Transcript Total fiscal balance

A Tale of Two Faux Crises:
Italy, Spain and the Euro
Money and Development
Seminar Series
29 February 2012
John Weeks
Professor Emeritus, SOAS
http://jweeks.org
Background:
Two non-technical articles:
"Democracy in Europe and the Italian Crisis"
In Insight
http://www.insightweb.it/web/
"Catastrophe Now: The Euro Runs its Course"
In the Social Europe Journal
http://www.social-europe.eu/
Both linked on http://jweeks.org
Statistical Sources:
1. OECD
www.oecd.org (click on "statistics")
2. Eurostat
http://epp.eurostat.ec.europe.eu/portal/
Especially Supplementary Tables on the Financial Crisis
Definitions
1. Debt: gross and net
OECD definition of the net debt is liabilities minus liquid assets.
Examples: In 2011, Norway's gross debt was just below the
infamous Maastricht criterion at 56% of GDP. Its net debt was
minus 160 percent of GDP. For the UK the numbers were 90%
and 64%.
2. Deficits
Total fiscal balance is revenues minus expenditures. The primary
balance is net of interest, which the IMF uses for its test of
fiscal stability.
For no obvious reason, the Maastricht criteria refer to
the gross debt and total fiscal balance.
Simple algebra of deficits:
Define:
B = fiscal balance = revenue - expenditure
B* = primary fiscal balance
= revenue - non-interest expenditure
= zY - (Ē - eY)
z is the tax rate (average = marginal)
Y is national income
Ē is discretionary expenditure
e is automatic counter-cyclical expenditure
B* = Y - [Ē - eY]
DB* = [zDY + YDz] - [eDY - YDe]
d' = DB/Y = [z + e]g
If Dz = De = 0
g = DY/Y, GDP growth rate,
d' = first difference of the primary fiscal deficit,
The Italian Story:
High borrowing rates in the 1990s
and
German trade policy in the 2000s
Yield on long term public bonds and
interest payments as share of GDP, 1993-2011
[Interest rates now lower than for 1993-2002]
14
12
interest on debt
(% of GDP)
10
8
Long term
yield on
public bonds
(% )
6
4
2
0
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
Italy: Total and primary deficits, 1993-2011
[Lowest primary deficit in the euro zone
and recent decline recession-generated]
12
Interest
on debt
10
Global
recession
8
6
4
Primary
deficit
2
0
2011
2010
2009
2008
2007
2006
2005
2004
2003
-10
Overall
deficit
2002
-8
2001
-6
2000
-4
1999
1998
1997
1996
1995
1994
1993
-2
Italy: Changes in the public sector balance has been GDP
driven,1993-2011 (share of GDP)
6.0
GDP Growth
4.0
lnD[FsDf/GDP] = -.01 + .47ln[GDP grw]
F = 9.9 (R2 = .38), DF = 16
2.0
.0
-4.0
-2.0
0.0
2.0
-2.0
-4.0
-6.0
Change in PrimaryDeficit
4.0
Italy: The public debt "burden" has declined, 1993-2011
[real value of net debt in 2011 same as 1997]
2500
Public debt
prices of 2011
bns of euros
250
2047 bn
gross
2000
200
1597 bn
net
1500
1000
150
100
gross
net
500
50
Debt burden 2011 prices,
interest rate adjusted
bns of euros
0
0
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
Fiscal balance in surplus, net debt steady,
what is the problem?
[Not real wage inflation as suggested by Krugman]
Ratio of Italian to German private sector real wages
1994-2009
8
6
4
2
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
-4
1995
-2
1994
0
`
German trade policy is the problem:
Italian-German trade balance & unit labour costs, 1994-2009
10
ULC Germany/Italy, 1998=0
10
5
Trade balance Italy-Germany, € bns
5
0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
-5
-5
-10
-10
`
-15
-15
-20
-20
-25
-25
-30
[Falling German unit costs result of relatively faster productivity
increases and export subsidies]
Inflexible labour market in Italy?
Not according to the OECD
10
1.6
OECD employment
protection index,
Italy/Germany
5
1.4
0
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
-5
1.2
1.0
-10
.8
-15
.6
-20
Italy's trade balance
with Germany
.4
-25
.2
-30
.0
The Italian story summarized
Italy has not had does not have an excessive fiscal
deficit. On the contrary, for the last twenty years it
has had the best primary fiscal balance in the
European Union. In the 1990s it suffered from
unwise borrowing at high interest rates. That problem
is over. Present "unsustainable" interest rates are well
below the level of the 1990s.
Italy's public debt is no larger in real terms than it was
twenty years ago. Its interest-adjusted "burden" is far
lower.
Italy has a serious trade deficit with Germany, that
results in great part from implicit and explicit export
subsidies. The most important of these are:
1) suppression of domestic demand
2) VAT and pay roll tax relief on export commodities
The Spanish Story:
No good deed
goes unpunished.
Fiscal surpluses in Spain, 1993-2011
6.0
4.0
2.0
.0
Primary Deficit/GDP
-10.0
-12.0
2011
-8.0
2010
Total Deficit/GDP
2009
-6.0
2008
-4.0
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
-2.0
Even in Spain recession causes deficits
GDP and the total deficit, 1993-2011
20
3.0
1.0
10
-1.0
0
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
-3.0
-10
-5.0
-20
-7.0
-30
GDP (2004 = 0)
Total Deficit
-40
-50
-9.0
-11.0
-13.0
And growth reduces the deficit
Spain: GDP growth and the first difference in the primary
balance, 1993-2011
5.0
lnD[FsDf/GDP] = -.02 + .68ln[GDP grw]
F = 8.1 (R2 = .35), DF = 15
4.0
3.0
2.0
1.0
Change in primary Deficit/GDP
.0
-5.0
-3.0
-1.0
-1.0
1.0
-2.0
-3.0
-4.0
-5.0
GDP Growth
-7.0
3.0
Spain & the euro
During 1990-2007 property speculation resulted in an asset
bubble in Spain as or more extreme than in North America.
The speculation included large exposures of Spanish banks in
the US sub-prime market.
When the bubble burst, the Spanish government embarked on
a bank recapitalization ("bailout") that generated an annual
average primary deficit of minus 7% of GDP.
In the absence of the bailout the primary fiscal balance was
minus 2% of GDP.
Spain: Public sector balance, 2001-2010
4.0
2.0
0.0
-6.0
-8.0
-10.0
-12.0
Total deficit/GDP
2010
Less bank bailout
2009
2008
2007
2006
2005
2004
2003
2002
-4.0
2001
-2.0
The Spanish story summarized:
[technical term is "chutzpah"]
To save the financial sector from collapse, the
Spanish government [social democrat!] bailed
it out. The bailout more than tripled the fiscal
deficit. The rescued Spanish financial
institutions used the bailout funds to speculate
on government bonds, thus creating the fiction
that public finances were unsustainable.
What to do in the euro zone
Comment on Krugman & devaluation
German expansion
Deficit country export subsidies
The Great Euro Scam
Along side the Tulip Mania of the 1630s, the South
Sea Bubble (1720s) and other ponzi schemes will go
the Great Euro Scam of the 2000s, characterized by
both tragedy and farce.
The farce: Central Bank of Europe leaning to banks at
2-3%, so the banks could buy Greek, Italian,
Portuguese and Spanish bonds paying 7-15%.
The tragedy: The political purpose of the "crisis", the
end of social democracy and weakening of
representative government, is succeeding.