Transcript What Future for the Eurozone?

What Future for the Eurozone?
Ton Notermans
Tallinn University of Technology
Tallinn School of Economics and Business
Administration
[email protected]
My Home Town
Maastricht, Netherlands
My Current Home Town
Tallinn: An Old Hanseatic Town
The Common Currency
• Was seen as a crucial step towards further
integration
• Was hoped to boost Europe’s economic
performance by completing the Single Market
• Agreed upon at the EU Maastricht Conference
in December 1991
• Introduced on January 1, 1999
• Exchange rate: 1 € ≈ 1450 ₩
• 18 EU Countries have adopted the Euro
The Eurozone Members
• 11 original members: Finland, Ireland, Germany, Austria,
the Netherlands, Belgium, Luxembourg, France, Spain,
Portugal, Italy.
• The following seven countries joined subsequently:
Greece (1/1/01), Slovenia (1/1/07), Malta (1/1/08),
Cyprus (1/1/08), Slovakia (1/1/2009), Estonia (1/1/11),
Latvia (1/1/14)
• The UK and Denmark have negotiated an opt-out; i.e.
they do not need to join even if they satisfy the entrance
requirements
• Sweden has no opt-out but refuses to join
• All other EU member states are required to join once
they fulfill the convergence criteria
Euro Notes
Diverse Development Levels of Eurozone Countries
GDP per Capita EU Countries 2012 (€1000)
Eurozone Members in Red
Source: AMECO
90.00000
80.00000
70.00000
60.00000
50.00000
40.00000
30.00000
20.00000
10.00000
0.00000
The Eurozone Crisis
• The first years after the introduction of the
Euro in 1999 showed satisfactory growth
• Growth rates were higher in Greece, Spain and
Ireland than in the core countries (Benelux,
Germany France)
• It seemed that the Euro would help poorer
members catch-up
• But in the spring of 2010 the Eurozone crisis
erupted
The Eurozone Crisis; What Happened?
• Spring 2010: Greek government unable to borrow on the
financial markets to repay debts
• Greece receives a first €110 billion rescue package from the
EU / IMF.
• November 2010: Ireland receives a €67.5 billion rescue
package from the EU / IMF
• Spring 2011: Portugal receives a €78 billion EU / IMF rescue
package
• June 2012: Spain receives a €100 billion EU / IMF rescue
package
• March 2013 Cyprus receives a €10 billion EU / IMF rescue
package
• Slovenia most likely will be the next country to apply for
assistance
• In Italy public finances are also in a very vulnerable position
The Eurozone Crisis in Figures
Real GDP Growth (%)
Source: IMF WEO Database; 2013 Figures are Estimates
15
Advanced economies
Euro area
Spain
10
Portugal
Ireland
Greece
5
Cyprus
0
-5
-10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Escalating Unemployment
Unemployment Rate, % of Total Labour Force
30.00
Source IMF WEO Database, 2013 Figures are Estimates
Euro Area
Advanced economies
25.00
Cyprus
Greece
20.00
Ireland
Portugal
Spain
15.00
10.00
5.00
0.00
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
... which especially affects the young
Youth Unemployment (15-24 yrs), % of Total Labour Force
Source: EUROSTAT
60
EU(27)
Ireland
50
Greece
Spain
Cyprus
40
Portugal
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Political Fallout of the Eurocrisis
• The political effects of the Eurocrisis are at
least as important as the economic effects
• European Integration is commonly seen as
peace project
• But the Eurocrisis has led to acute tensions
between Southern Europe and Northwestern
Europe
Greek Demonstrator Comparing Chancellor
Merkel to Hitler
Italian Newspaper Suggesting Chancellor Merkel is
a Nazi
Germany’s Largest Newspaper telling Bankrupt
Greece to sell its Islands
Populist and Xenophobic Parties on
the Rise
• Several countries have seen a rapid growth of parties
that are both critical of European integration and
xenophobic
• Finland: True Finns Party
• Denmark: Danish People’s Party
• The Netherlands: Partij voor de Vrijheid
• Hungary: Fidesz Party
• In Greece the second and third biggest political parties
by now are the Fascists and the Communists
• Italy: Movimento Cinque Stelle; Lega Nord
• France: Front National
Doubts about the Benefits of European
Integration
• None of these parties have a parliamentary
majority (…..yet)
• But more and more people start to doubt
whether European integration is a good thing
Eurobarometer Survey
• Eurobarometer is a opinion poll conducted by
the EU Commission twice a year
• Until May 2011 the Commission asked the
following question
• “Taking everything into consideration, would
you say that (your country) has on balance
benefited or not from being a member of the
European Community (Common Market)?”
Perceived Benefits from EU membership
Percentage of Respondents Answering that their Country has not
Benefitted from EU Membership, May 2011
60
50
40
30
20
10
0
Source:
Wrong Question??
• As fewer and fewer respondents answered
that they thought EU membership benefitted
their country…
• The EU Commission decided to no longer
include this question in its opinion polls
• Apparently the Commission did not like the
results
• But not asking the question does not make
the problem go away
Recent Opinion Data
Source: The New Sick Man of Europe: The European Union, Pew Research Center, May
13, 2013.
What caused the Eurocrisis?
• The answer would seem easy: excessively high
public debt
Public debt as a percentage of GDP in the countries
that applied for EU / IMF assistance
• Greece 2010: 148.3%
• Ireland 2010: 92.1%
• Portugal 2011: 108.3%
• Spain 2012: 84.2%
• Cyprus 2013: 116.0%
• [Korea 2012: 34.98%]
Two Causes of Excessive Public Debt
But the answer is not that easy
Public debt in Greece was clearly the outcome
of irresponsible spending and taxation policies
But in Spain, Ireland and Cyprus, the need to
bail out failing banks caused excessive public
debt
The sequence is thus: Excessive Private Debt →
Bank Failures → Bank Bailouts → Excessive
Public Debt → need for EU / IMF Assistance
Two Questions
• What Caused Excessive Public Debts in
Countries without big banking Crises: Greece,
Portugal, Italy
• What caused the Banking Crises?
Fragmented Political Systems and Lack of Consensus
in Southern Europe
• Spain, Portugal & Greece have had civil wars in
the 20th century
• Italy was close to civil war in the 1970s
• All countries have had authoritarian / military
governments in the 20th century
• Public spending and lax enforcement of
taxation laws serves to contain domestic
political and social conflicts
Rapid Deregulation of Finance and Speculative
Investment in the EU
• South European countries strictly regulated their
financial markets
• [Korea did so too when it was developing]
• Since the 1990s the EU has rapidly deregulated
financial markets
• Large speculative inflows from North Western
Europe destabilised countries such as Ireland,
Spain, Greece
• [Rapid deregulation of finance was one of the
main causes of the 1997 crisis in Korea]
What to Do: More Europe or Less
Europe?
• The Debate is very Controversial
• The EU Commission and countries like
Germany and France think we need more
Europe
• Tighter control form Brussels on the spending
policies of member states
• Centralised EU supervision of banks
• Common resolution mechanism for banks in
trouble
But we might need less Europe
• Asking the crisis countries to brutally cut
spending creates massive unemployment
• And thus creates a lot of political and social
tensions
• But it does not solve the debt problem
EU Policies fail to reduce public debt in the
crisis countries
Public Debt as a Percentage of GDP
Source: AMECO; 2013 figures are estimates
200
Ireland
180
160
Greece
Spain
140
120
100
80
60
40
20
0
2009
2010
2011
2012
2013
Competitiveness and Devaluation
• Wages in many Southern European countries have grown
faster than in Germany and the rest of North Western
Europe
• This is in part because inflows of speculative capital created
growth and higher inflation
• But it was bad for industry
• Now that the boom has collapsed industry needs to recover
competitiveness
• The quickest way to do that is a devaluation of the currency
• Devaluation would be bad for North West European
(German) exports
• Ending the Euro might end the whole project of European
integration
Debt Default or Restructuring
• Debt levels in Greece Portugal and Spain are
so high that these countries will never recover
if they do not default on at least part of their
debt
• But North-Western European countries are
against devaluation and default
• Much of the speculative capital that flowed
there came for these countries
The European Dilemma
• South European countries would need to default and
devalue to recover
• But that would create enormous tension with North
Western Europe
• Ending the Euro would give South European countries more
autonomy
• Southern Governments don’t’ want that because they tend
to blame problems on Brussels, if they leave the Euro they
will need to take responsibility themselves
• Most people in Southern Europe do not want that because
they don’t trust their politicians and think that economic
policies set in Brussels (EU) / Frankfurt (ECB) would still be
better than those set in their own capitals
South Europeans Do Not Trust Their Governments
Percentage of Respondents Who Tend Not To Trust Their National
Government
Source: Eurobarometer May 2013.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Bleak Prospects for Europe
• Keeping the Euro creates enormous tension
between Northern and Southern Europe and
within South European Countries
• To Recover Southern Europe would Need to
Leave the Euro and Default
• But that Would Create Even More Tensions
Between North and South
• And many people doubt that South European
governments can manage their economies
without being controlled by Brussels.
Thank You
감사합니다.