a tale of two faux crises: italy, spain and the euro money and development seminar series 29...
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A Tale of Two Faux Crises: Italy, Spain and the Euro
Money and Development Seminar Series
29 February 2012
John WeeksProfessor Emeritus, SOAShttp://jweeks.org
Background:Two non-technical articles:
"Democracy in Europe and the Italian Crisis"In Insight
http://www.insightweb.it/web/
"Catastrophe Now: The Euro Runs its Course"In the Social Europe Journal
http://www.social-europe.eu/
Both linked on http://jweeks.org
Statistical Sources:
1. OECDwww.oecd.org (click on "statistics")
2. Eurostathttp://epp.eurostat.ec.europe.eu/portal/
Especially Supplementary Tables on the Financial Crisis
Definitions1. Debt: gross and netOECD definition of the net debt is liabilities minus liquid assets. Examples: In 2011, Norway's gross debt was just below the
infamous Maastricht criterion at 56% of GDP. Its net debt was minus 160 percent of GDP. For the UK the numbers were 90% and 64%.
2. DeficitsTotal fiscal balance is revenues minus expenditures. The primary
balance is net of interest, which the IMF uses for its test of fiscal stability.
For no obvious reason, the Maastricht criteria refer to the gross debt and total fiscal balance.
Simple algebra of deficits:
Define:
B = fiscal balance = revenue - expenditure
B* = primary fiscal balance
= revenue - non-interest expenditure
= zY - (Ē - eY)
z is the tax rate (average = marginal)
Y is national income
Ē is discretionary expenditure
e is automatic counter-cyclical expenditure
B* = Y - [Ē - eY]
B* = [zY + Yz] - [eY - Ye]
d' = B/Y = [z + e]g
If z = e = 0
g = Y/Y, GDP growth rate,
d' = first difference of the primary fiscal deficit,
Yield on long term public bonds andinterest payments as share of GDP, 1993-2011[Interest rates now lower than for 1993-2002]
0
2
4
6
8
10
12
14
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
interest on debt(% of GDP)
Long termyield on public bonds(% )
Italy: Total and primary deficits, 1993-2011[Lowest primary deficit in the euro zoneand recent decline recession-generated]
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Intereston debt
Overalldeficit
Primarydeficit
Globalrecession
Italy: Changes in the public sector balance has been GDP driven,1993-2011 (share of GDP)
-6.0
-4.0
-2.0
.0
2.0
4.0
6.0
-4.0 -2.0 0.0 2.0 4.0
Change in PrimaryDeficit
GD
P G
row
th
ln[FsDf/GDP] = -.01 + .47ln[GDP grw]F = 9.9 (R2 = .38), DF = 16
Italy: The public debt "burden" has declined, 1993-2011[real value of net debt in 2011 same as 1997]
0
500
1000
1500
2000
2500
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
50
100
150
200
250Public debtprices of 2011bns of euros
gross
net
Debt burden 2011 prices,interest rate adjusted
bns of euros
gross
net
2047 bn
1597 bn
Fiscal balance in surplus, net debt steady,what is the problem?[Not real wage inflation as suggested by Krugman]
-4
-2
0
2
4
6
8
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
`
Ratio of Italian to German private sector real wages1994-2009
German trade policy is the problem:Italian-German trade balance & unit labour costs, 1994-2009
[Falling German unit costs result of relatively faster productivity increases and export subsidies]
-25
-20
-15
-10
-5
0
5
10
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-30
-25
-20
-15
-10
-5
0
5
10 ULC Germany/Italy, 1998=0
Trade balance Italy-Germany, € bns
`
Inflexible labour market in Italy?Not according to the OECD
-30
-25
-20
-15
-10
-5
0
5
10
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
.0
.2
.4
.6
.8
1.0
1.2
1.4
1.6
Italy's trade balancewith Germany
OECD employmentprotection index,Italy/Germany
The Italian story summarizedItaly has not had does not have an excessive fiscal deficit. On the contrary, for the last twenty years it has had the best primary fiscal balance in the European Union. In the 1990s it suffered from unwise borrowing at high interest rates. That problem is over. Present "unsustainable" interest rates are well below the level of the 1990s.
Italy's public debt is no larger in real terms than it was twenty years ago. Its interest-adjusted "burden" is far lower.
Italy has a serious trade deficit with Germany, that results in great part from implicit and explicit export subsidies. The most important of these are:
1) suppression of domestic demand
2) VAT and pay roll tax relief on export commodities
Fiscal surpluses in Spain, 1993-2011
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
.0
2.0
4.0
6.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total Deficit/GDP
Primary Deficit/GDP
Even in Spain recession causes deficitsGDP and the total deficit, 1993-2011
-50
-40
-30
-20
-10
0
10
20
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-13.0
-11.0
-9.0
-7.0
-5.0
-3.0
-1.0
1.0
3.0
GDP (2004 = 0)
Total Deficit
And growth reduces the deficitSpain: GDP growth and the first difference in the primary balance, 1993-2011
-5.0
-4.0
-3.0
-2.0
-1.0
.0
1.0
2.0
3.0
4.0
5.0
-7.0 -5.0 -3.0 -1.0 1.0 3.0
Change in primary Deficit/GDP
GD
P G
row
th
ln[FsDf/GDP] = -.02 + .68ln[GDP grw]F = 8.1 (R2 = .35), DF = 15
Spain & the euro
During 1990-2007 property speculation resulted in an asset bubble in Spain as or more extreme than in North America. The speculation included large exposures of Spanish banks in the US sub-prime market.
When the bubble burst, the Spanish government embarked on a bank recapitalization ("bailout") that generated an annual average primary deficit of minus 7% of GDP.
In the absence of the bailout the primary fiscal balance was minus 2% of GDP.
Spain: Public sector balance, 2001-2010
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Total deficit/GDP
Less bank bailout
The Spanish story summarized:[technical term is "chutzpah"]
To save the financial sector from collapse, the Spanish government [social democrat!] bailed it out. The bailout more than tripled the fiscal deficit. The rescued Spanish financial institutions used the bailout funds to speculate on government bonds, thus creating the fiction that public finances were unsustainable.
What to do in the euro zone
Comment on Krugman & devaluation
German expansion
Deficit country export subsidies
The Great Euro Scam
Along side the Tulip Mania of the 1630s, the South Sea Bubble (1720s) and other ponzi schemes will go the Great Euro Scam of the 2000s, characterized by both tragedy and farce.
The farce: Central Bank of Europe leaning to banks at 2-3%, so the banks could buy Greek, Italian, Portuguese and Spanish bonds paying 7-15%.
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