Transcript Economic Drivers of the European Future

Oberbank Day
Linz, May 28 2010
Economic Drivers of the European Future
-–
– 15 Propositions –
(one proposition every four minutes)
Wolfgang Wiegard
University of Regensburg
and
German Council of Economic Experts
Economic Drivers of the European Future
Table of contents
I. Looking back: European policy reactions during the
financial crisis
II. Looking forward: Euro at risk?
II.1. Sovereign debt problems in the euro area
II.2. How to reduce public debt burdens
II.3. A brief evaluation of current policy reactions to
the euro crisis
II.4. Still lacking: Reform of the Stability and
Growth Pact
II.5. Monetary policy and inflation
II.6. Will the euro survive?
II.7. Taxing financial transactions or activities?
III. Final remarks
I. Deep recession in 2009
Proposition 1
In 2009, European economies as well as other industrialized countries have been hit by the deepest recession
since the Great Depression.
Only in the emerging and developing economies did the
GDP increase during the crisis.
Annual percentage change in real GDP (2009)
-1.7
-2.0
-2.0
-1.9
-2.2
-2.7
-3.0
-3.0
-3.6
-3.6
-4.0
-4.2
-4.1
-4.0
-4.7
-5.0
-5
-4.9
-6.0
-7.0
-7.1
-7.3
-8.0
Cyprus
Malta
Greece
France
Portugal
Belgium
Austria
Spain
Netherlands
Euro Area
Luxembourg
Slovak Republic
-1.0
Germany
Italy
Ireland
Slovenia
Finland
0.0
-7.8
Source: IMF, World Economic Outlook, April 2010
Annual percentage change in real GDP (2009)
-4.1
Euro Area
-4.9
United Kingdom
Sweden
-4.4
Russia
-7.9
Japan
-5.2
-2.6
Canada
United States
-2.4
ASEAN 5
1.7
Sub-Saharan Africa
2.1
2.4
Middle East/North Africa
5.7
India
China
Source: IMF, WEO, April 2010
-10.0
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
8.7
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
I. Economic policy reactions during the financial crisis
Proposition 2
Fiscal and monetary policy interventions on an unprecedented scale prevented an even worse slump in
economic activity.
Massive fiscal stimulus packages in the euro area
helped to stabilize aggregate demand.
I. Monetary policy reactions: central banks’ key interest rates
%
7
%
7
6
6
United Kingdom
5
5
4
4
3
3
Euro-Area
2
2
1
1
United States
Japan
0
0
1999
April 20 2010
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Thomson Financial Datastream
I. Fiscal stimulus packages in the euro area
Total Fiscal Package
Including:
Expenditures
Total Fiscal Package
Including:
Expenditures
Country
billion Euro
2009
percent of GDP
2010
2009
2010
2009
2010
Belgium ...............................
1.3
1.2
Germ any ................................................
35.9
48.4
Finland ................................
2.4
2.4
France ................................
17.0
4.0
Greece ................................
0.0
0.0
Ireland .................................
0.0
0.0
Italy .....................................
– 0.3
– 0.8
Netherlands ........................
3.1
2.9
Austria ..............................
4.9
4.6
Portugal ...............................
1.0
0.3
Spain ...................................
26.8
14.7
Total .....................................
92.0
77.6
0.9
18.0
0.4
16.3
0.0
0.0
3.1
0.2
1.4
0.9
12.1
53.2
0.8
13.6
0.4
4.0
0.0
0.0
0.2
0.0
1.0
0.3
0.0
20.4
0.36
1.44
1.25
0.87
0.00
0.00
– 0.02
0.53
1.71
0.60
2.44
1.01
0.33
1.93
1.25
0.20
0.00
0.00
– 0.05
0.49
1.63
0.18
1.34
0.85
1)Source: GCEE, Annual Report 2009/10
2009
0.27
0.72
0.23
0.83
0.00
0.00
0.19
0.03
0.48
0.54
1.10
0.58
2010
0.24
0.54
0.23
0.20
0.00
0.00
0.01
0.00
0.36
0.18
0.00
0.22
I. Expenditure multipliers in the euro area
Impact of Expenditure Programs on Euro Area GDP
Percentage Changes Against Reference Path
Expenditures:
Real GDP:
%
1.2
Smets and Wouters (2003)
Ratto et al. (2009)
Taylor (1993)
Laxton and Pesenti (2003)
Fagan et al. (2005)
NiGEM
%
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
0
-0.2
-0.2
-0.4
-0.4
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2009
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II.1. Sovereign debt problems in Europe
Proposition 3
Due to fiscal policy interventions, public debt increased considerably during the crisis, and will continue to increase dramatically if fiscal policy does not
change.
II.1. Long-term debt projections under
no-policy-change assumption
Debt to GDP Ratios
8,7
vH
2009
2010
2030
300
vH
300
271.3
260.8
250
250
188.2
200
200
177.4
155.6
150
150
102.5
113.3
116.7
112.2
100
100
78.5
72.4
69.3
48.1
60.0
64.0
70.6
50
50
0
0
Germany
Italy
Austria
France
Spain
Ireland
United Kingdom
EU 27
Source: European Commission, Sustainability Report 2009, p. 40
II.1. Economic effects of government debt
Proposition 4
In the short run, higher deficit-spending stabilizes
aggregate demand and dampens economic fluctuations.

In the long run, higher debt-to-GDP ratios will
increase long-term interest rates and reduce
economic growth
narrow the room for growth-enhancing
public investment expenditure
burden future generations.
II.2. How to reduce public debt burdens
Proposition 5
In principle, there are five ways of achieving a
reduction in public debt burden :
1. strict consolidation efforts by reducing (structural)
primary deficits (i.e. cutting public expenditures or
increasing taxes)
2. a higher growth rate of GDP
3. a “bailout” or capital transfer from abroad
4. a default (repudiation; restructuring of sovereign
debt)
5. higher inflation.
II.2. How to reduce public debt burdens
Proposition 6
A higher growth rate could help to solve the debt
problem, but will not suffice to consolidate public
budgets.
GDP growth rate is endogenous and not a policy
instrument; it is hard to boost growth rates in a
lasting manner by tax or expenditure policies.
For example:
The growth rate effects of the German “Growth
Acceleration Law”, implemented in 2010, are
 ZERO
II.2. Growth rate effects of recent tax policies in Germany
Growth Rate Effects of the German "Growth Acceleration Law" (2010)
Percentage Changes Against Refernce Path
0.06
0.06
0.05
0.05
0.04
0.04
0.03
0.03
0.02
0.02
0.01
0.01
0
0
-0.01
- 0.01
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1) Own calculations with NiGem.
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II.2. How to reduce public debt burdens
Proposition 7
In northern “core” countries of the euro area (DE, FR,
AT, NL, BE, LU) fiscal sustainability has to be restored
by a long-term fiscal tightening.
Public expenditures have to be cut and/or taxes
increased in order to achieve (structural) primary
surpluses in public budgets.
Unfortunately, so far almost nothing has been done in
DE, AT, FR.
II.3. Evaluation of the Greek “rescue package”
Proposition 8
With the “rescue package” of May 2 2010, euro area
member states and the IMF agreed to bail out Greece,
conditional on Greece meeting strict consolidation
requirements.
The alternative – a Greek default or “haircut” – could have
been even more expensive for euro area countries.
Even after the three-year financial support program,
Greece will not be able to manage its debt crisis alone
and will need additional help or have to restructure its
debt.
II.3. Some details of the Greek “rescue package”
“rescue shield”
for Greece
BE
3.58
DE
27.92
1.64
IE
EL
ES
12.24
FR
20.97
IT
110 bn euro
€ 80 bn
bilateral
loans
€ 30 bn
IMF
18.42
CY
0.2
LU
0.26
MT 0.09
NL
5.88
AT
2.86
PT
2.58
SI
SK
FI
0.48
Relative Shares in
ECB‘s capital
(excl. Greece share)
1.85
1.85
II.3. Is there a conflict between the rescue package
and the no-bail-out clause of the TFEU? ?
II.3. European Stabilization Mechanism
Proposition 9
In addition to the Greek rescue package, on May 10 2010,
EU finance ministers established a European Stabilization
Mechanism (ESM) with a total volume of 500 billion euros.
The IMF will participate and provide a further 250 billion
euros.
The package provides financial support to member states
in financial difficulties and is subject to strong conditionality.
Even if the legal basis for the program is weak, it will help to
stabilize financial markets.
II.3. Details of the “European Stabilization Mechanism”
European Stabilization Mechanism:
an even larger rescue shield
750 bn euro
€ 60 bn
€ 440 bn
loans and credit lines
by euro area
from EU Commission members via SPV
€ 250 bn
IMF
II.3. Risk spreads before and after the ESM
Spreads for 10-year government bonds
basis points
1100
basis points
1100
1000
1000
EU-IMF-Stabilization
Mechanism
900
900
800
800
700
700
Greece
600
Portugal
500
600
500
Irland
400
400
Spain
300
300
Italy
200
United
Kingdom
100
France
0
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
20
09
01
.0
3.
20
09
01
.0
4.
20
09
01
.0
5.
20
09
01
.0
6.
20
09
01
.0
7.
20
09
01
.0
8.
20
09
01
.0
9.
20
09
01
.1
0.
20
09
01
.1
1.
20
09
01
.1
2.
20
09
01
.0
1.
20
10
01
.0
2.
20
10
01
.0
3.
20
10
01
.0
4.
20
10
01
.0
5.
20
10
01
.0
6.
20
10
01
.0
7.
20
10
01
.0
8.
20
10
01
.0
9.
20
10
20
09
Jan Feb Mar Apr May Jun Jul
01
.0
2.
20
08
2008
01
.0
1.
May 25 2010
01
.1
2.
20
08
Oct Nov Dec
01
.1
1.
01
.1
0.
20
08
-100
2009
200
100
0
-100
2010
Source: Thomson Financial Datastream
II.3. The legal basis for the ESM is weak
II.4. Reforming the Stability and Growth Pact
Proposition 10
The rules of the Stability and Growth Pact (SGP) were
neither strict enough nor enforced strictly enough to
prevent the European debt crisis.
Hence, it is essential for the Greek rescue package and the
European Stabilization Mechanism to be complemented by
a strengthening of the SGP.
A recent proposal by the European Commission is a first
step; the proposal of a “European Consolidation Pact”
launched by the German Council of Economic Experts is
even better.
II.5. ECB has lost its reputation
Proposition 11
The role of the ECB in the current euro crisis is not
at all convincing.
By first explicitly excluding far-reaching measures,
only to take a number of them a few days later, the
reputation of the ECB has been diminished.
The critical measures are:
•
purchasing sovereign debt in secondary markets as part of the
“Securities Markets Program” (May 10 2010);
•
suspending the application of any minimum credit rating for
collateral requirements in the case of Greek sovereign debt
(May 3 2010).
II.5. The legal basis for ECB bailout
II.5. ECB reputation loss translates into a weaker euro
Bilateral exchange rates
USD or GBP
JPY
1.8
180
daily values
1.7
170
1.6
160
Yen/ Euro
1.5
150
1.4
140
1.3
130
Dollar/ Euro
1.2
120
1.1
110
1.0
100
GBP/Euro
0.9
90
0.8
80
0.7
70
0.6
60
2004
May 25 2010
2005
2006
2007
2008
2009
2010
source: Datastream
II.5. Inflation will remain low in the euro area
Proposition 12
Despite the purchase of sovereign debt by the ECB
there will be no inflation in the euro area during the
next few years.
The probability of inflating away the real burden of
public debt is higher in the United States and, to a
lesser degree, in the United Kingdom.
II.5. M3 growth is negative
Saisonally adjusted
%
%
14
14
Monetary aggregate M3
Loans to private
sector
12
12
10
10
3-month moving
average (centred)
8
8
6
6
4
4
Reference value M3
2
2
Monetary aggregate M1
0
0
-2
-2
2004
Date: May 26 2010
2005
2006
2007
2008
2009
2010
Source: ECB
II.5. Long-term inflation expectations remain low
Source: ECB, Monthly Bulletin, May 2010
II.6. Will the euro survive ?
Proposition 13
The euro area will not break up, nor will the euro collapse.
A country cannot simply leave the euro area.
It could, however, leave the EU and then re-apply for EU
membership. Incentives are weak, even if a country could
depreciate its currency in the meantime.
A country cannot be expelled from the euro area, or from
the EU.
The only real threat to the euro area is that Germany or
France will leave the EU, because of the fear of becoming
the principal bail-outers. But this will not happen!
II.7. Taxing financial transactions or activities ?
Proposition 14
In June 2010, the G-20 leaders will decide on how the
financial sector can contribute to paying for any burden
associated with government interventions to repair the
banking system.
The options are:
•
a financial transaction tax
•
a financial activity tax
•
a levy on financial institutions.

III. Final remarks
Proposition 15
(a somewhat optimistic outlook)
Economic recovery is underway in the euro area,
even if only gradually and only for the “core” countries.
Annual percentage change in real GDP (2010 and 2011)
European Commission Spring Forecast
2010
2011
3.7
3.0
2.7
2.4
2.1
2.0
1.8
1.4
1.4
1.1
1.8
1.6
1.5
1.2
0.9
0.8
1.6
1.3
1.3
1.6
1.3
1.3
0.8
0.5
Finland
Slovenia
Ireland
Italy
Germany
Slovak Luxembourg Euro Area Netherlands Spain
Republic
-0.4
Austria
Belgium
1.7
1.5
1.1
1.3
0.7
Portugal
France
Greece
-0.5
Malta
Cyprus
-0.4
-0.9
-3.0
Source: European Comission, Spring Forecast, April 2010
More optimistic: OECD Spring Forecast
2010
2011
3.9
3.6
3.1
3.0
2.7
2.5
1.9
1.7
2.3
2.1
1.8
1.2
Ireland
Italy
1.4
1.2
Slovak
Republic
Luxembourg
Euro Area
Netherlands
Spain
-0.2
1.7
1.4
1.0
0.9
Germany
2.1
1.9
1.5
1.1
Finland
2.0
Austria
Belgium
0.8
Portugal
France
Greece
-0.7
-2.5
-3.7
Source: OECD, Economic Outlook, May 2010
III. Final remarks
Thanks for listening ..
and have a nice evening