the euro crisis. a tale of divergences - uvfcliment/mgb/seminarios_25_ed_files/enrique...
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ADG INTERNATIONAL AFFAIRS
The euro crisis. A tale of divergences Enrique Alberola(*) Master de Gestión Bancaria
Valencia, 6 de Mayo
(*) The views expressed here do not necessarily coincide with those of Banco de España or the Eurosystem
ADG INTERNATIONAL AFFAIRS
OUTLINE
• Two issues
• Update of economic situation and perspectives
• Progress in crisis management and prevention
• Under a very specific light:
2
Divergence, n. 1. The act of moving away in different direction from a common point; 2. A difference between conflicting facts or claims or opinion
Economic The ones you see Political Economy The ones you perceive
ADG INTERNATIONAL AFFAIRS 3
DIVERGENCE IN THE DYNAMICS OF CRISIS AT THE GLOBAL LEVEL
Euro Area
Euro periphery
Global economy
Ñ 0
5
10
15
20
25
30
0
15
30
45
60
75
90
2007 2008 2009 2010 2011 2012 2013VIX SRM1(Escala1dcha.)
%
VIX $Y $S Y S TEMIC $R IS K $MEAS UR E $(S RM)$(a)
sas
(a)1S RM:1P robabilidad de1una1 quiebra1s imultánea1de1dos 1o1más 1grandes 1grupos 1bancarios
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ECONOMIC DIVERGENCES WITHIN THE EURO AREA. Growth dynamics and internal adjustment
!40!35!30!25!20!15!10!505
1015
GR IE P T ES IT UEM NL F I FR BE DE AT
DEMANDA7 INTERNA IMPORTACIONESEXPORTACIONES PIB
DEMANDA INTERNA, IMPORTACIONES, EXPORTACIONES Y PIBVARIACIÓN 2008-2012%
• Euro area double dip, with large divergences
• Internal demand slump is very severe in periphery, in core it is stagnant
90
95
100
105
2007 2008 2009 2010 2011 2012
ESTADOS.UNIDOS ZONA.DEL.EURO ITALIA
ALEMANIA PORTUGAL ESPAÑA
GRECIA
2007T1=100
EVOLUCIÓN DEL PIB REAL
82%
ADG INTERNATIONAL AFFAIRS 5
ECONOMIC DIVERGENCES. External adjustment
ITAESP
POR
IRL
GRE
FRA
BEL
GER
NED
AUT
FIN
015
010
05
0
5
10
15
015 010 05 0 5 10 15
Current'account'balance'in'2012
Current'account'balance'in'2007Sources:;Eurostat,;IMF;;and;Banco de;EspañaSources:;Eurostat,;IMF;;and;Banco de;España
Regression line
Less than average
surplus reduction
More than average
deficit reduction
Worsen deficit
Improve surplus
• Extremely sharp in periphery. Spain > 10 pp GDP
• Limited, insufficient in core
!20
!15
!10
!5
0
5
10
GR PT ES IE IT FR UEM BE F I NL AT DE
2008 1998 2012 PROMEDIO8 1999!2012
SALDO DE LA BALANZA POR CUENTA CORRIENTE
% 8del8P IB
Global imbalances adjustment, G-20 & euro area
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ECONOMIC DIVERGENCES. Internal devaluations
95100105110115120125130135140145
IE ES GR PT IT NL F R BE UEM F I AT DE
2008 2012
COSTES LABORALES UNITARIOS TOTAL ECONOMÍAÍndice>1998> = >100
95
100
105
110
115
120
1998 2000 2002 2004 2006 2008 2010 2012
C LU RE LAT IVOS , DE ,E S PAÑA,FR E NTE ,A,LA,Z ONA,DE L ,E URO
1998=100
• Competitiveness adjustments have been remarkable.
• Spain has recovered more than 70% of previous loss
• …at a high cost. Productivity <<< employment loss, rather than wage restraint (there’s too)
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ECONOMIC DIVERGENCES. Indebtedness
• Easy financing leads to excess indebtedness in the periphery
• But not only (NL), not always (IT)
• Reduction in denominator –income/wealth- limits the process of deleveraging
0
50
100
150
200
250
300
2000 2008 2012DE FR IT ES NL
FI IE GR
ENDEUDAMIENTO*HOGAR ES% 2RBD
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ECONOMIC DIVERGENCES. Fiscal adjustment
• Fiscal consolidations feasible in the core
• But extremely difficult and risk of becoming self-defeating in the periphery
!12!10!8!6!4!202468
2000 2008 2012DE FR IT ES NLFI PT IE GR
S AL DO&PR ES UPUES TAR IO% 4P IB
020406080
100120140160180
2000 2008 2012DE FR IT ES NLFI PT IE GR
DEUDA%PÚBL IC A% 3P IB
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ECONOMIC DIVERGENCES. Financing
• Financing stress on sovereigns and overall
• Lead to extreme divergences.
• Reflecting a massive capital reversal…to the core
!15
!10
!5
0
5
10
15
2010 2011 2012ALEMANIA,-HOLANDA,-FRANCIA-Y-FINLANDIAITALIA,-ESPAÑA,-PORTUGAL-Y-GRECIA
FLUJOS FINANCIEROS CON EL EXTERIOR (a)(Acumulado desde diciembre de 2009 hasta
diciembre de 2012)% -del-P IB
0
2
4
6
8
10
12
14
16
03 04 05 06 07 08 09 10 11 12 13ALEMANIA FRANCIA ITALIAESPAÑA PORTUGAL IRLANDA
FINANCIACIÓN DEL TESOROTIPOS DE INTERÉS A 10 AÑOS%
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ECONOMIC DIVERGENCES. The role of ECB • Liquidity provision through TARGET alleviates the strains.
• Unconventional policies are decisive
• Sort of international reserves
• But the capital draught remains
!450
!350
!250
!150
!50
50
150
250
350
450
550
650
750
Euro.Crisis.MonitorInstitute.of.Empirical.Economic.Research.Osnabrück.University
Net.Balance.with.the.Eurosystem./.Target.[bn.€]
Finland France
Germany Greece
Ireland Italy
Netherlands Portugal
Spain Luxembourg
!400
!200
0
200
400
600
800
1,000
1,200
1,400
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
ENTRADAS(FLUJOS(FINANCIEROS(0ZONA(EURO,(PAISES(CON(ESTRÉS(FINANCIERO
Otra2inversión,2autoridades2monetarias2(variación2de2pasivos)
Entradas2flujos2financieros2!excluyendo2OI,2autoridades2monetarias
Desmbolsos2de2programas2del2FMI/UE
m.m.2USD
EURO(AR EA(F INANC IAL LY (S TR ES S ED(C OUNTR IE SF INANC IAL (INFLOWS
OTHER (INVES TMENT.(MONETARY (AUTHOR IT IE S ((OI/MA)
OTHER (F INANC IAL (INF L OWS ,(EXC L .(OI/MA
R E INBUR S MENTS (F R OM(OF F IC IAL (P R OGR AMMES (IMF /EU
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POLITICAL ECONOMY DIVERGENCES
11
EMU fragile foundations • Economic
• Disparities in economic structures • Markets are procyclical, no discipline • EMU shock destabilizing
• Institutional • Imbalances dismissed • Failure of fiscal discipline framework • Implications financial integration dismissed • Lack of crisis management mechanisms
Euro crisis
CRISIS PREVENTION (the long run/ end point)
Deep institutional reform More integrated Europe
CRISIS MANAGEMENT AND RESOLUTION (the short run)
Rescues & backstops v Adjustment
Closely interlinked Economic rationale -refoundation -moral hazard Political rationale -bargain core-periphery
DIVERGENCE
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POLITICAL ECONOMY DIVERGENCES. Crisis management and resolution
• Traits and patterns
• Slow, dubitative response. Discoordination, cacophony, undecisiveness
• Sharing of responsabilities gives way to shirking of responsabilities
• Increasing credibility gap.
• Painful adjustment with little return so far
• Back and forth from the brink
• Action is only under pressure
• Outcome
• The extension of crisis has not been contained: GR, IE, PT, SP-b,CY,… SL?
• Increasing strains among actors
• Disproportionate role of ECB, relative to national governments
• Credible backstops are evasive
• Some remarkable bright spots:
• Regain access to markets, reduction of financing costs
• Progress in resolution schemes: ESM, successor of EFSF
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POLITICAL ECONOMY DIVERGENCES. Crisis prevention
• Deepening of crisis fosters institutional reform
• Two stages
• Reaction to first wave of crisis (2010-2011) <<< fallout from small economies
• Reaction to second wave of crisis (2012-) <<< contagion, redenomination risks
• Multiples areas of action
• Fiscal discipline
• Macroeconomic surveillance
• Financial surveillance and supervision
• Political underpinnings: more integration
• …but one is spared:
• The ECB mandate: just price stability
• Does not prevent, policy hyperactivity
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POLITICAL ECONOMY DIVERGENCES. An overview of the euro crisis
Management & resolution
Crisis prevention
ECB role
Fiscal Economic Financial Political
1st stage 2008- 2012
Greece (5.10) >Troika,EFSF IE(10.10) PT(5.11) contagion GR2 (2.12) contagion
Conventional Liquidity (LTRO<1) Bond purchases (SMP) LTRO<3
6-pack (10.11) ESFS: +EBA+ESMA… ESRB(12.10) =macroprud +supranational integration
Swift constitutional changes Speedy ratification (Asymmetric) Intergovern- mentalism
Revision SGP Excessive Imbalance Procedure
2-pack Fiscal compact (3.12)
Euro+
2nd stage Summer 2012-
ESM (9.12) SP-b (11.13) CY (4.13)
MTOs Announced (7.12)+ establish’d (9.12) Not used yet
NEW UNION (Council June 2012)
European Budget/Treasury
ECCM BANKING UNION SSM+SRM
Legitimacy
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POLITICAL ECONOMY DIVERGENCES. Wrap-up
• Key elements
• The EU response is subordinated to the intergubernamental decisions
• Divergences in the interpretation of the crisis
• Discrepancies in allocation of responsabilities
• Moral hazard concerns compound with reluctance to support by core
• Thus, creditor countries dominate the process. Commission and debtors follow
• Dynamics between management, resolution and prevention determined by bargaining process
• Divergences
• Intertemporal. The urgency (M&R) lags behind the priority (prevention). Backtracking, too
• Leadership. ECB leads short-term response. Relatively, governments drag their feet
• Keys to resolution …beyond the ECB realm (under actual basis-mandate,euro arch)
• Internal incumbent governments lose social support
• External increasing strains among partners
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CONCLUSIONS
• Divergences provide a key to interpret the euro crisis
• Intersection of economic and political divergences have generated powerful negative feedbacks
• Explains that the crisis is being much worse and extended than…
• Anticipated
• Could and should have been
• Is progress in management catching up with these divergences?
• Prevention proceeds at the speed of light
• Interaction of management and prevention is falling into place = progress
• But the economic and political divergences are not decreasing, overall
• The jury is still out
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Thanks. Gracias
Support slides, below
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ANNEX. Comparison with Latam. External Adjustment
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ANNEX. Comparison with Latam. Financing
Gráfico(1.(Flujos(financieros(brutos
Fuentes:(FMI((IFS)(y(Datastream(a) Argentina, Brasil, Chile, Colombia, México, Perú y Venezuela(b) Grecia, Italia, Irlanda, Portugal y España(c) Excluido "pasivos otra inversión, autoridades monetarias"
0
200
400
600
800
1000
1200
1400
0
1
2
3
4
5
6
7
Q1(1998 Q1(2000 Q1(2002 Q1(2004 Q1(2006 Q1(2008 Q1(2010
América(Latina((a).(Entradas(de(flujos(financieros(brutos(y(EMBI
Entradas(de(flujos(financieros(brutos
EMBI(Global(de(América(Latina((Esc.(Derecha)%PIB pb
0
100
200
300
400
500
600
700
800
900
Q10
Q5
0
5
10
15
20
25
30
35
Q1(1998 Q1(2000 Q1(2002 Q1(2004 Q1(2006 Q1(2008 Q1(2010
Países(de(la(Zona(Euro(con(tensiones(financieras((b).((Entradas(de(flujos(financieros(y(diferenciales(
de(deuda(soberanaEntradas(de(flujos(financieros(brutos((c)
Diferencial(deuda(soberana((Esc.(Derecha)%GDP pb
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ANNEX. ECB RESPONSE
Standard monetary policy response: • Reduction of interest rates and provision of liquidity
+ Non-standard measures • Fixed rate full allotment, extension of maturities, extension of collateral ellegibility, • Currency swaps + New programs to address impaired transmission of monetary policy • Covered Bonds Program (CB) • Securities Market Pogram (SMP) + Additional liquidity meassures • Two Longer Term Refinancing Operations (LTRO) with a maturity of 3 years each • Reduction in the reserve ratio to 1% • Further increases in collateral availability (including new assets like bank loans). The silver bullet?: Outright Monetary Transactions (OMT, unlimited purchases of sovereign bonds in secondary markets)
20