity:
↓ Financial
costs in capital
markets
↓ Public
spending
↓ Public
debt
↓ Government
deficit
↑GDP
↑ Stability
↑
Investment
3.- The politics to overcome the crisis
1. Fiscal adjustment measures
Freeze /
Cuts in the
reducing
number of
salaries of
public
public
employees
employees
Cuts in
Cuts in
health
pensions
spending
spending
/ health
/ pension
system
reforms
reforms
Reduction
Other
Increase
of social Reduction
public consumpt
transfers of public
spending ion taxes
investment
and
cuts
(VTA)
subsidies
Greece
X
X
X
X
X
X
X
X
Ireland
X
X
X
X
X
X
X
X
Italy
X
X
X
X
X
X
X
Portugal
X
X
X
X
X
X
X
X
Spain
X
X
X
X
X
X
X
X
Source: Fiscal Monitor, FMI, 2012; Ortiz and Cummins (2013: 16-17)
3.- The politics to overcome the crisis
2. Internal devaluation
↓ Public
debt
↓ Wages
↑ Competitiviness
and exports
↑GDP
↓ Private
debt
3.- The politics to overcome the crisis
2. Internal devaluation:
COUNTRY
POLICY
Disappearance of collective agreements at
national level
Ireland
Legal extension of opt-out clauses, allowing
enterprise-level deviation from sectoral
agreements
Italy, Portugal, Greece and Spain
Priority of firm-level agreements vs. sectoral or
national agreements
Greece and Spain
Legal enforcement to bargain with non-union
workers' representatives
Portugal, Greece and Spain
Limitation to the ultra-activity of collective
agreements
Greece and Spain
Formal restrictions to the general application of
collective agreements
Portugal and Spain
Source: Busch et al. (2013); Schulten and Müller (2013)
3.- The politics to overcome the crisis
3. Reforms of public pension systems:
Main features of the reforms in the PIIGS
-aim is to raise effective retirement age several years
-entitlement to a full pension will require more working years (from 35 to
40)  lower pensions
-pensions will be calculated on the basis of the whole working life, no
longer on the last insured years  lower pensions
3.- The politics to overcome the crisis
4. Privatizations  another tool for raising revenue needed to
meet debt payments, especially in those economies bailout
by the EU.
*Greece: 50.000 M€ between 2012 and 2015
12 major ports in the country, public gas company, the national postal company,
highways, railways, public water supply of Athens and Thessaloniki, 39 regional
airports, the Athens International Airport, and 40 Mediterranean islands
*Portugal: 5.000 M€ between 2013 and 2015
large public companies in the financial sector (BNP, Caixa Seguros), energy (EDP,
GALP, Cahora Bassa Hydroelectric, REN) or transport (Aeroportos de Portugal,
TAP, EMEF)
3.- The politics to overcome the crisis
4. Privatizations
*Ireland: 5.000 M€ between 2012 and 2015
privatization of various airports and seaports, 25% of the airline Aer Lingus, the
power supply (Bord Gáis Energy) and water supply (Irish Water), two thirds of
the currently nationalized banking system.
*Spain: 5.000 M€ between 2013 and 2015
Railways (Renfe), airports (AENA), the Port Authority, Lotteries, Wagering
Company. In addition, these plans include the privatization of public services,
such as the water supply in Madrid, or various hospitals and health centers.
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
4
May-10
5
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
3.- The politics to overcome the crisis
5. Liquidity injections by the ECB
6
Main refinancing operations
Facility of Deposit
Euribor 12 months
3
2
1
0
3.- The politics to overcome the crisis
5. Liquidity injections by the ECB
240
Monetary base, euro zone
(2007=100)
220
200
180
160
140
120
100
80
Source: ECB
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
60
3.- The politics to overcome the crisis
6. Bank restructuring
“Bad” bank financial
EU
FROB
€
€
“Bad” bank
(SAREB)
€
?
↑Credit
Private
banks
institution created to
hold non-performing
assets; it is
a state guaranteed bank.
Real estate
assets, nonperforming
loans
3.- The politics to overcome the crisis
Main concepts
Lender of
Last Resort
Labor market
reforms
Austerity
Bad bank
Internal
devaluation
Liquidity
injections
Privatizations
Contents
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
4.- An assessment of the EU policies
Real public expenditure, excluding interests (2005=100, change in %)
EU-12
Belgium
Germany
Ireland
Greece
Spain
France
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Source: AMECO
2003-2006
2007-2009
2010-2012
7,4%
9,8%
-0,6%
25,6%
21,4%
16,4%
8,9%
10,9%
9,0%
8,1%
7,4%
8,5%
16,0%
9,2%
13,6%
6,1%
36,3%
20,4%
21,8%
6,8%
2,5%
17,0%
15,8%
9,0%
9,9%
11,0%
-0,4%
6,7%
0,9%
-16,1%
-15,7%
-2,3%
3,0%
-4,7%
0,9%
0,1%
2,9%
-10,9%
5,6%
4.- An assessment of the EU policies
Source: AMECO
4.- An assessment of the EU policies
Euro Zone
Greece
Spain
Portugal
Greece
Spain
Portugal
Euro Zone
4.- An assessment of the EU policies
Euro Zone
Greece
Spain
Portugal
Ireland
Greece
Spain
Italy
Portugal
4.- An assessment of the EU policies
3 traps operating simultaneously:
-Internal-fiscal trap
-External-devaluation trap
-Liquidity trap
4.- An assessment of the EU policies
1. Internal-fiscal trap:
↓ Public
spending
Fiscal
multiplier
↓ GDP
↑ Public
debt
2. External-devaluation trap
↓ Wages
↓ Private
consumption
↓ GDP
≈ Private
debt
4.- An assessment of the EU policies
3. Liquidity trap: monetary policy is not enough
14
Credit to private sector (right scale, %)
Monetary base (left scale)
Monetary Supply-M3 (left scale)
240
220
12
10
200
8
180
6
160
Source : ECB
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
-4
Sep-09
60
May-09
-2
Jan-09
80
Sep-08
0
May-08
100
Jan-08
2
Sep-07
120
May-07
4
Jan-07
140
4.- An assessment of the EU policies
GR
PT
IT
FR
ES
BE
IE
DE
AT
Source: European Commission, Eudata. Deutsche Bank
NL
FI
4.- An assessment of the EU policies
So… we do not solve the crisis
… and we expand the root problems!!
4.- An assessment of the EU policies
Social protection expenditure and reduction of inequality and poverty in
the EU Member States
HU
FI
SI
EE
LV
Source: ESDE, 2013
RO BG
PT
PL
LT
CY
AT
LU
CZ
MT
SK
IE
IT
UK
EL
ES
SE
DK
FR
BE
DE
4.- An assessment of the EU policies
Inequality (S80/S20 measure) by groups of EA and non-EA Member
States
Source: ESDE, 2013
4.- An assessment of the EU policies
Main concepts
Double-dip
recession
Mini-jobs
Deflation
“Light”
deleverage
Inequalities
Jobless
recovery
Working poor
Debt
restructuring
- Haircut
5.- An alternative economic policy
•New strategy based on 4 principles
1. De-financialization, regulation
2. Global Green New Deal
3. Wage-led recovery
4. Debt restructuring
5.- An alternative economic policy
….finish with this
Annual growth rate of financial transactions vs. GDP growth, euro
zone
60%
Bonds and securities
Loans
Shares and equity
GDP
50%
40%
30%
20%
10%
0%
-10%
-20%
1996-1999
Source: BIS, WSE.
2000-2003
2004-2007
5.- An alternative economic policy
….finish with this
Total public expenditure, excluding
interests (evolution, % of GDP)
Source: AMECO
5.- An alternative economic policy
….finish with this
Wage share (% GDP), euro zone
75
70
65
60
Source: AMECO
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
55
5.- An alternative economic policy
….finish with this
Source: McKinsey Global Institute
The example of Iceland
•Main policies adopted
1. Capital controls to free movements
2. Moratorium on repayment of foreign debt
3. Nationalization of banks
4. Debt forgiveness on mortgage debt
5. Higher social spending
6. Wage increases
The example of Iceland
Real GDP growth, 2011-2012 (%)
6%
4%
2%
0%
-2%
Iceland
Islandia
Euro
Zone
Zona Euro
Spain
España
Portugal
Portugal
-4%
-6%
-8%
-10%
-12%
-14%
Source Eurostat; Statistics Iceland
Greece
Grecia
The example of Iceland
Euro Zone
Greece
Spain
Portugal
Euro Zone
Greece
Spain
Portugal
Iceland
Iceland
The example of Iceland
Iceland
Euro Zone
Spain
Portugal
Greece
The example of Iceland
Mortage debt
restructuring
↑ Wages
↑ Private
consumption
↑ Social
spending
+ Capital
controls
↑ Employment
↑ GDP
↓ Debt/GDP
Thank you!!
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