CSO IMF/WB forum Fall 2013 Powerpoint - Mark Weisbrot

7/27/2019 CSO IMF/WB forum Fall 2013 Powerpoint - Mark Weisbrot

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The Prolonged Destructive Impact of

Macroeconomic Policy in Europe:

Economic and Political AgendasOctober 2013

Mark Weisbrot, Director Center for Economic and Policy Research

www.cepr.net



•

Biggest threat to the world economy continuesto be Europe, although U.S. is not helping

• IMF overview of Europe is grim; they seem to

understand that there is a lot of unnecessary,self-inflicted damage



Source: Euro Area Policies: 2013 Article IV Consultation .






























•

IMF now projects -0.4 percent growth for Euro Area and 0.0 for Europe in 2013.



The Troika and the World

• Troika is slowing the

world economy

Year World Output

(Percent change)

2010 5.2

2011 3.9

2012 3.2

2013 2.9

• IMF projections for

world GDP growthin 2013 have beenrevised downward:

Projection

Date

World Output

(Percent Change)

April 2012 4.1

July 2012 3.9

October 2012 3.6

January 2013 3.5 April 2013 3.3

July 2013 3.1

October 2013 2.9



•

The ILO estimates a record 202 million peoplecould be unemployed worldwide in 2013

• IMF: Fiscal adjustment in Euro Area probably

0.8 percentage points (in structural terms) in2013, after 1.5 percentage point adjustment in2012.



•

Note: IMF projections have generally been over-optimistic. For example, Greece



Greece:Real GDP Projection

Source: IMF various. Latest review is from July 2013,

Fourth Review Under the Extended Arrangement.

192.8

162.1

196.6

210.9

140

150

160

170

180

190

200

210

220

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

b i l l i o n s o f 2 0 0 5 c o

n s t a n t e u r o s

1st Review

2nd Review

3rd Review

4th Review

5th Review

Latest: Extended Agreement

Actual



Greece:Unemployment Rate Projections

Source: IMF various. Latest review is from July 2013,

Fourth Review Under the Extended Arrangement.

26.6

11.3

7.7

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

p e r c e n t o f t o

t a l w o r k f o r c e

1st Review

2nd Review

3rd Review

4th Review

5th Review

Latest: Extended Agreement

Actual



• Eurostat announced 0.3 percent growth insecond quarter 2013 after 6 consecutive quartersof negative growth. Significant drag on world

economy.• As part of the “Troika”, the IMF decides and

influences economic policy in the Eurozone, as well as affecting policy in the rest of theEuropean Union, especially since the worldeconomic crisis and recession of 2008-2009.



•

Much unnecessary suffering in Europe, andunnecessary increase in unemployment andpoverty worldwide, as a result of flawedmacroeconomic policy in Europe.

• Until summer 2012, when Mario Draghieffectively guaranteed Spanish and Italian bonds,threat of a financial meltdown caused recurrentcrises and extended recession.



• ECB and European authorities could have actedmuch sooner but didn’t.

• Why? They were using the crisis to push forchanges in fiscal, labor market, social, and otherpolicies. Changes that people in the affectedcountries would not vote for.



• Even after threat of financial meltdown ended,austerity continues, prolonging recession,

stagnation, record unemployment. Why?• Crisis As Opportunity: “empirical evidence also

suggests that recoveries from economic crises oftenserve as an opportunity for reform” (IMF Article

IV consultation for Spain, 2010, p.13).• Similar statements from European and ECB

officials: – “crucial to ensure that ECB decisions did not reduce

pressure on governments to reform.” -- Joerg Asmussen,the most senior German at the IMF, and ECB executiveboard member. (Sept 2012)



• IMF Article IV consultations are more evidenceof the Fund’s political agenda for Europe,mostly shared and determined by Troika

partners• It is the attempt to achieve this political agenda

– not debt dynamics or financial markets -- that

has kept Europe in recession and stagnationsince 2008



• Based on a content analysis of 67 Article IV agreements from 1 January 2008 – 31 December

2011 between the IMF and EU countries.• Focus on medium-term policy recommendations

in fiscal adjustment, inflation targeting,employment generation and social protection.

IMF Article IV Consultations in

Europe



1) Macroeconomic policy that focuses onreducing spending and shrinking the size of government, regardless of whether this isappropriate or necessary.

Evidence of a consistent pattern of

policy recommendations:



2) A focus on other policy issues that tend toreduce social protections for broad sectors of the population (including public pensions,

health care, and employment protections),reduce labor’s share of national income, and

possibly increase poverty, social exclusion, and

economic and social inequality.



Fiscal Adjustment



•

Recommended for all 27 EU countries.• Spending cuts preferred to higher taxes.

• Emphasis on cutting public pensions and

“increasing the efficiency” of health careexpenditure.



Country Frequency of Fiscal Policy

Recommendations, 2008-2011

Source: Various Article IV consultation reports with EU countries, 2008-2011. Note: The IMF recommendedboth revenue increases and revenue decreases in consultations with 10 countries. The net revenue effect couldnot be determined based on the information provided in the consultation reports. The IMF did not providerevenue recommendations in consultations with 6 countries.

100.096.3

70.4

48.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Fiscal consolidation Expenditure decrease Revenue increase Revenue decrease

P e r c e n t

Policy Guidelines



Labor Market Reforms



• Increase in unemployment over the time frame

of the study.• Measures suggested include: reducing eligibility

for disability payments or cutting unemployment

compensation, raising the retirement age,decentralizing collective bargaining.

• Overwhelmingly focused on measures that

would directly reduce wages or would createdownward pressure on wages.



Labor Supply

• Recommendations to increase labor supply irrespective of unemployment or labor forceparticipation rates (13 countries explicitly, in 8

further countries implicitly).

• No apparent correlation betweenrecommendation to increase the labor force and

a country’s labor force participation rate orunemployment rate.



Country Frequency of Labor Market Policy

Recommendations, 2008-2011

70.4

51.9

18.5

48.1

37.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Wages EmploymentProtection

UnemploymentBenefits

Labor Supply Training

P e r

c e n t

Policy Guidelines

Source: Various Article IV consultation reports with EU countries, 2008-2011.



Social Policy



Country Frequency of Recommendations to

Reduce Social Program Spending, 2008-2011

75.0

50.0

25.0

8.3

50.0

86.7

53.3

20.0

26.7

40.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Pension Health care Education UI benefits Welfare

G r o s s D e b t , P e r c e n t

Policy Guidelines

Low Debt High Debt

Source: IMF, World Economic Outlook Database, general government gross debt as percent of GDP,October 2012; and various Article IV consultation reports with EU countries, 2008-2011. Note: Average debt level over the period 2008-2011. Countries with average gross debt below 50 percent of GDP were categorized as low debt (12 countries), and countries with 50 percent or more werecategorized as high debt countries (15 countries).



Pensions

• The IMF offered advice on pensions for 22 out of 27countries reviewed.

• Pension recommendations were frequently referenced in thecontext of fiscal consolidation and focused on reducing

pension spending in every single case by tightening eligibility,raising retirement ages, increasing service period, reducing benefits levels (often through tightening pension indexation),and phasing out early retirement programs.

• Several consultations advocated expansion of privatepensions to supplement cuts in public pension.

• No correlation between life expectancy andrecommendations to increase the retirement age or scaleback pensions.



Healthcare

• A total of 26 consultations for 15 countriesexplicitly mentioned health care policies.

• Health care policy advice was usually framed in

terms of budget consolidation.• For 14 of the 15 countries, recommendations

were for decreased spending on health care



Welfare

• Majority of welfare recommendations werecentered on cutting expenditures, very few onalleviating poverty and increasing the standards

of living through social programs.• Recommendations on unemployment benefits

focused on reducing level and duration of benefits in order to strengthen job searchincentives, reduce public expenditures andincrease labor supply.



Conclusion



• Eurozone officially out of recession but we

don’t really know when or how much it recovers • Long-term damage is enormous: e.g. IMF

projects Spain with 25.3 percent unemployment

in 2018, but very little output gap – in other words, Spain is projected to have near 25percent unemployment as “full employment”!



• Structural flaws in the Eurozone were big part

of the problem, but post-crisis macroeconomicpolicy is the main cause of massive unnecessary suffering and damage

•Fundamental problem: countries forfeitedcontrol of most important macroeconomicpolicy (monetary, exchange rate, then fiscal) to

unelected, unaccountable authorities



• These authorities have used and prolonged the

crisis to pursue “reforms” and apolitical/ideological agenda

• Lack of democracy in economic policy is thecentral problem: about 20 governments havefallen and after two years of unnecessary damage, ECB finally ended acute crisis; butausterity continues to prevent/slow recovery

•European voters will have to either force Troikato change policies or elect governments thatrefuse to accept these policies

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CSO IMF/WB forum Fall 2013 Powerpoint - Mark Weisbrot

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