The economic crisis in the European Monetary Union: Conceptual and terminological issues Nacho...

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


•A second methodological warning:

A Political Economy approach: interdisciplinary analysis drawing upon economics, sociology and political science


•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)


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





Contents


• Causes of the crisis in the euro zone:

↑ Internal demand ↑ Debt↑External deficit

CENTER

PERIPHERY

↓Internal demand↑External demand↑External surplus


• Increasing inequalities

Average annual growth rates for the period (%), euro zone

Source: AMECO



Source: AMECO

Wage share (% GDP), euro zone



Source: AMECO

Wage growth, contribution of private consumption to GDP and wage share (% GDP), euro zone


• Financing and credit growth

Source: BIS, WSE.

Annual growth rate of financial transactions vs. GDP growth, euro zone


• Financing and credit growth

IE PT

ES

NL

GR

BE

EM

U-1

2

ATFI IT DEFR



Source: Eurostat.


Peripheral variety (debt-led growth) Center variety (export-led growth)


Peripheral variety (debt-led growth) Center variety (export-led growth)

External and internal demand contributions to GDP growth (%)


Export-led growth vs. Debt-led growth

Unit labor costsCapital outflows

Credit crunchZombie banks

Main concepts





Contents


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


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


10 year bond yield of sovereign debt (%)

Source: ECB


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


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


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


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)


2. Internal devaluation

↓ Public debt

↓ Public debt

↓ Wages↓ Wages ↑ Competitiviness and exports

↑ Competitiviness and exports ↑GDP↑GDP

↓ Private debt

↓ Private debt


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. 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


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)


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.


5. Liquidity injections by the ECB


5. Liquidity injections by the ECBMonetary base, euro zone (2007=100)

Source: ECB

Real estate assets, non-performing

loans


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?


Austerity

Lender of Last Resort

Main conceptsLabor market

reforms

Bad bank

Liquidity injections

Privatizations

Internal devaluation





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%


Source: AMECO



Euro Zone

Greece

Spain

Portugal

Greece

Spain

Portugal

Euro Zone


Euro ZoneGreeceSpainPortugal

IrelandGreeceSpainItalyPortugal

3 traps operating simultaneously:

-Internal-fiscal trap

-External-devaluation trap

-Liquidity trap



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


3. Liquidity trap: monetary policy is not enough

Source : ECB

GRPT

IT

ES

DE

AT

FRBE

NLFI

IE

Source: European Commission, Eudata. Deutsche Bank


So… we do not solve the crisis

… and we expand the root problems!!



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


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


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


….finish with this

Source: BIS, WSE.

Annual growth rate of financial transactions vs. GDP growth, euro zone


Total public expenditure, excluding interests (evolution, % of GDP)

Source: AMECO




Source: AMECO

Wage share (% GDP), euro zone



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


Real GDP growth, 2011-2012 (%)

Source Eurostat; Statistics Iceland

Euro Zone GreeceSpain PortugalIceland


Euro ZoneGreeceSpain

Portugal

Iceland

Euro Zone

Greece

Spain

Portugal

Iceland


Euro Zone GreeceSpain PortugalIceland


↑ 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!!

[email protected]

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