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The global body for professional accountants
AGENDA
• The story so far• Greece: a brief update• The limits of austerity• The EU roadmap• The mechanics of contagion• What hope for reform?
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1. The story so far.
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Stimulus
Sovereign debt crisis
US politics, fundamentals
China slowdown
Green shootsInvestment stalls Inflation peaks,
Africa slows
Uncertainty peaks
Fukushima
Investment stalls
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-60
-50
-40
-30
-20
-10
0
10
20
30
40
Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012
AmericasMiddle EastAsia PacificCentral and Eastern EuropeSouth AsiaWestern EuropeAfrica
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IS IT ALL DOWN TO EUROPE?
• Stimulus withdrawal (incl. China)• Bank capitalisation & Basel III• Household and corporate deleveraging• Falling imports• Corporate cash hoarding• Conflict & civil unrest• Uncertainty
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WHAT IS THE EURO CRISIS?
• Debt sustainability & market access• Bank capitalisation, leverage & liquidity
• Contagion•De-integration & bank-sovereign loops
• Falling output; permanent capacity loss• Loss of human and social capital
• Incomplete EU institutional framework• Stretching of legitimacy and mandates
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2. Greece: a brief summary
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Bank of Greece (2012) Report on the Recapitalisation of Greek Banks http://www.bankofgreece.gr/BogEkdoseis/Report_on_the_recapitalisation_and_restructuring.pdf
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CREDIT (1) TO THE DOMESTIC PRIVATE SECTOR(Outstanding amounts and net flows(2) in EUR millions)
% change Nov 2011-12Ι. TOTAL -4.6%ΙΙ. ENTERPRISES -5.4% ΙΙΑ. NON-FINANCIAL CORPORATIONS -4.1% 1. Agriculture -7.0% 2. Industry -4.2%
2.1 Mining and Quarrying -3.6% 2.2 Manufacturing -4.2%
3. Trade -8.3% 4. Tourism 0.8% 5. Shipping -3.1% 6. Construction -5.0% 7. Electricity - Gas - Water 6.3% 8. Storage and Transport services excl. Shipping -6.4% 9. Remaining branches -3.8%
9.1 Information and Communication -4.1% 9.2 Real Estate Activities -0.3% 9.3 Professional and other activities -14.7% 9.4 Other -1.1%
ΙΙΒ. INSURANCE & OTHER FINANCIAL -24.2%ΙΙI. UNINCORPORATED ENTERPRISES -2.8%ΙV. INDIVIDUALS ETC (2) -3.9% 1. Housing loans -3.5% 2. Consumer credit -5.1% 3. Other loans 0.5%
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3. The limits of austerity.
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IMF: “We got fiscal
multipliers wrong. We assumed 0.5; they are between
0.9 and 1.7”
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More significant influence on confidence
ACCA/IMA 2012: Global Economic Conditions Survey Q4 2011
Revenues falling
Global economy seen as making progress
New orders falling
Very good policies
Austerity
Sector-specific factors
Poor policies
Access to growth capital
Business size
Unstable customers
Value-added business opportunities
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More significant influence on investment
ACCA/IMA 2012: Global Economic Conditions Survey Q4 2011
Falling new orders
Falling revenues
Potential for new orders?
Profitable projects
Sector-specific
Finance & Gov support
SME
‘Excessive’ austerity
Unstable customers
Global Economy improving
‘Excessive’ spending
Unstable suppliers
Poor policy
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Labour taxes only Capital taxes only Labour &capital taxes Real 10 yr yields
Max add tax yield/GDP
Max interest rate
Max add tax yield/GDP
Max interest rate
Max add tax yield/GDP
Max interest rate
GDP Cons
Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ Across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, National Bureau of Economic Research, Inc.
42.7% is the limit!
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DEBT SUSTAINABILITY
• Debt < (NPV of future fiscal surpluses)• This is a moving target in every way.• In practice, policymakers use arbitrary
thresholds•120% debt/GDP is the best example
• Prisoners of austerity v. prisoners of liquidity
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Arlsanalp & Tsuda, 2012. “Tracking global demand for advanced economy sovereign debt," IMF Working Papers 12/284, International Monetary Fund
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NOT ALL AUSTERITY IS THE SAME
1. Improved tax administration2. Improved procurement etc3. Benefits cuts4. Public consumption cuts5. Direct tax hikes6. Public investment cuts7. Indirect tax hikes
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Quick Q&A Break?
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4. The EU Roadmap.
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6-pack(macro imbalances,
budget surveillance, co-ordination and enforcement)
Treaty on stability, coordination &
governance (fiscal compact)
CRD / CRR IV
Single Supervisory Mechanism
Recovery and Resolution DirectiveDeposit
Guarantee Scheme Directive
ESM Operational Framework
Single resolution mechanism
Co-ordination of national reforms
Reform and solidarity ‘contracts’ between MS and EU institutions
Participation of Parliaments and EP in further integration
ECB Outright Monetary Transactions
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Worse, what if Europe isn’t solvent?
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Delia Velculescu, 2010. "Some Uncomfortable Arithmetic Regarding Europe’s Public Finances," IMF Working Papers 10/177, International Monetary Fund
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Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision, http://esa.un.org/unpd/wpp/index.htm
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5. The Mechanics of Contagion.
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The global body for professional accountantsAntonakakis, N. and Vergos, K. (2012) ‘Sovereign bond yield spillovers in the Euro zone during the financial and debt crisis’ MPRA 12/2012 http://mpra.ub.uni-muenchen.de/43284/1/BYS_MPRA.pdf
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The global body for professional accountants
Labour taxes only Capital taxes only Labour &capital taxes Real 10 yr yields
Max add tax yield/GDP
Max interest rate
Max add tax yield/GDP
Max interest rate
Max add tax yield/GDP
Max interest rate
GDP Cons
Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ Across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, National Bureau of Economic Research, Inc.
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6. What future for reform?
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INEFFICIENCY COSTS REVENUE
• Low returns on public spending• Loss of revenue due to poor tax
administration• Lower tax morale• More so in a recession
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Thanks!
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