Transcript Introduction by Etienne de Callatay, Chief

More of the same
Economic outlook & crisis management
in Europe
Etienne de Callataÿ
Chief Economist
BECI
May 31, 2013
Overview
1. The economic outlook
2. Europe : where do we stand ?
3. Europe : where do we go from here ?
4. Structural reforms : we need more
5. Global assessment
Conclusion
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1. The economic outlook
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1. The world outlook
2011
2012
2013
2014
World
+ 4.0%
+ 3.2%
+ 3.3%
+ 4.0%
Euro area
+ 1.4%
– 0.6%
- 0.3%
+ 1.1%
USA
+ 1.8%
+ 2.2%
+ 1.9%
+ 3.0%
Emerging
+ 6.4%
+ 5.1%
+ 5.3%
+ 5.7%
source : IMF [April 2013]
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1. The US economy
Business cycle
- Real estate
- Labor market
- Household debt
- Loan activity
- Business capex
- Policy stance
Structural factors
- Energy production
- New technology
- Demographics + migration
- Economic integration, strong (solidarity & transfers) & credible
- Creative destruction / flexibility
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1. The Euro area economy
Business cycle
- Real estate
- Labor market
- Household debt
- Loan activity
- Business capex
- Policy stance
no bottoming out yet
increasing unemployment rate
de-leveraging hasn’t started yet
anemic
shrinking
ambiguous
Structural factors
- Energy production
- New technology
- Demographics + migration
- Economic integration
- Creative destruction / flexibility
no shale gas, less nuclear, …
lagging behind
population ageing
no shared vision, no leadership
rigidities / vested interests
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2. Europe : where do we stand ?
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2. Intertwined crises
-
Financial sector
Public finance
Economic growth
European integration
→ Intertwined crises
vicious circles … that may become virtuous
BUT there is no such thing as “the” solution to all problems
→ The repair progress has to be slow and patchy
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2. No “good old times”
-
Banks were not wise and ethical
-
Public sector was not efficiently run, with a long-term view
-
European integration was not progressing nicely
-
Underlying growth was not that strong
-
Wrong policy choices
- Deregulation (f.i., in financial sector, irrespective of high degree of
intermediation)
- Monetary union with no transfers, no rescue fund, no Eurobonds, no
central bank support, no single supervision, no tazx convergence, …
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2. Wrong policy choices, before the crisis
-
Deregulation
f.i., in financial sector, irrespective of high degree of intermediation
-
Monetary union
- Poor crisis prevention mechanisms
-
-
No crisis resolution mechanism
-
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Supervision focused on public finance (financial bubbles, wage,
competitiveness, … out of scope)
Wrong indicators, easy to play with
No enforcement
Lack of focus on stabilization mechanism
No single supervision of financial sector
No policy convergence (taxation, social protection, …)
Very limited budgetary transfers
No rescue fund
No central bank support, and no Eurobonds
2. What had been achieved ?
-
A lot
- Pragmatic, heterodox monetary policy (LTRO, OMT, …)
- Solidarity tools (EFSF, ESM)
- Broadening of minds (competitiveness, …)
- Transfer of competences (SSM, 6-Pack, 2-Pack, Golden rule)
- “Don’t fight the ECB”
- …
-
Not enough … and with risks :
- Economic growth
- Social tensions
- Political tensions / loss of support for European integration
- Moral hazard
- Monetary risks
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3. Europe : where do we go from here ?
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3. What more the ECB can do in 2013 ? (1/2)
-
To lower the repo rate (currently at 0.5%)
(cheaper financing at ECB = downward pressure on banks lending rates)
-
To lower the deposit rate (currently at 0%)
(lower rate for deposit at ECB = greater incentive for banks to lend)
-
To extent the 3-year LTRO (long-term refinancing operations)
-
To introduce a UK-type “funding for lending scheme” (FLS)
(banks access to cheaper ECB funding in proportion of their new loans activity)
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3. What more the ECB can do in 2013 ? (2/2)
-
To activate the OMT (outright monetary transactions)
-
To purchase private sector assets
-
To purchase sovereign debt
public debt monetization BUT forbidden and raising concerns
- Debt from which countries ?
- At what price ?
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3. Why is the ECB so reluctant to do more ? (1/2)
-
Fear of terra incognita – uncharted territory
-
Fear of long-term consequences (inflation)
-
Fear of fuelling a new credit bubble
cf. Jeremy Stein (FED), Feb 2013 : regulation and supervision cannot keep all
credit bubble risks under control; higher interest rates would be helpful to
alleviate such risks … but it goes against the very lenient current monetary
policy
./..
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3. Why is the ECB so reluctant to do more ? (2/2)
-
Fear of negative feeling for German voters
-
Divergence of interest
Fear of loss of competitive advantage for German corporations
(now that wages in Spain have declined, if the cost of capital was to be the
same in Spain as in Germany, production could move to Spain)
-
Fear of loss of leverage for structural measures
easy QE solution is a substitute for reforms
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3. 4 Unions for 4 crises
-
Financial crisis
Banking Union
-
Fiscal crisis
Fiscal Union
-
Economic crisis
Economic Union
-
European crisis
Political Union
BEWARE :
- Hard to achieve
- Partial answer only
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4. The structural reforms : we need more !
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4. Structural reforms – Financial sector (1/3)
-
Basle III / Solvency II / …
Scope of activities
Additional equity requirements for systemic institutions
Pay package (ratio bonus/fixed)
Consumer protection
Rating agencies
Restructuring of financial institutions
Banking Union
- Supervision (SSM)
- Deposit guarantees
- Resolution mechanism
→ significant progress … BUT not yet completed
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4. Structural reforms – Financial sector (2/3)
significant progress … BUT not yet completed
Inherent instability of central bank primary objective : price stability, financial
stability, State financing
Role of ECB as supervisor
→ conflict of objectives for ECB
SSM = credibility at stake ≈ risk of excess monetary rigor
→ SSM : delegation of powers
≈ risk of regulatory capture not eliminated
→ illusion of risk under control
= bigger bets (“la stabilité rend fou”)
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(./..)
4. Structural reforms – Financial sector (3/3)
significant progress … BUT not yet completed
→ financial landscape of the future undetermined
- Splitting commercial banks / investment banks
- Capital & liquidity requirements
(but knowing that ↑ liquidity = ↓ activity = ↓ retained earnings)
- Impact of SSM on mergers (made easier through common regulation)
→ “too big to fail” and moral hazard issues unresolved / “too big money-friendly”
→ towards more de-leveraging BUT need for countercyclical rules
(high buffers are PRO cyclical, not dynamic provisioning)
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4. Structural reforms – Public finance (1/2)
Declining structural primary imbalances (IMF, April 2013)
2006
2010
2012
US
Euro Area
Belgium
France
Germany
Greece
Italy
Spain
- 0.4
0.5
3.9
0.0
0.3
- 3.7
- 0.2
2.5
- 6.7
- 2.4
- 0.4
- 2.9
- 1.4
- 6.1
0.8
- 6.9
- 4.4
0.3
- 0.5
- 0.7
2.3
2.1
4.0
- 2.6
→ significant progress … BUT much more is required
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2013
2014
- 2.7
1.4
1.0
0.3
2.1
4.3
4.9
- 1.2
- 1.9
1.5
1.7
0.5
2.0
5.3
4.8
- 1.8
4. Structural reforms – Public finance (2/2)
significant progress … BUT debt levels + ageing require more
How ? Only 5 options
- more reforms to boost growth
(retirement age, red tape, tax expenses, tax shift, …)
- more austerity
- low interest rates (financial repression + EA implicit mutualization)
- Inflation
- further debt restructuring
More … and better
• Focus on quality more than on numerical targets
• Focus on long-term
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4. Structural reforms – Economic growth (1/4)
-
Pension reforms
Labor market reforms
Tax reforms (mostly differentiated tax increases)
→ progress … BUT much more is required
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4. Structural reforms – Economic growth (2/4)
Europe’s structural weaknesses
- insufficient investment in human capital and research
- limited ability to transition from an imitation-based economy to an innovationbased economy
- excessive reliance on established firms in traditional industries
- in a number of countries, a growth model based on low-productivity
construction and traditional services
- inefficiency of public administrations
- education levels, with “talent gaps” and “excellence vs. democratization”
dilemma
- difficulty to combine social protection and economic incentives in a globalized
world
- + ageing, openness towards other culture, lack of effective European union, …
See : Breugel, Europe’s Growth Problem (and what to do about it), Bruegel Policy
Brief 2013/03, April 2013
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4. Structural reforms – Economic growth (3/4)
The low growth rate means that :
- Private de-leveraging can only be slow
- Fiscal consolidation can only be slow (at best !)
- Banks can only remain weak
- Unemployment can only remain high … and become permanently high
- Convergence of competitiveness within the EA can only be limited
- Investment can only be constrained
- The European social model can only be under pressure
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4. Structural reforms – Economic growth (4/4)
progress … BUT much more is required
→ there is room for improvement
(labor market policies, tax incentives, entrepreneurship, education, …)
→ downward revision of trend output growth
- Ageing
- End of technological catch-up
- Environmental constraints
- Globalization, with rigidities and skill mismatches
- From leverage turbo to private & public de-leveraging
→ insiders will slow down the pace of desirable changes
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4. Structural reforms – European integration (1/2)
-
Macroeconomic convergence / competitiveness
Fiscal consolidation
Financial sector discipline
Stabilization tools : heterodox ECB, ESM, PSI, …
→ significant progress … including solidarity without the name
BUT much more has to come
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4. Structural reforms – European integration (2/2)
significant progress … including solidarity without the name …
BUT much more has to come
→ no optimal currency area
→ no shared vision, no leadership no willingness to give up sovereignty
→ poor track record of European control (cf. SGP)
→ institutions at EU level, not at EA level, even less at EA+ level
→ poor legitimacy of technocratic agencies & of taxpayer money for banks
2 key concerns
→ trilemma : moral hazard OR EU interference OR exclusion threat
→ impatience / risk of political and social troubles (in “core” as in “periphery”)
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5. Global assessment
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5. Europe – low expectations
-
Fiscal consolidation
De-leveraging / credit crunch
Corporate : cost cutting / low capex
Lack of confidence
- No shared vision (cf. EU Budget 2014-2020)
- No agreed upon strategy (Troïka : stop ou encore)
- Rising unemployment
- No end in sight for recession in periphery
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5. Europe – not yet out of the woods
Risks factors
- Loss of political momentum for reforms due to market rally
- Loss of momentum due to political reluctance
- Next crisis trigger :
- Debt unsustainability (Greece, Cyprus, …)
- Political stalemate in Italy
- Banks in Spain, with no access to ESM for past mistakes
- “Brexit”
- Elections in Germany
- social unrest (rising unemployment and no end in sight)
- …
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5. Europe – don’t be too gloomy … again
-
-
Lower inflation = less pressure on real disposable income
Some support from external growth
Low level of inventories
Bottoming out of leading indicators in the periphery
Less fiscal tightening
Less fear of extreme risks (post Draghi put, post Cyprus crisis, …)
Room for
- policy expansion in some countries (fiscal, wage increases)
- credit expansion ( + Basle III relaxation)
- more risk appetite : financial repression means TINA
Virtuous confidence circle (“Positive contagion”, Mario Draghi)
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5. A new oxymora : painful improvement
Past mistakes = current miseries
First results
- More misery
BUT ALSO
- Declining risk of moral hazard
- Improving competitiveness (unit labor costs)
- Shrinking current accounts imbalances
- Largely adjusted housing prices
- …
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5. Austerity : stop ou encore ?
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5. Austerity : stop ou encore ?
Austerity does not seem to work, alternatives well
evolution in Greece, Spain, Portugal, Latvia
vs. Iceland, with no austerity but with devaluation
Take idiosyncratic characteristics into consideration
- High public & current account deficits in some countries
- Resilient exports (commodity-related) in others
No alternative to long-term fiscal & external sustainability
Better to focus on LT sustainability than on ST fiscal balances
… but so far patience has not been rewarded with structural reforms
See Daniel Gros, CEPS, Feb 2013
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5. Debt restructuring ?
-
Financial repression a must for some countries and some banks
-
… but risky
-
Alternative : more restructuring
- of countries (Greece, Cyprus, …)
- of banks
-
… with implications
- official creditors will incur losses
- potential contagion effect (best argument of the financial lobby)
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Conclusion
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The moment of truth ?
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Procrastination OR gradual, smart repair ?
Crisis management = to gain time …
In order to “kick the can down the road”
OR
In order to “kick the can down the cul-de-sac” ?
Thanks to Brian Reading
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Europe – no monopoly of uncertainties !
US
pragmatic political convergence ?
Japan
eventually out of deflation ?
China
sustainable imbalances ?
+ Geopolitical tensions
+ “Currency war”
+…
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Mind the excesses
-
Black swan : be ready for the unexpected
Does not mean that any crazy scenario will materialize
Major surprises will take place at any time
-
From one excess to the opposite
from the great moderation to the Armageddon
-
Continuity is more frequent than radical changes !
-
Reforms do bear fruit … with delay
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More of the same
More of the same ≠ status quo
More of the same = same slow dynamics
-
Suppressed growth
-
Healing process : slow and ad hoc
-
Learning by doing
- change of focus, from ST fiscal consolidation to reforms
- less “sinners”, more explicit solidarity
-
… AND emergence of new dangers
(monetary leniency, social unrest, …)
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Conclusion
Fear as only drive for change
« People only accept change when faced with necessity, and
only recognize necessity when crisis is upon them »
Jean Monnet
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