Transcript Rapporto Europa 2010

Professor
Stefan
Collignon
Rapporto Europa
Adjusting to the crisis
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Professor
Stefan
Collignon
1.
2.
3.
4.
5.
6.
Table of Content
Europe's adjustment to the crisis
Exit strategies for what?
Public deficits and the sustainability of debt
Private union bonds as an exit from the
Greek drama
Global imbalances: Europe’s role
European economic governance. The Lisbon
Treaty, the crisis and possible outlooks
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Professor
Stefan
Collignon
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Rapporto Europa 2010
The world is coming out of its deepest
economic crisis in 70 years, but the danger is
not over.
Although economic growth has returned, it is
weak. The European economy risks falling
back into a «double-dip» recession, unless
the restocking of inventory translates into
sustained investment and job creation.
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Professor
Stefan
Collignon
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Rapporto Europa 2010
Lessons from the Great Depression teach that
an early recovery can revert back into
recession, when bankruptcies, defaults,
currency depreciations, and low assets prices
undermine the creditworthiness of borrowers.
The Greek crisis risks to be precisely such an
event


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Falling bond and stock prices
Fiscal restraint
Weak euro
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Professor
Stefan
Collignon
1.
Europe's adjustment to the crisis
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Professor
Stefan
Collignon

The crisis has not only lowered growth,
but also affected long term growth
potential negatively


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Investment
Employment
Euro Area is less affected than non-euro
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Rapporto Europa 2010
Exception: Poland
Asia is least affected
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Table 2. Employment Adjustment
Column
1
2
3
4
jobs created 199-2008 job growth
job losses 2008-10 job losses
in thousands in % of 1999 in thousands in % of 2008
Euro area16
15,181.8
11.4%
-4866.0
-3.3%
Euro area12
14,803.2
11.5%
-4772.6
-3.3%
Ireland
476.7
29.4%
-238.4
-11.4%
Spain
4,884.7
31.3%
-1806.2
-8.8%
Finland
286.3
12.7%
-133.2
-5.3%
Slovenia
97.1
10.9%
-45.4
-4.6%
Portugal
220.1
4.5%
-139.3
-2.7%
France
2,144.6
9.1%
-674.0
-2.6%
Netherlands
797.3
10.0%
-193.3
-2.2%
Belgium
433.4
10.8%
-97.9
-2.2%
Austria
364.4
9.7%
-90.0
-2.2%
Germany
1,855.0
4.8%
-838.3
-2.1%
Slovakia
175.9
8.5%
-45.7
-2.0%
Italy
2,769.0
12.3%
-480.6
-1.9%
Greece
472.8
11.2%
-80.7
-1.7%
Cyprus
85.3
27.6%
-1.9
-0.5%
Malta
20.3
14.2%
-0.5
-0.3%
Luxembourg
98.9
39.6%
-0.6
-0.2%
9
5
(3)/(1)
loss/gain
-32.1%
-32.2%
-50.0%
-37.0%
-46.5%
-46.7%
-63.3%
-31.4%
-24.2%
-22.6%
-24.7%
-45.2%
-26.0%
-17.4%
-17.1%
-2.2%
-2.5%
-0.6%
Professor
Stefan
Collignon
Rapporto Europa 2010
Okun’s Law

claimed a dependable relation between employment
and output.


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
Our estimate (table 3) shows Okun’s law for Europe
Given that the unemployment rate has risen from 6 to
9.5 percent in the crisis:
the European economy would have to grow 8.2 % in
one year to return to the status quo ante
or 5.2 % over two years.
If it grows at the rate of 3 percent, it will take over 7
year to return to Unemployment rates of 2008
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Professor
Stefan
Collignon
Rapporto Europa 2010
Competitiveness distortions



The PIIG problem?
Current account balances vs unit labour cost
levels?
Unit labour cost levels determine relative
growth

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Nominal wages relative to productivity
Degree of distortions measured by Variance
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Professor
Stefan
Collignon
Rapporto Europa 2010
Unit Labour Cost Levels in the Euro Area
Levels
of ULC
1999Q1:
nominal
= real ULC
1.0
0.9
0.8
0.7
0.6
0.5
Variance
Coefficient of Variation: ULC in Euro Area
.12
0.4
99
00
01
02
03
04
05
06
07
08
.11
ULCEU
ULCFI
ULCGR
ULCLUX
ULCSP
.10
.09
.08
.07
ULCAU
ULCFR
ULCIR
ULCNL
ULCBE
ULCGE
ULCIT
ULCSLOVAK
12
Source: OECD, own calculations
.06
99
00
01
02
03
04
05
06
07
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Professor
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Collignon
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Rapporto Europa 2010
How did member states adjust?
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Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
2. Exit strategies for what?
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Collignon
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Policy response to the crisis
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Low interest rates and monetary easing
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Fiscal stimulus packages
But when is it time to return to less
accommodating policies?
Who should tighten first?
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Rapporto Europa 2010
Monetary or fiscal policy?
Is there a danger of inflation?
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
Euro Monetary Aggregates
12
10
8
bn euros
6
4
2
0
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Professor
Stefan
Collignon
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Rapporto Europa 2010
Despite ample liquidity supply,
money supply is not growing

No danger of inflation
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Credit is not growing
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But also: no growth
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Danger of deflationary spiral?
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Professor
Stefan
Collignon
Rapporto Europa 2010
The interaction of monetary and fiscal
policy
 New issue after Greek bail-out and ECB
buying government debt

Keynesian economics: stimulate demand

Ricardian economics: Not possible
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Savings will increase to cover future tax
liabilities
Government bonds are not net wealth
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Professor
Stefan
Collignon
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Rapporto Europa 2010
If Central bank buys government debt,
the tax liability of citizens is reduced
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Seignorage
Government bonds are then net wealth
because government spending increases
income
Whether the economy is Keynesian or
Ricardian depends on open market
operations of Central bank
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
The optimal exit strategy
 ECB buys government bonds
 ECB controls price stability and money
supply, possibly rising interest rates

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Increases seignorage effects
Governments maintain fiscal stimulus
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Until corporate sector is borrowing again
Like Obama
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Professor
Stefan
Collignon
3. Public deficits and the sustain
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Professor
Stefan
Collignon
Rapporto Europa 2010
Is fiscal policy out of control?
 The Greek crisis
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Excessive spending
Or reduced income due to crisis?
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Professor
Stefan
Collignon
Rapporto Europa 2010
Euro Area 12 countries
Germany
4,800
France
1,200
1,200
1,100
4,400
1,000
1,000
4,000
900
800
800
3,600
600
700
3,200
600
400
500
2,800
200
400
2,400
1980
1985
1990
1995
2000
EURO Expenditure
2005
2010
300
1980
1985
1990
Euro Revenue
1995
2000
2005
2010
0
1980
1985
1990
GERMANY Expenditure
GERMANY Revenue
Greece
2000
2005
2010
2005
2010
FRANCE Expenditure
FRANCE Revenue
Ireland
Italy
140
90
900
120
80
800
700
70
100
1995
600
60
80
500
50
400
60
40
40
20
0
1980
300
30
200
20
1985
1990
1995
2000
GREECE Expenditure
2005
2010
10
1980
100
1985
1990
GREEC Revenue
1995
2000
2005
2010
0
1980
1985
IRELAND Expenditure
IRELAND Revenue
Portugal
Spain
90
80
1990
1995
ITALY Expenditure
2000
ITALY Revenue
United Kingdom
500
800
450
700
70
600
400
60
500
50
350
40
300
400
300
30
250
200
20
200
10
0
1980
1985
1990
1995
2000
PORTUGAL Expenditure
PORTUGAL Revenue
2005
2010
150
1980
100
1985
1990
1995
SPAIN Expenditure
2000
2005
SPAIN Revenue
2010
27
0
1980
1985
1990
1995
UK Expenditure
2000
2005
UK Revenue
2010
Professor
Stefan
Collignon
Rapporto Europa 2010
Greece budget trends in euro
130
Geece
joins
euro
120
110
Bn euro
100
90
80
Lehman
crisis
70
60
50
99
00
01
02
03
04
05
06
07
08
GREECE Expenditure
GREECE Expenditure forecast
GREECE Revenue
GREECE Revenue forecast
28
09
10
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Professor
Stefan
Collignon
Rapporto Europa 2010
Greece Budget Deficits
12
8
George
Papandreou
4
billion euros
0
-4
-8
-12
Andreas
Papandreou
-16
Kostas Karamanlis
Kostas Simitis
Konstantinos
-20 Mitsotakis
-24
90
92
94
96
98
00
02
04
06
GREECE SURPRISE DEFICIT 29
GREECE TREND DEFICIT
08
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Professor
Stefan
Collignon
Rapporto Europa 2010
Italian Deficits
60
euro
Amato
Ciampi
Berlusconi
40
20
0
-20
Prodi
D'Alema
Amato
-40
Berlusconi
Prodi
-60
-80
90
92
94
96
98
00
02
04
ITALY SURPRISE DEFICIT
30
ITALY TREND DEFICIT
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08
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Professor
Stefan
Collignon
Rapporto Europa 2010
Is public debt in Europe sustainable?
 Rising debt/GDP ratios
 The concept of sustainability

A long term „steady state“
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
Depends on fiscal policy objectives and growth
rate
Convergence to the steady state
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
Fast or slow?
Depends on policy reaction function relative to
growth adjusted real interest rate
(r-y)>α
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
Our estimates of the policy parameter
 Growth adjusted interest rate (r-y) hardly
ever exceeded 10%
 Policy reaction to excessive deficit is well
above these values: α

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Italy: 20-24 %
Greece: 35 %
Spain: 28 %
Germany: 70-74 %
Denmark: 8-13 %
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Professor
Stefan
Collignon


Hence: public debt is sustainable in
Europe
but the steady state rises significantly
because of low growth
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Rapporto Europa 2010
Need to accelerate growth is more urgent
than cutting deficits
However, if debt is growing fast and there
is need for refinancing, this could lead to
illiquidity and default
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Professor
Stefan
Collignon
4. Private Union Bonds as an ex
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Professor
Stefan
Collignon

On 9 May, Euro Area member states
have set up a European Stabilisation
Mechanism of € 750 bn
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Rapporto Europa 2010
Subject to radical austerity packages
Is it sufficient?
Will it generate non-Keynesian growth
effects?
Danger: overly hasty fiscal exit will push
the European economy back into
recession
What will happen to bail-out loans?
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Professor
Stefan
Collignon

The constitutional problem

Defaulting on bail-out loans is equivalent to
“assuming a member state’s debt”
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Rapporto Europa 2010
Forbidden by Lisbon Treaty § 123
German constitutional court
The Transfer Union and moral hazard
A way to circumvent the problem:
synthetic Union Bonds
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Professor
Stefan
Collignon
Rapporto Europa 2010
Private Union Bonds
 Different from Tremonti’s proposal
 A Fund or Trust buys government bonds
of all Euro member states in proportion of
ECB share capital
 Issues Union Bonds in exchange



A portfolio of government debt
Les risk and volatility
Higher return
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
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Professor
Stefan
Collignon
Rapporto Europa 2010
Private Union Bonds
 Acceptable as paper for central bank
operation



AAA
Ensures liquidity for banking system in case
of default
Possibility to structure this product to
give greater security to sovereign lenders
and higher returns to risk taking private
lenders

Overcomes the constitutional problem
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Professor
Stefan
Collignon
5. Global imbalances: Europe’s role
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Professor
Stefan
Collignon
Rapporto Europa 2010
The Greek crisis has accelerated the fall
of the euro
 Short term speculation?
 Long term equilibrium: parity?




Economic stagnation in Europe
Accelerating growth in USA
High growth in Asia
This poses new difficulties and threats to
the global economy
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Professor
Stefan
Collignon
Rapporto Europa 2010
Global imbalances were a major cause
of the financial crisis
 Low savings in USA


High current account surpluses in Asia


Consequence of bubble
Bernanke: Global savings glut
Europe in balance
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Professor
Stefan
Collignon
Rapporto Europa 2010
Current Account Balance as Percent of GDP
12
8
4
0
-4
-8
1980
1985
1990
1995
United States
JAPAN
CHINA
Euro area
2000
2005
2010
USA TREND
JAPAN TREND
CHINA TREND
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Professor
Stefan
Collignon
Rapporto Europa 2010
Global imbalances reveal

Excessive US deficits of the Bush years
are getting corrected by financial crisis


But structural US deficit remains

Euro Area is in balance

China will increase its surpluses


Who will absorb them?
Symbiotic relationship: USA-Asia
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Professor
Stefan
Collignon
The three objectives for global adjustment



Reduce the American current account
deficit
Prevent the crash of the Asian growth
model
Avoid putting the burden of adjustment
exclusively on the euro
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Professor
Stefan
Collignon
Rapporto Europa 2010
The transformation of the world
economy
Elastic world labour supply due to
globalisation


China`s labour force: 25% of world and still
growing


But slowing down and will stop in 2015
Anchor for wage and price stability



Unlimited supply of labour (Arthur Lewis)
Great Moderation
The new global growth pole is Asia
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Professor
Stefan
Collignon
Rapporto Europa 2010
The Asian development model
Based on stable and competitive exchange
rates


Competitive level generates attractive profits

Low volatility generates certainty for
investment planning
Focus on the USD zone


Similar Europe and Japan under Bretton Woods
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Professor
Stefan
Collignon
Rapporto Europa 2010
CHINA
12
11
10
9
8
7
6
99
00
01
02
03
04
05
06
52
YUAN
YUANUSD
07
08
09
Professor
Stefan
Collignon
Rapporto Europa 2010
Asia’s Dollar Standard
Volatility between Asian currencies and
euro is higher than with USD

Deters trade and investment between
Europe and Asia



Chinese FDI benefits from exchange rate
stability to the United States and Japan
with respect to Europe the undervaluation
of the exchange rate compensates for the
increased volatility-induced uncertainty
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Professor
Stefan
Collignon
Economic growth dominates exchange rate
effects
Import and Export Elasticities for China and Europe
c
trend
GDP growth E
GDP growth China
Yuan/euro
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Imports
Coeff
t-Stat
0.079
1.476
-0.001
-0.500
6.604
12.172
0.649
0.800
0.774
0.077
0.228
53.327
5.683
Exports
Coeff
t-Stat
0.061
0.693
-0.005
-4.202
2.885
-0.676
0.514
0.455
0.088
0.316
50.868
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2.381
-5.380
Professor
Stefan
Collignon
Import and export shares for Asian countries (2008)
Export destination
Exporter
China
Japan
China
8.1
Japan
16.0
Korea
21.7
6.7
India
5.6
2.0
ASEAN
12.4
10.3
ASEAN+4
9.1
6.5
Usa
5.5
5.1
EU12
2.5
1.3
EU12 external trade
6.9
3.5
Importer
China
Japan
Korea
India
ASEAN
ASEAN+4
Usa
EU12
EU12 external trade
Import source
China
Japan
18.8
17.7
10.1
11.3
10.0
16.5
4.8
12.2
14.0
2.5
11.3
9.0
6.6
1.8
4.7
Korea
5.2
7.6
2.1
4.1
4.7
2.7
0.7
2.1
Korea
9.9
3.9
2.6
4.8
5.5
2.3
0.8
2.1
India
2.2
1.0
2.1
2.8
2.0
1.4
0.7
2.1
India
1.8
0.7
1.5
2.0
1.4
1.2
0.7
1.7
ASEANASEAN+4
6.7
22.2
12.2
36.8
9.7
40.1
9.5
19.1
22.9
52.6
12.2
34.5
5.0
19.7
1.6
6.8
4.3
18.9
USA
17.7
17.8
11.0
11.8
10.9
15.0
ASEANASEAN+4
9.9
34.9
12.2
35.5
8.5
41.7
7.9
23.1
21.6
51.1
12.9
38.7
4.5
31.2
1.8
10.0
4.6
25.3
Usa
7.2
10.4
8.9
7.8
7.7
8.3
6.5
17.9
4.6
55
11.7
EU12
14.7
10.3
8.5
16.2
8.8
11.7
15.5
63.9
RoW
45.4
35.2
40.3
52.9
27.7
38.7
64.8
22.8
63.2
World
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
EU12
9.6
7.3
7.5
10.4
8.1
8.6
13.1
60.6
RoW
48.3
46.8
42.0
58.7
33.1
44.4
55.8
24.8
63.0
World
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Professor
Stefan
Collignon
The need to defuse excessive appreciation
pressure for the euro
China bashing

China manipulates its currency to gain unfair
trade advantages

China should revalue


US need more exchange rate flexibility, not Asia
Appreciating RMB would kill growth in Asia


Demand from China for European exports is 3
times as important as the exchange rate
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Professor
Stefan
Collignon

An alternative proposal



Burden sharing for global adjustment.
Asia switches its peg from the dollar to a basket
of euros and Japanese yen

Maintain competitive exchange rate to keep growth
going

The two main economies

25 % of Chinese exports against 18% of USA

23.% of Chinese imports against 7% of USA
A collective switch would maintain the stability
of Asian monetary system

See Europe’s experience
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Professor
Stefan
Collignon

An alternative proposal

The Euro Area and Japan cooperate to
minimize exchange rate volatility

Create a stable environment for investment


Japan as leading FDI provider for Asia
Stronger trade and investment relations between
Europe and Japan would foster growth
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Professor
Stefan
Collignon
Reserve management

Asian surplus countries place an increasing
share of their reserves in European and
Japanese bonds



A gradual shift: old stock remain in USD, new
reserves are placed in euro and yen
thereby stimulating financial markets in Europe and
Asia
Kickstart for higher domestic demand in these two
economies due to wealth effects

Supporting exports from China and other emerging Asian
economies
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Professor
Stefan
Collignon
Reserve management



The basket could become a vehicle for a future
international reserve currency
The basket composition could change over time
Moving away from the Triffin dilemma



The basket is managed by more than 1 country
Learning from the ECU experience?
PBC governor Zhou Xiaohuan : a new definition of
SDRs?
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Professor
Stefan
Collignon
Policy implementation





a unilateral re-peg?
Need for exchange rate stability within the
basket
Coordination should be discussed in the G20
but the initiative would best be taken by a
reduced G4 and ASEM.
The sleeping beauty Europe could be kissed
awake by Asia


The Treaty foresees the possibility of coordinated
exchange rate management.
But is Europe capable to govern itself?
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Professor
Stefan
Collignon
6.
European economic governance. Th
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Professor
Stefan
Collignon


Rapporto Europa 2010
1st December 2009, the Lisbon Treaty
entered into force.
The economic governance innovations
contained in it are only of marginal
impact and appear far from providing the
answers that are required to overcome
the economic crisis quickly.


Recognition of Euro-group (art. 136)
weak in terms of contents and procedures relating
to the Broad Economic Policy Guidelines (BEPG)
(art. 121 TEU)
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Professor
Stefan
Collignon
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Rapporto Europa 2010
First application: European Stabilisation
Mechanism (9. May 2010)
Commission now wishes to keep tighter
control over member state finances


European semester
Submit financial programs in advance
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Professor
Stefan
Collignon
Rapporto Europa 2010
Conclusion: What Europe needs
 Better governance


No diktat


Efficiency in administrating our common
goods
Freedom from domination
Democratic legitimacy

Equality among European citizens
65
Professor
Stefan
Collignon
Rapporto Europa 2010
Grazie!
Viva la Repubblica europea!
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