Transcript Macro-model scenarios

AUGUR conference January 2013
Challenges for Europe in the world in 2030
Macro-model scenarios
Francis Cripps
Alphametrics Co., Ltd.
Slide 1
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Europe today and in coming years
Economic and financial issues in
Europe today including low GDP
growth, unemployment, government
deficits and high levels of debt raise
fundamental questions about
institutions, priorities, standards and
policy rules.
During the past three years AUGUR
teams have examined these and
related global issues. One
component of the research has
been the preparation of macromodel simulations of possible
outcomes to 2030 under different
assumptions about the institutional
and political context (governance).
Slide 2
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Governance assumptions for scenarios to 2030
Global contexts
Europe
Struggling on with existing
institutions and ad hoc policy
adjustments
Reduced government,
increased dependence on global
business
EU break up with fragmentation
of the euro zone
US-China accommodation with
defensive moves by the US and
China to protect their economies
Multi-speed Europe, pegged
currencies and greater national
autonomy
Regionalisation at the world
level with less reliance on global
rules and solutions
Towards federal Europe with
centralised powers and budget
Multipolar cooperation to tackle
major global problems
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Content of the scenarios
The world is divided into 19 countries and country groups with 50
behavioural equations and 100 accounting identities for each bloc
Historical series cover 1970 to 2012 (43 years)
Projections run from 2013 to 2030 (18 years).
Europe comprises 5 country groups:
North (Norway, Sweden, Finland, Denmark)
West (Netherlands, Belgium, France, Germany, Switzerland, Austria, Italy)
South (Ireland, Portugal, Spain, Greece + islands)
East (Poland, Czech, Slovakia, Hungary, Bulgaria, Romania etc.)
and the UK
The rest of the world comprises 4 countries (USA, Japan, China, India)
and 10 other groups (by continent and income level)
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Scenario assumptions
Governance hypotheses about institutions and norms provide the basis
for explicit assumptions about changes in government and privatesector behaviour. This requires judgement and the modelling exercise
has relied on advice from all AUGUR research partners as well as
participants from China, India, Brazil and South Africa.
New policies introduced in each scenario have well-defined objectives
which may or may not be achievable (considering the historical record)
e.g. government spending cannot be reduced easily or quickly
Policy packages are more effective than single policies and changes
implemented by many blocs have a larger impact than those initiated
by one country or bloc.
Formal and informal cooperation is captured by visualising responses
across Europe or groups of countries in other parts of the world.
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Global trends (in all scenarios)
Continuing rise of East Asia
30% of the world’s population, income and resources
China slowing down and shifting to consumer-led growth
Emerging market economies in other regions
together with East Asia will account for more than half of world GDP
the US and Europe will be in a minority position
World energy use and emissions up to 2030
increases of 85% in world GDP, 25% in energy use, 10% CO2 emissions
Demographic transition (few children, many old people)
urbanisation, low birth rates and extended life expectancy everywhere
child and working-age populations fall and elderly populations increase
Slide 6
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Macro-economics: the crunch issue
“How to achieve sustainable growth rates that match development
needs in each country.”
Sustainable GDP for an open economy is a growth path of income and
spending which can be financed long-term with exports sufficient to pay
for imports or stable, long-term capital inflows covering any deficit.
Development needs include a high employment rate and rising
productivity generating resources for consumption, investment and
public services matching social needs and political expectations.
Imbalances between development needs and sustainable GDP are
widespread and, whether globally or within Europe, can hardly be
mitigated by cross-border migration.
Financial instability makes governments play safe and reduces
growth of trade and GDP in the world as a whole.
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Scenario 1 “struggling on” to 2020 and 2030
Global context: “reduced
government”
Resource-driven growth in Africa,
Other Asia and America
Gradual slow-down in East Asia
Very low growth in Europe (1% p.a.
average)
It will be hard to escape from this
prospect so long as Europe relies
on exports and financial investments
GDP growth in world regions (% p.a.)
10
8
6
4
2
0
-2
-4
2000
2010
2020
2030
Africa
Other Asia
America
East Asia
Europe
Resources and market shares will
continue to drift to newcomers
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Haves and have-nots
Japan and other countries in North
East Asia have caught up with the
US and Europe. China looks
capable of doing the same. India is
on the way to graduating from low
(20% of world average) to low
middle income status (50% of world
average).
Low income regions relative to world average (%)
60
50
40
North Africa
Other East Asia
India
Other Africa
Other South Asia
30
20
10
0
80
90
00
10
20
30
Other parts of East and West Asia
are not catching up. Africa and the
rest of South Asia with 20% of world
population remain too far behind.
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Debt reduction in Europe
It may take a long time to reduce
debt/GDP ratios in the UK and South
Europe to the 60% level which is
supposed to be the ceiling for
government debt in the European
Union. Meantime austerity will rule,
holding down growth of GDP.
Employment rates in South and East
Europe are much lower than in the
North and likely to remain low for
many years. Per capita income in
South Europe may be no higher in
2030 than in 2007. Other parts of
Europe will realise small increases.
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Government debt (% of GDP)
120
100
80
60
40
20
0
80 90 00 10 20 30
Employment rates in Europe (%)
70
65
60
55
50
45
40
80 90 00 10 20 30
South Europe
UK
West Europe
North Europe
East Europe
North Europe
West Europe
UK
South Europe
East Europe
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Scenario 2: “EU break up”
Prospects for Europe as a whole
 zero GDP growth long term due to weak investment and exports
 reduced income per capita
 declining employment rates and higher unemployment
Compensatory stimulus policies in the US and East Asia may cushion the
impact elsewhere with growth rates returning to normal after one or two years.
Europe: GDP, income and employment
GDP grow th (% p.a.)
income per capita ($2005 pp)
3
34,000
1
32,000
-1
30,000
28,000
-3
-5
26,000
10
15
20
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25
30
10
15
20
25
30
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employment rate (% of 15+ population)
56
54
52
reduced government
50
EU break-up
48
46
44
10
15
20
25
30
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Scenario 3: “multi-speed Europe”
The key elements are an
option for less competitive
member states to leave the
euro zone by agreement and
greater policy flexibility for
national governments in a
global ‘regionalization’
context.
The scenario assumes a
‘pegged’ exchange rate
system versus the euro in
which rate changes are
progressive and gradual.
Slide 12
Exchange rate index - South Europe vs West Europe
1.10
1.05
1.00
struggling on
0.95
EU break-up
0.90
multi-speed Europe
0.85
0.80
0.75
15
20
25
30
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Employment objectives
National policies should target
GDP growth and job creation to
reduce unemployment and
provide employment
opportunities for the growing oldage population.
Exchange-rate realignment, fiscal
stimulus and other employment
policies raise the ratio of total
employment to population (aged
15+) towards 60% in North and
West Europe and 55% in South
and East Europe where women’s
participation is lower.
Slide 13
Employment rates (% of 15+ population)
64
60
North Europe
56
West Europe
52
UK
48
East Europe
South Europe
44
Brussels
40
90
00
10
20
30
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Government spending on goods and services(% of GDP)
North Europe
Government spending
To improve employment and
productivity growth government
spending needs a boost rather
than cut-backs. The projected
level of government spending on
goods and services needed to
achieve full recovery in South
Europe and the UK reaches 30%
of GDP in 2020 - similar to the
current level in North Europe. In
other parts of Europe
government spending on goods
and services could be maintained
at 22-25% of GDP.
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35.0
32.5
30.0
27.5
25.0
22.5
20.0
17.5
15.0
90
00
10
20
West Europe
30
35.0
32.5
30.0
27.5
25.0
22.5
20.0
17.5
15.0
90
00
10
East Europe
35.0
32.5
30.0
27.5
25.0
22.5
20.0
17.5
15.0
90
00
10
20
30
35.0
32.5
30.0
27.5
25.0
22.5
20.0
17.5
15.0
90
00
10
struggling on
multi-speed Europe
00
10
20
30
20
30
UK
South Europe
35.0
32.5
30.0
27.5
25.0
22.5
20.0
17.5
15.0
90
20
30
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Debt reduction
Countries in South Europe will
have a large debt overhang for a
long time to come if their
economies rely heavily on
government spending.
Government debt (% of GDP)
100
South Europe
UK
West Europe
North Europe
East Europe
80
To maintain an orderly pegged
exchange-rate system in Europe
it would be necessary to maintain
a credible, long-term mutual
support system for government
finance.
Slide 15
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60
40
20
90
00
10
20
30
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Scenario 4: “towards Federal Europe”
European federal budget: net receipts by country group (% GDP)
The key elements are a federal
budget rising to 5% of GDP
(without the UK) and structural
and fiscal policies in member
states aimed at restoring GDP
growth and a high level of
employment.
The federal budget would likely
show a significant deficit and
national budgets would benefit
from net receipts.
South Europe
12
10
8
6
4
2
0
15
20
25
East Europe
30
15
West Europe
12
10
8
6
4
2
0
15
20
25
Brussels
20
25
30
North Europe
30
receipts
Slide 16
12
10
8
6
4
2
0
12
10
8
6
4
2
0
15
20
25
contributions
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GDP growth and income per capita
The federal budget and restructuring programs is an alternative to the
multi-speed solution. By 2030 income in Europe would be around 25%
higher per person than in the baseline (“struggling on” scenario).
Europe: GDP growth and income per capita
GDP growth (% p.a.)
income per capita ($2005 pp)
3
1
-1
-3
-5
10
15
Slide 17
20
25
30
45,000
42,500
40,000
37,500
35,000
32,500
30,000
27,500
25,000
struggling on
multi-speed Europe
towards Federal Europe
10
15
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20
25
30
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Impact in each part of Europe
South and East Europe could
realize 40-50% income gains
relative to “struggling on” while
the rest of Europe (including the
UK) gains 10-20%.
The projected improvement in
growth prospects for Europe
under “multi-speed” and
“federal” scenarios is assumed
to be reinforced by expansionary
regional programs in other parts
of the world and closer
cooperation with Europe’s
neighbours.
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Income per capita (scenario E1 = 100)
160
150
South Europe
140
East Europe
130
UK
120
West Europe
110
North Europe
100
90
15
20
25
30
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Scenario 4a: “multipolar collaboration”
Global “regionalisation” leaves several major issues open:
 energy security, greenhouse-gas emissions and adaptation to
unavoidable climate change
 global financial imbalances and problems of deficit regions
 the gap in income and wealth between highly-developed countries,
emerging market countries and least developed countries
Collaboration specifically addressed to these issues can in principle
make important contributions in coming decades and thereby improve
economic security and sustainability for all parts of the world including
Europe.
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