Transcript BOG_NORTH-SOUTH_2016

The Greek Crisis in the Context
of the North-South Divide
Nicos Christodoulakis
Athens University of Economics and Business
October 2016
1
Leon Tolstoy: Anna Karenina, Ch.1.
“Happy families are all alike;
every unhappy family is unhappy in its own way.”
Regarding the Euro Area:
Before the 2008 crisis: Happy families were NOT all alike;
After the 2008 crisis: Unhappy families are all very much alike.”
Clue: Look at external imbalances before and after the 2008 crisis
2
Based on two research projects, funded by the Bank of Greece
“ External Asymmetries in the Euro Area and the Role of FDI.”
N. Christodoulakis and V. Sarantides
The World Economy, 2016, June.
“Disinvestment and Unemployment: The double hazard in the Euro Area”
N. Christodoulakis and Ch. Axioglou
Applied Economics Quarterly (forthcoming).
3
TWO FAMILIES IN THE EURO AREA
External Surplus: Improved after EMU
AT, BE, FI, IE, NE, GE
excl. LUX
“NORTH”
External Deficit: Deteriorated after EMU
PT, SP, FR, IT, EL
“SOUTH”
4
Trade Balances
Countries
1990-1998
1999-2007
CHANGE
%GDP
AT
0.16
3.93
3.78
BE
3.48
3.79
0.31
FI
4.57
7.41
2.84
GE
0.44
3.81
3.37
NL
4.90
6.58
1.68
IE
12.15
13.93
1.78
NORTH
3.35
6.58
+3.23
IT
2.44
0.60
-1.84
FR
0.84
0.30
-0.54
PT
-7.55
-8.63
-1.08
SP
-1.04
-3.79
-2.74
EL
-6.95
-11.89
-4.94
SOUTH
-0.91
-4.68
-3.78
Trade balances in the Eurozone as % of GDP.
Simple averages, no country weights.
Source: IMF World Economic Outlook, and Eurostat.
5
AFTER EMU, THE GAP IN TRADE BALANCES WIDENED …
12%
EMU
8%
XY_NORTH
XY_SOUTH
6%
4%
GAP=9 pp
2%
GAP=15 pp
0%
-2%
-4%
-6%
Net Exports as % GDP (XY). Simple averages, no weights.
Source: AMECO, Eurostat.
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-8%
1991
TRADE BALANCE AS %GDP
10%
6
The importance of North-South imbalances
was either ignored or misinterpreted several times
Several argued that the external deficits have been a demand-driven
phenomenon which is most likely to dissipate as integration advances.
Blanchard and Giavazzi (2002)
noted that increased mobility in capital markets
was likely to result in large current account deficits in the short run,
but they disregarded any explosive pattern in the medium run,
and argued that countries such as
Portugal and Greece need not take measures to reduce their deficits.
Ahearne et al. (Bruegel, 2007). Internal and External Balances in the Euro Area
“EMU… has increased the tendency of capital to flow from relatively rich to relatively
poor countries in the euro area. This trend suggests that the observed current account
imbalances are a sign of the proper functioning of the euro area
rather than a sign of improper macroeconomic management.”
7
Polarisation in production
After EMU, investment flows increased in all countries
But: Composition was vastly different
The NORTH: Attracting more productive investment
Producing more in the tradeable sector
The SOUTH: Attracting more Real-estate investment
Producing more in the service sectors
8
FDI, NET INFLOWS AS % GDP
NORTH POST-EMU
0.859
NORTH PRE-EMU
0.643
SOUTH POST-EMU
1.274
0.284
0.343
SOUTH PRE-EMU
1.204
0.394 0.291
0
0.5
MANUFACTURING
1
1.5
2
2.5
NON-MANUFACTURING
Details in: Christodoulakis and Sarantides (2016).
9
RATIO (%) OF FDI IN REAL-ESTATE TO FDI IN
MANUFACTURING & ENERGY-W ATER. (OECD,2007)
80
EMU
70
NORTH
SOUTH
PERCENT
60
50
40
30
20
10
0
93
94
95
96
97
98
99
00
01
02
03
04
05
Real-Estate In “NORTH”: 10% of FDI in Manufacturing+Energy
Real-Estate In “SOUTH”: 50-75% of FDI in Manufacturing+Energy
Source: OECD, FDI indicators, 2007.
10
Estimates: Pool data from Eurozone countries
Long-run equation
𝑻𝑩𝑨𝑳𝒊𝒕 = 𝜶𝒊 + 𝜷𝟏 𝑹𝑬𝑬𝑹𝒊𝒕 + 𝜷𝟐 𝑮𝒓𝒐𝒘𝒕𝒉𝒊𝒕 + 𝜽 ∙ 𝑭𝑫𝑰𝒊𝒕 +𝜺𝒕
The Pooled Mean Group (PMG) model specification in error-correction form:
∆𝑻𝑩𝑨𝑳𝒊𝒕 = 𝜇 𝑻𝑩𝑨𝑳𝒊𝒕−𝟏 − 𝜶𝒊 − 𝜷𝟏 𝑹𝑬𝑬𝑹𝒊𝒕−𝟏 − 𝜷𝟐 𝑮𝒓𝒐𝒘𝒕𝒉𝒊𝒕−𝟏 − 𝜽 ∙ 𝑭𝑫𝑰𝒊𝒕−𝟏
𝛿1 ∆𝑅𝐸𝐸𝑅𝑖𝑡 + 𝛿2 ∆𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝜑 ∙ ∆𝐹𝐷𝐼𝑖𝑡 + 𝜉𝑡
Τhe PMG estimator allows short-run coefficients and the speed of adjustment
to differ across countries, but imposes homogeneity on long-run coefficients
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Trade Balance determinants for Euro Area countries
PMG estimations. Annual data 1989-2009. Nobs=144
Long run estimates (t-stat)
NORTH
}
similar
}
opposite
}
opposite
Real Effective
Exchange Rate
GROWTH
SOUTH
-0.159***
-0.096***
(-3.386)
(-3.879)
-0.250**
-0.419**
(-2.017)
(-3.656)
0.485***
-1.014***
(6.578)
(-3.569)
FDI
manufacturing
-
-
FDI nonmanufacturing
-
FDI total
NORTH
SOUTH
-
-
-
-
-
-
2.099**
0.290
(2.282)
(0.379)
1.124 **
-0.608***
(2.490)
(-4.769)
-
Details in: Christodoulakis and Sarantides (2016). The World Economy
“ External Asymmetries in the Euro Area and the Role of FDI.”
insign.
External imbalances instrumental in the 2010 bail-out crises
CURRENT ACCOUNT %GDP, average 2006-2008
10
5
0
-5
-10
Note: Ireland was still having a surplus Trade Balance
Lux
Germany
Netherlands
Austria
Finland
Belgium
France
Italy
Ireland
Spain
Portugal
Greece
-15
13
Even when fiscal imbalances not critical in some countries
120
Debt %GDP, avg 2006-2008
100
80
60
40
Of the bail-out countries,
Only Greece had
an excessive public debt
and an excessive
public deficit,
in addition
to a huge
external imbalance
Ireland got a high GG deficit
after the banking collapse
20
0
6
GG deficit %GDP, avg 2006-2008
4
2
0
-2
-4
-3%
-6
-8
14
World Bank Governance Indicators: Regulatory Quality
Reflects perceptions of the ability of the government to formulate and implement
sound policies and regulations that permit and promote private sector development.
1.80
EMU
1.60
1.40
NORTH_AVG
SOUTH_AVG
1.20
1.00
0.80
0.60
1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
After EMU, the SOUTH improved market regulation,
but the gap remained substantial
15
POST-CRISIS, THE GAP IN TRADE BALANCES NARROWED …
12%
Global
Crisis
EMU
TRADE BALANCE AS %GDP
10%
8%
6%
GAP=10 pp
4%
2%
0%
XY_NORTH
XY_SOUTH
-2%
-4%
-6%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-8%
Net Exports as % GDP (XY). Simple averages, no weights.
Source: AMECO, Eurostat.
16
Competitiveness indicators based on unit labour cost: 2000=100
After 2009, most improved or stopped worsening
Global
Crisis
115
110
Germany
105
Greece
Spain
100
France
Italy
95
Portugal
90
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
85
Source: Ameco Eurostat. Real unit labour costs: total economy (QLCD).
Index rebased at year 2000, value =100.
17
The narrowing of the external gap should not be misleading
There is some improvement in competitiveness
But most of the correction in the SOUTH is due to the austerity programs
Thierry et al. (2014). “Adjustment in Euro Area Deficit Countries”. IMF SDN 14/7.
18
The improvement in
External Balances is
correlated (negatively)
with more
competitiveness …
External Balances
Real Effective Exchange Rate
3
1
-1
-3
R² = 0.2199
-5
-7
-9
-11
80
90
100
110
120
130
3
1
-1
… but is also equally
correlated (positively)
with higher GG surpluses
requested by the austerity
programs
R² = 0.2353
-3
-5
-7
-9
External Balances
Primary Surpluses % GDP
-11
-12
-7
-2
3
19
In Greece,
improvement in Trade Balance was impressive
-5,000
-15,000
-25,000
-35,000
Trade Balance €m
Non-oil TB €m
-45,000
Source: Bank of Greece Conjectural Indicators
20
In Greece, the huge reduction of ULC
had an almost negligible effect on Non-Oil Exports
20,000
Non-oil Exports €m
125
18,000
ULC_based competitiveness (RHS)
120
16,000
115
14,000
110
12,000
105
10,000
100
8,000
95
6,000
4,000
90
2,000
85
0
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Improvement in Trade Balance was mostly the result of slumping demand
Thus, external imbalances are likely to re-emerge
as soon as aggregate demand recovers ….
Source: ULC data from ECB. Exports from Bank of Greece Conjectural Indicators
21
But post-crisis, market quality gap widened …
Marginally improved in the NORTH
Seriously deteriorated in the SOUTH.
1.80
Global
Crisis
EMU
1.60
1.40
NORTH_AVG
SOUTH_AVG
1.20
1.00
0.80
0.60
1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
World Bank Governance Indicators: Regulatory Quality
22
The Regulatory Divide between NORTH and SOUTH
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
NLD
LUX
IRL
FIN
AUT
DEU
Pre-crisis
BEL
ESP
PRT
FRA
ITA
GRC
Post-crisis
Slightly improved in Finland, Germany and France.
Post-crisis deterioration in Portugal, Greece, Spain, Italy.
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The grim diagnosis
IMF: EURO AREA POLICIES, Article IV Consultation (2014, p 70)
“The recent improvements in the current accounts of debtor
economies mostly reflect a large fall in investment across sectors”
In fact, across all countries there is a symmetric effect
of higher unemployment and lower investment activity
Definitions:
KY: Net Fixed Investment as %GDP
Improved after EMU in both NORTH and SOUTH
Post-crisis, it fell in the NORTH; collapsed in the SOUTH
UR: Unemployment Rate as % civilian population
Fell after EMU in both NORTH and SOUTH
Post-crisis, small rise in the NORTH; exploded in the SOUTH
24
20%
15%
Three periods:
10%
Global
Crisis
EMU
KY_NORTH
UR_NORTH
5%
I.Before EMU:
Small N-S disparities
0%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-5%
II.After EMU:
20%
15%
III.After Global Crisis:
Wild N-S disparities
UR_SOUTH
KY_SOUTH
10%
5%
0%
-5%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Similar patterns
25
A new measure is needed to capture
the utilization of productive resources:
The Capital-Employment Gap: KEG = KY – UR
(new investment %GDP) – (unemployment rate %)
KEG high/positive  Strong investment,
Low unemployment
KEG low/negative  Underinvestment,
High unemployment
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-20%
2014
2013
2012
2011
2010
2009
2008
EMU
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
5%
1997
1996
1995
1994
-10%
1993
1992
1991
The Capital-Employment Gap
Global
Crisis
0%
-5%
KEG_NOR
KEG_SOU
SOUTH_xcl GR
-15%
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CONCLUSIONS
1.Major disinvestment in the SOUTH prohibits a revival of production
2.Market conditions dramatically deteriorated in the SOUTH
3.Investment is the key for Eurozone.
Otherwise, external asymmetries are likely to return, if growth resumes
Pre - crisis :
Investment activity converged, but external gap widened.
The N-S divide was due to different types of investment
Post-crisis:
External gap narrowed, but investment gap is huge.
The N-S divide is caused by the different levels of investment
28
Greece is just the most dramatic case of the SOUTH
in terms of underinvestment and unemployment
30
25
20
15
10
5
0
-5
Investment (%GDP) & Unemployment rate (%) in Greece
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-10
Greece also suffered the most serious deterioration of
market regulation among the countries in the SOUTH
EMU
Crisis
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
NORTH_AVG
SOUTH_xcl GREECE
GREECE
0.00
1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
After EMU, market quality improved rapidly (though not sufficiently).
In post-crisis Greece, quality is below the level in early 1990s
Greece faces tougher challenges than the rest of the South:
1.More devastating unemployment
2.Deeper and more extensive disinvestment
3.Regulatory quality more downgraded by the crisis
Hence, the only way ahead is:
Invest and Reform
31
Thank you for your attention
32