the economic crisis in the european monetary union: conceptual and terminological issues nacho...
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The economic crisis in the European Monetary Union: Conceptual and terminological issues
Nacho Álvarez Department of Applied Economics
University of Valladolid (Spain)
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
Contents
1.- The starting point: some methodological issues
•A first methodological warning:
Economic approach vs. linguistic approach
1.- The starting point: some methodological issues
•A second methodological warning:
A Political Economy approach: interdisciplinary analysis drawing upon economics, sociology and political science
1.- The starting point: some methodological issues
•A third methodological warning:
Concept of “periphery”: the weaker economies of the euro area
-Lower GDP per capita-Prevalence of low-tech manufacturing-Lower productivity-Structural external imbalances-Tendency to over-indebtedness
PIIGS (Portugal, Ireland, Italy, Greece and Spain)
1.- The starting point: some methodological issues
Peripheral countries
latecomers in building up the Welfare State
Source: Soede et al.
GR
PT
ES
IT
SK CZ
HU
PL
USCA
UK IE
AU
NO
FIEE
DK
NLBE
DEFR
EEAU
LU
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
Contents
2.- The crisis in peripheral countries
• Causes of the crisis in the euro zone:
↑ Internal demand ↑ Debt↑External deficit
CENTER
PERIPHERY
↓Internal demand↑External demand↑External surplus
2.- The crisis in peripheral countries
• Increasing inequalities
Average annual growth rates for the period (%), euro zone
Source: AMECO
2.- The crisis in peripheral countries
• Increasing inequalities
Source: AMECO
Wage share (% GDP), euro zone
2.- The crisis in peripheral countries
• Increasing inequalities
Source: AMECO
Wage growth, contribution of private consumption to GDP and wage share (% GDP), euro zone
2.- The crisis in peripheral countries
• Financing and credit growth
Source: BIS, WSE.
Annual growth rate of financial transactions vs. GDP growth, euro zone
2.- The crisis in peripheral countries
• Financing and credit growth
IE PT
ES
NL
GR
BE
EM
U-1
2
ATFI IT DEFR
2.- The crisis in peripheral countries
2.- The crisis in peripheral countries
Source: Eurostat.
2.- The crisis in peripheral countries
Peripheral variety (debt-led growth) Center variety (export-led growth)
2.- The crisis in peripheral countries
Peripheral variety (debt-led growth) Center variety (export-led growth)
External and internal demand contributions to GDP growth (%)
2.- The crisis in peripheral countries
Export-led growth vs. Debt-led growth
Unit labor costsCapital outflows
Credit crunchZombie banks
Main concepts
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
Contents
3.- The politics to overcome the crisis
What is the situation of the peripheral economies when the crisis explodes? dramatic situation
•Huge external deficits
•Tremendous accumulation of debt by the private sector
•Gradual increase in public sector debt (due to initial rescue plans)
•Without access to international financial markets
•“Zombie” banks
•Unable to devalue national currencies
3.- The politics to overcome the crisis
First phase of the crisis (2008-2009) rapid increase in public debt due to 3 types of measures:
•The functioning of the automatic stabilizers (unemployment benefits....)
•“Light” fiscal stimulus
•Aid to the financial system
Investors fear that the euro will break, and they start attacking the sovereign
debt of the peripheral countries
3.- The politics to overcome the crisis
10 year bond yield of sovereign debt (%)
Source: ECB
3.- The politics to overcome the crisis
Second phase of the crisis (2010-2014) radical change, back to neoliberal economic policy
•Fiscal austerity
•Reform in public pension systems
•Privatization of public services
•Internal devaluation
•Restructuring of the banking sector
•Liquidity injections by the ECB
3.- The politics to overcome the crisis
The Troika strategy with peripheral countries
Troika
PIIGSForeign banks €
€
Conditionality
•Fiscal austerity•Reform pensions•Privatization•Internal devaluation
↓ Internal demand and government surplus
↑ Competitiveness↑ External
demand
↑ GDP
↑ Payout debt
€
↑ Financial stability
↑ Capital inflows
3.- The politics to overcome the crisis
1. Fiscal austerity:
↓ Public spending↓ Public spending
↓ Government deficit
↓ Government deficit
↓ Financial costs in capital
markets
↓ Financial costs in capital
markets
↓ Public debt
↓ Public debt
↑GDP↑GDP
↑ Investment
↑ Investment↑ Stability↑ Stability
3.- The politics to overcome the crisis
1. Fiscal adjustment measures
Freeze / reducing
salaries of public
employees
Cuts in the number of
public employees
Cuts in pensions spending / pension reforms
Cuts in health
spending / health system reforms
Reduction of social transfers
and subsidies
Reduction of public
investment
Other public
spending cuts
Increase consumption taxes
(VTA)
Greece X X X X X X X X
Ireland X X X X X X X X
Italy X X X X X X X
Portugal X X X X X X X X
Spain X X X X X X X X
Source: Fiscal Monitor, FMI, 2012; Ortiz and Cummins (2013: 16-17)
3.- The politics to overcome the crisis
2. Internal devaluation
↓ Public debt
↓ Public debt
↓ Wages↓ Wages ↑ Competitiviness and exports
↑ Competitiviness and exports ↑GDP↑GDP
↓ Private debt
↓ Private debt
3.- The politics to overcome the crisis
2. Internal devaluation:
POLICY COUNTRY
Disappearance of collective agreements at national level
Ireland
Legal extension of opt-out clauses, allowing enterprise-level deviation from sectoral agreements
Italy, Portugal, Greece and Spain
Priority of firm-level agreements vs. sectoral or national agreements Greece and Spain
Legal enforcement to bargain with non-union workers' representatives Portugal, Greece and Spain
Limitation to the ultra-activity of collective agreements
Greece and Spain
Formal restrictions to the general application of collective agreements
Portugal and Spain
Source: Busch et al. (2013); Schulten and Müller (2013)
3.- The politics to overcome the crisis
3. Reforms of public pension systems:
Main features of the reforms in the PIIGS
-aim is to raise effective retirement age several years
-entitlement to a full pension will require more working years (from 35 to 40) lower pensions
-pensions will be calculated on the basis of the whole working life, no longer on the last insured years lower pensions
3.- The politics to overcome the crisis
4. Privatizations another tool for raising revenue needed to meet debt payments, especially in those economies bailout by the EU.
*Greece: 50.000 M€ between 2012 and 2015
12 major ports in the country, public gas company, the national postal company, highways, railways, public water supply of Athens and Thessaloniki, 39 regional airports, the Athens International Airport, and 40 Mediterranean islands
*Portugal: 5.000 M€ between 2013 and 2015
large public companies in the financial sector (BNP, Caixa Seguros), energy (EDP, GALP, Cahora Bassa Hydroelectric, REN) or transport (Aeroportos de Portugal, TAP, EMEF)
3.- The politics to overcome the crisis
4. Privatizations
*Ireland: 5.000 M€ between 2012 and 2015
privatization of various airports and seaports, 25% of the airline Aer Lingus, the power supply (Bord Gáis Energy) and water supply (Irish Water), two thirds of the currently nationalized banking system.
*Spain: 5.000 M€ between 2013 and 2015
Railways (Renfe), airports (AENA), the Port Authority, Lotteries, Wagering Company. In addition, these plans include the privatization of public services, such as the water supply in Madrid, or various hospitals and health centers.
3.- The politics to overcome the crisis
5. Liquidity injections by the ECB
3.- The politics to overcome the crisis
5. Liquidity injections by the ECBMonetary base, euro zone (2007=100)
Source: ECB
Real estate assets, non-performing
loans
3.- The politics to overcome the crisis
6. Bank restructuring
EU
Private banks
FROB
“Bad” bank (SAREB)
€€
€
“Bad” bank financial institution created to hold non-performing assets; it is a state guaranteed bank.
↑Credit?
3.- The politics to overcome the crisis
Austerity
Lender of Last Resort
Main conceptsLabor market
reforms
Bad bank
Liquidity injections
Privatizations
Internal devaluation
1.-The starting point: some methodological issues
2.- The crisis in peripheral countries
3.- The politics to overcome the crisis
4.- An assessment of the EU policies
Contents
Real public expenditure, excluding interests (2005=100, change in %)
Source: AMECO
2003-2006 2007-2009 2010-2012EU-12 7,4% 9,2% -0,4%
Belgium 9,8% 13,6% 6,7%
Germany -0,6% 6,1% 0,9%
Ireland 25,6% 36,3% -16,1%
Greece 21,4% 20,4% -15,7%
Spain 16,4% 21,8% -2,3%
France 8,9% 6,8% 3,0%
Italy 10,9% 2,5% -4,7%
Luxembourg 9,0% 17,0% 0,9%
Netherlands 8,1% 15,8% 0,1%
Austria 7,4% 9,0% 2,9%
Portugal 8,5% 9,9% -10,9%
Finland 16,0% 11,0% 5,6%
4.- An assessment of the EU policies
Source: AMECO
4.- An assessment of the EU policies
4.- An assessment of the EU policies
Euro Zone
Greece
Spain
Portugal
Greece
Spain
Portugal
Euro Zone
4.- An assessment of the EU policies
Euro ZoneGreeceSpainPortugal
IrelandGreeceSpainItalyPortugal
3 traps operating simultaneously:
-Internal-fiscal trap
-External-devaluation trap
-Liquidity trap
4.- An assessment of the EU policies
4.- An assessment of the EU policies
1. Internal-fiscal trap:
2. External-devaluation trap
↓ Public spending↓ Public spending
Fiscal multiplier
Fiscal multiplier ↓ GDP↓ GDP
↑ Public debt
↑ Public debt
↓ Wages↓ Wages ↓ Private consumption
↓ Private consumption ↓ GDP↓ GDP
≈ Private debt
≈ Private debt
4.- An assessment of the EU policies
3. Liquidity trap: monetary policy is not enough
Source : ECB
GRPT
IT
ES
DE
AT
FRBE
NLFI
IE
Source: European Commission, Eudata. Deutsche Bank
4.- An assessment of the EU policies
So… we do not solve the crisis
… and we expand the root problems!!
4.- An assessment of the EU policies
4.- An assessment of the EU policies
Social protection expenditure and reduction of inequality and poverty in the EU Member States
Source: ESDE, 2013
LV RO BG
EE
LTCY
MTCZ
SI
SK
IT EL
ES
UK
AT
PT FRDE
BEDK
SE
IEFI
HU
LU
PL
4.- An assessment of the EU policies
Inequality (S80/S20 measure) by groups of EA and non-EA Member States
Source: ESDE, 2013
Deflation
Double-dip recession
Main concepts
Mini-jobs
“Light” deleverage
Jobless recovery
Working poor
Inequalities
Debt restructuring
- Haircut
4.- An assessment of the EU policies
5.- An alternative economic policy
•New strategy based on 4 principles
1. De-financialization, regulation
2. Global Green New Deal
3. Wage-led recovery
4. Debt restructuring
5.- An alternative economic policy
….finish with this
Source: BIS, WSE.
Annual growth rate of financial transactions vs. GDP growth, euro zone
5.- An alternative economic policy
Total public expenditure, excluding interests (evolution, % of GDP)
Source: AMECO
….finish with this
5.- An alternative economic policy
….finish with this
Source: AMECO
Wage share (% GDP), euro zone
5.- An alternative economic policy
….finish with this
Source: McKinsey Global Institute
The example of Iceland
•Main policies adopted
1. Capital controls to free movements
2. Moratorium on repayment of foreign debt
3. Nationalization of banks
4. Debt forgiveness on mortgage debt
5. Higher social spending
6. Wage increases
The example of Iceland
Real GDP growth, 2011-2012 (%)
Source Eurostat; Statistics Iceland
Euro Zone GreeceSpain PortugalIceland
The example of Iceland
Euro ZoneGreeceSpain
Portugal
Iceland
Euro Zone
Greece
Spain
Portugal
Iceland
The example of Iceland
Euro Zone GreeceSpain PortugalIceland
The example of Iceland
↑ Social spending↑ Social spending
↓ Debt/GDP↓ Debt/GDP
↑ Wages↑ Wages
↑ Private consumption
↑ Private consumption
↑ GDP↑ GDP
Mortage debt restructuringMortage debt restructuring
↑ Employment↑ Employment
+ Capital controls+ Capital controls
Thank you!!