Workshop “External imbalances: causes, consequences and rebalancing” October 14, 2016 University Lille 1 and Research axis “Sustainable and International Finance” of the European Research Group (GdRe) Money, Banking, Finance Keynote address by Guillaume Gaulier* (Banque de France, UP1 & CEPII) “Current account imbalances in the euro area: competitiveness or demand shock?” *The views expressed here are my own and should not necessarily be interpreted as those of the Banque de France or the Eurosystem
Transcript
Workshop “External imbalances: causes, consequences and rebalancing”
October 14, 2016University Lille 1
andResearch axis “Sustainable and International Finance”
of the European Research Group (GdRe) Money, Banking, Finance
Keynote address by
Guillaume Gaulier* (Banque de France, UP1 & CEPII)
“Current account imbalances in the euro area: competitiveness or demand shock?”
*The views expressed here are my own and should not necessarily be interpreted as those of the Banque de France or the Eurosystem
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Outline• EA CA imbalances: facts and causes• Building-up of imbalances (graphs)• Rebalancing? (graphs)• What to do?• Structural reforms: the cost of non-
coordination
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Growing imbalances / Asymmetric adjustments
Source: AMECO By country
4Group of Twenty, Euro Area Imbalances, IMF 2012
Source: AMECO, my calculations
Not what was expected
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Competing narratives• Negative competitiveness (supply) shock in
the South /North• Excess demand in the South• Financial shock: excess credit, real estate
bubbles, larger non-tradable sector… • Deleveraging + Sudden Stop, lack of lender of
last resort… until “whatever it takes”– De Grauwe: EA countries issue debt in a “foreign”
• The crisis revealed growing divergence across EA countries, where convergence was expected
• In a sense the euro worked as it promoted cross-border flows of capital within the EA
• But this capital was misallocated: non-tradables versus tradables (Kalantzis 2015 –more below),
• (Anticipated) spread convergence, and not “catching-up”, caused EMU imbalances (Sienna 2016)
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• Clear lack of macro-prudential supervision before the crisis
• Asymmetric adjustment: CA adjustment supported by deficit countries (capital account reversal) with little adjustments in surplus countries
• Imbalances (NEP) are still there and need to be addressed: too much savings in the Euro Area hamper the recovery process
• Growing EA surplus (a drag on demand elsewhere)• Relative price adjustments are still needed and this
requires cooperation
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Who is responsible?
• Excess saving in the North (GE +NL, AT) had to be balanced by excess investment in the South (given a stable EA CA)
• Creditors (in GE, FR, etc.) failed to identify the accumulation of credit risk linked to cross-border lending activities
• Excess investment/borrowing in South or excess saving/lending from North?Low interest rates suggest excess lending
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“South” is/was heterogeneous
• Spain: convergence, but only intensive (more capital and labor, low productivity growth), construction boom fuelled by inward funds (through banking sector), private debt
• Greece: signs of convergence but clear excess public spending
• Ireland: real estate boom, private debt• Portugal: no convergence, no construction boom,
loss of EU structural funds and remittances
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Kalantzis "Financial fragility in small open economies: firm balance sheets and the sectoral structure" (2015), Review of
Economic Studies, 82 (3).
• Increase in financial openness• larger capital in flows lead to a larger relative size of
the non-tradable sector.• access to cheaper foreign loans leads firms to
increase their leverage• Kalantzis (2015) shows how the evolution of these
two factors tends to make crises more likely. N-to-T ratios and large credit-to-GDP ratios are good predictors of twin crises (Sudden stop+Banking crisis)
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N-to-T ratios and large credit-to-GDP ratios are good predictors of twin crises
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Growing imbalances,8 graphs
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1999-2007: CA imbalances and ULC grew hand in hand
Source: Gaulier Vicard 2012
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But export performances seems not be responsible
Source: Gaulier Vicard 2012
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Export: Spain, Portugal and Greece >= Germany once specialization taken into account
Source: Gaulier Vicard 2012
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CA deficit rather linked to imports/domestic demand growth(with the exception of Portugal)
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ULC grew hand in hand with imports/demand
Note: But Bussière et al 2014 show X not correlated with ULC but X/GDP is.
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ULC diverged because of non manuf VA prices. Wage share not necessarily up
(down in ES like GE & AT in non-manuf, down everywhere in manuf)
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GR, PT: lack of savingsES: too much investment (construction)
DE (+LU): too much saving, too few investmentNL, AT (+BE+FI): too much saving
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Who?: Households in ES (-),Gov in GR (-), NFC in PT (-) and NL (+)
Everybody in GE and AT(Net lending/borrowing)
Rebalancing?12 graphs
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2008-2011: some CA rebalancing, while ULC dropped in IE and ES
Source: Gaulier Vicard 2012
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This time a + correlation with export?(not Greece because of services –transport and travel)
Source: Gaulier Vicard 2012
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Export: OK
Source: Gaulier Vicard 2012
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So, a bit of demand shifting
Source: Gaulier &Vicard 2012
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But probably more demand destruction
Source: Gaulier Vicard 2012
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Adjustment: demand destruction
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Adjustment: NFC (investment collapsed), Banks in GR?not offset by Government
Source: ECB Occasional Paper 167, 2016
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Gov support was short lived, only automatic stabilizers
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Cleansing effect of the crisis: demand shocks
• Within-sector reallocation across firms is more sizeable among European countries with large current account adjustment.
• Explained by relative demand shocks faced by high and low productive firms in home and foreign markets (Berthou, 2016)
Eurostat, whole economyWithin-sector reallocation during the crisis
Source: Berthou 2016
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Graph: Percentage of credit-constrained firms by labour productivity decile in stressed and non-stressed economies
Source: Bartelsman et al. (2015a), based on CompNet data (sample with 20+ employees). Notes: CompNet The non-stressed countries are Belgium, Germany, Finland and France, while the stressed countries are Spain, Italy and Slovenia. Pre-crisis data cover the period 2004-08 (with the exception of Spain, for which only 2008 data are available), while crisis period data cover the period 2009-12.
Cleansing effect of the crisis: credit constraints
Bartelsman, di Mauro and Dorrucci (2015)
Increase in credit constraints in EA « stressed » countries concentrated among low productive firms
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Net external debt crucial
• Luis Catão, Gian Maria Milesi-Ferretti 2013• “Debt seems to be a lightning rod for crises[…] the ratio of net foreign liabilities to GDP, and in particular its net external debt component, is indeed a significant crisis predictor”
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Net Investment Position: no rebalancing…
Source: Eurostat
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Because of revenues/interests(and valuations effects?)
Source: Eurostat
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Global perspective, at the ZLB• EA surplus clearly not a solution• In a global ZLB environment surplus countries hold
world output down (Caballero et al 2015:”Global imbalances and currency wars at the ZLB”, Eggertsson et al 2016 “A contagious malady? Open Economy dimensions of secular stagnation”)
• Coeuré 2015: “[…] help policymaking escape the obsession of “competitiveness” which, when narrowly defined, focuses on export market shares, real exchange rates and unit labour costs. Such an approach indeed risks perpetuating the fallacy of composition where all economies aim to export low demand”
What to do?• EA NEP OK but (own) debt matters: EA debt must be
shifted away from deleveraging countries/agents to countries/agents with better balance sheet, less financially constrained– Does not imply that investments should be made only in GE:
channel savings to where they can be best employed (solar panels in GR?)
• Blanchard 2016: EA should engineer higher inflation to allow Southern countries to reestablish competitiveness and eventually recover– Successful rebalancing through relative price adjustments
extremely difficult with low EA inflation (Berthou & Gaulier 2013)
What to do?• Coordination of economic policies• Macroprudential policy, Banking supervision• Fiscal and Competitiveness Councils• Financing and Investment Union • EA fiscal capacity• Which tasks for a euro area Finance Minister? (Villeroy
de Galhau 2016)– preparing the euro area-wide collective strategy – supervising the implementation of policy objectives and
I assume: a positive SR/MR eco impact f ; a positive demand shifting effect when only one country conduces the reform a ; a (small) political cost p
With a high political cost and/or small anticipated eco gain (p> f):
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At the ZLB
No reform in Country 2
Reforms in Country 2
No reform in Country 1
0 / 0 -a / f-p+aReforms in Country 1 f-p+a / -a f-p / f-p
f is now supposed to be negative (SR, deflationary reform…)Even if p small (crisis is the right time to reform?) f-p<0a is large : strong demand shifting effects
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ANNEXES
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GE +NL+AT break the upper bound of the (asymmetrical) MIP threshold
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G. Gaulier. & V. Vicard., 2012
• "Current account imbalances in the euro area: competitiveness or demand shock?," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 27, pages 5-26, Autumn.
In Bussière et al. (lettre du CEPII, 2014) we show that Export/GDP (~Tradables
share) strongly correlated with ULC, both before and after the crisis
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Official lending substituted to private lending
Source: ECB Occasional Paper 167, 2016
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Pay attention to Gross flows
• “…current accounts deficits or surpluses, linked to net capital flows, miss important dimensions of the process of international adjustment of countries and of their financial fragility in crisis times. After all, the euro area was running a balanced current account vis-a-vis the US and yet it was deeply affected by the US financial crisis of 2007-8.” (Gourinchas & Rey 2013)
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Global imbalances: NFA 2010 & CA (2011-15 average)
