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Europe in Transition –Political Economy of the Crisis
EESC GROUP II Houffalize, 28 November 2012
Andreas Botsch
Overview
I. Overview and summaryII. ImbalancesIII. Wrong questions, wrong answersIV. Balance sheet recessionV. European alternatives
I. OVERVIEW AND SUMMARY
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Four crises in Europe, one effect: accumulation of uncertainties
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● Public debt crisis austerity
● Private debt crisis insolvencybanking / financial crisis collapse of
financial system● Political crisis and
architechture of EMU legitimacy crisis● Economic crisis unemployment● Social crisis poverty
Euro zone crisis
Three overlapping financial crises
● Normal or „classical“ public debt crisis (Greece, Portugal)
● Asset bubble and ensuing ● Private debt crisis
● Banking crisis ● Public debt crisis
(Spain, Ireland)● Hidden balance sheet crisis / banking crisis
(France, Germany)
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Three overlapping financial crises
● Normal or „classical“ public debt crisis (Greece, Portugal)● Asset bubble and ensuing
● Private debt crisis● Banking crisis ● Public debt crisis(Spain, Ireland)
● Hidden balance sheet crisis / banking crisis (France, Germany)
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Europe‘s answer 2008-2012 in one sentence
● EU policy uses the wrong macro-economic answer to structural problems …
● … and the wrong ‚structural reforms‘ to an essentially macro-economic problem
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II. IMBALANCES → BALANCE OF PAYMENTS CRISIS
Let‘s get the fundamentals right
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Causes (1): Imbalances
Growth models of neo-liberalism●External and internal deregulation of financial markets ●Weakening of trade unions → growing disparity of income distribution ●2 growth models: exports vs. debt (i.e. finance) driven●Both models serve to compensate weak internal demand●Problem: liquidity overhang
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Debt Exports
Centre USA, UK Germany, Japan
Periphery GIIPS China
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Growth models of neo-liberalism
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Stagnating Internal Demand
Imbalances in Euro area: real economic growth
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real GDP 2000-2008 real GDP 2000-2008
Germany 10% Ireland 40%
Netherlands 17% Greece 35%
Austria 19% Spain 28%
Italy 7%
Euro area 15% Portugal 8%
Growing unequal: growth components
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Current account in % GDP
German capital export to euro zone
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● cummulated 1999-2010
Source: M. Payandeh
Public debt 2007-2010
Andreas Botsch © etui (year) Europa in der Krise oder nur Euro-Krise ?15 Europa in der Krise oder nur Euro-Krise ?15
Veränderung der Gesamtverschuldung zum Vorkrisenniv eau (2010 zu 2007)
- in Prozentpunkten zum jeweiligen jahresspezifischen BIP -
3,9
4,3
8,7
10,8
11,1
11,5
12,5
13,8
14,4
15,3
17,3
18,1
19,2
19,5
20,1
28,3
35,2
72,4
Zypern
Estland
Malta
Deutschland
Österreich
Luxemburg
Slowakei
Finnland
Belgien
Italien
Slowenien
Eurozone
Frankreich
Niederlande
Portugal
Spanien
Griechenland
Irland
Quelle: Europäische Kommission, Herbst 2010; eigene Berechnungen
Source: M. Payandeh
Crisis related state aid 2008-2010
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EZ budget deficits 2011: justifying austerity ?
IRL
GRE
ESP
SLO CYP
FRA
SLK NLD POR ITA
BEL
AUT
MAT
GER
LUX
FIN
EST
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
IRL
GRE
ESP
SLO CYP
FRA
SLK NLD POR ITA
BEL
AUT
MAT
GER
LUX
FIN
EST
Eurozone budget deficits 2011 in %GDP
Imbalances in Euro area: unit labour costs
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Unit labour cost 2000-2008
Unit labour cost 2000-2008
Germany 3% Ireland 33%
Netherlands 19% Greece 26%
Austria 9% Spain 30%
Italy 27%
Euro area (12) 16% Portugal 24%
Nominal unit labour costs 2000-2010
● ECB inflation target 2%
● Best in class: Belgium and France
● Drifting apart of inflation rates over period of 12 years is main cause of balance of payments imbalances
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III. WRONG QUESTIONS →WRONG ANSWERS: A GERMAN EUROPE ??
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causes (2): private, not public debt
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● Profligate governments, lazy Southern europeans?
● Source: European Economy 6/2011
Budget deficit 2007 in % GDP
Budget deficit 2007 in % GDP
Germany 0,2 % Ireland 0,1 %
Netherlands 0,2 % Greece -5,4 %
Austria -0,5 % Spain 1,9 %
Italy -1,5 %
Euro area (12) -0,6 % Portugal -2,7 %
Private and public debt (euro area)
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● Public and private debt in euro area
Wrong assumptions
● Main cause of crisis: private debt growth (except for Greece)
● … Result of imbalances in Euro area, characterising a neoliberal growth regime, worsened by dysfunctional economic policies in Europe
● Bundesbank dogma („stability culture‟):Price stability leading to growthAusterity key to price stability
● not price stability, but relatively lower inflation compared to trading partners responsible for growth in fixed exchange rate regime
● German monetarism = neo-mercantilism, export of unemployment
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Referential wage dumping ?
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ECB inflation target
Net asset and wealth distribution in Germany
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Source: M. Payandeh
Productivity and real wages: Germany
● Export of dysfunctional German income distribution
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Many european procedures… one answer: German Europe ?
● Many different european procedures (EU 2020/ Troika/ macro-economic imbalances)…
● … one simple message:● Crisis resolution (in particular for ‘external deficit
countries’) via devaluation of REERs, i.e. flexible wages and labour markets: moderate and lower wages will re-establish lost competitiveness
● Wage deflation in combination with private debt will lead to debt deflation (Irving Fischer 1933)
● … through joint measures in Euro area: Six Pack (Excessive Imbalances Procedure), Euro+ Pact, Two Pack, Fiscal Treaty, Euro Treaty (?)
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IV. BALANCE SHEET RECESSION
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Drastic Liquidity Injection Failed to Increase Money Supply
90
10 0
11 0
12 0
13 0
14 0
15 0
16 0
17 0
18 0
Base M oney
M oney Supp ly (M 3)
C redit to Eu ro Area Residents
(A u g . 2 00 8 = 10 0, S ea so n al ly A d jus ted )
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
08 /1 0 8 /4 0 8/7 08 /10 0 9/1 09 /4 0 9/ 7 09 /1 0 10 /1 1 0/4 10 /7 1 0/1 0 11 /1 1 1 /4 1 1/7 11 /10 1 2/1
(% , yo y)
C PI c ore
Sourc es : ECB, Euros tatNote: Base mon ey's figure s are seaso nally ad jus ted by Nomura Res earch Ins titu te.
Drastic liquidity injection failes to increase money supply:monetary transmission channels are broken
Eurozone in balance sheet recession
Spain in balance sheet recession
Ireland in balance sheet recession
Portugal in balance sheet recession
UK in balance sheet recession
Japan GDP growth despite of private sector deleveraging and major loss of private wealth
Balance sheet recession and the ‚paradox of thrift‘
• If everyone tries to save more money during times of recession, then aggregate demand will fall
• In stagnant populations, total savings in the population will fall because of the decrease in consumption and economic growth
• The paradox is that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.
• Fallacy of composition: what is true of the parts must not be true of the whole. While individual thrift is generally alleged to be good for the economy, the paradox of thrift holds that collective thrift is bad for the economy. (Keynes)
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V. EUROPEAN ALTERNATIVES
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Structural: Rapid growth of cross-border financial market integration
● Developments in trade and financial integration , OECD average, 1980-2008 (1980=100)
Note: Trade integration is defined as the sum of imports and exports as a percentage of GDP. Financial integration is defined as the sum of cross-border liabilities and assets as a percentage of GDP
Balance sheet composition: selected universal banks
Loans and financial assets in % of total assets (20 11)
17,4
3439,6
59
42
26
0
20
40
60
Deutsche Bank BNP Paribas Crédit Agricole
Loans Financial assets
Total domestic bank assets in % of GDP (2010)
83
164 167
304320 329
402418
493
50
150
250
350
450
USA
Italy
Belgiu
m
Germ
any
Franc
e
SpainNet
herlan
ds UKSwitz
erlan
d
Debt redistribution = Wealth redistribution
● Historical reminder: leverage ratios before WW I = 4-5
Leverage ratios of selected banks (2011)65
48,743
28,6 27,6
Dexia Axa Bank Deutsche Bank Credit Agricole BNP Pariba s
The elephant in the EU room: TBTF exclusively a US problem ?
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TBTF in UK
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TBTF Ireland
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TBTF France
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TBTF Spain
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TBTF Germany
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Shrinking balance sheets & financial markets: 5 S & D
● smaller in size
• slower in speed
• simpler in structure
• separated functionally
• less short-term oriented
• democratised
Conclusions
● Stop deflationary expectations inherent in ‘convertibility risk’(GREXIT etc)
● (Infrastructure) investment as vehicle of adjustment, not labourmarket ‘reform’ and wage deflation: Marshall plan for periphery, fiscal consolidation through growth
● Stop speculation folly of financial markets (self-fulfilling prophecy of insolvency fears)
● Repair constitutent structural flaws of euro area● Shield public debt from speculation: ECB as lender of last resort
and/or banking license to EFSF/ESM● Supplement Fiscal Treaty on revenue side● Harmonisation and cross-border transparency of corporate
taxation● Drain tax havens
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Macro-economic assignment: ECB monetary policy
● Add growth and full employment to ECB objectives● 3 year Long Term Refinancing Operation (LTRO) : the
1.000 billion Euro gift to the banks and the limits of (neutrality of) monetary policy: Europe is bailing out the wealthy in South and North
● Lender of last resort function (LOLR) instead of 1. limited Securities Markets Programme (SMP) 2. pro-cyclical OMT & ESM conditionality in Fiscal Treaty and 3. LTRO deviation of banking stabilisation
● ESRB: control and monitoring of balance sheet reduction to the benefit of loan portfolios and to the detriment of proprietary trading
● ESCB and BuBa: understand eurozone properly as EMU (no securitization of target II loans)Andreas Botsch © etui (2012)51
Macro-economic assignment: fiscal policy
● European Wealth Levy● Prime role of fiscal policy in fighting uncertainties since
monetary and competition don‘t guarantee stability● Consolidation: growing out of the crisis, not aggravating it
through synchronized austerity (fixed FX rate regime)● Marshall Plan for periphery● Transfer Union as Investment Union● Financing of European Investment Fund (EIF) through
mandatory zero interest bond on wealth > 500.000€(capital levy): 10 year R provide capital stock for EIF
● Financial Transactions Tax● Stop tax competition
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Macro-economic assignment: collective bargaining
● Coordination rule oriented to distribution neutrality = productivity + inflation target
● Avoidance of overload through ‚redistribution component‘● Coordination :● Euro area inflation target, not national inflation rates● Industry: cross-border collective bargaining along value
added chains and european right to strike● Strengthening of macro-economic dialogue while fully
respecting art. 138 and 152 of TFEU (no interference in free collective bargaining; autonomy of social partners)
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Thank you for your attention !
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