Presentation for ”Study days of the GUE/NGL”Copenhagen, Hotel Scandic

Wednesday, 6. june 2012

”THE EUROAnd

THE DEBT CRISIS”

EconomistHenrik Herløv Lund

1

Initial Question:

Is the euro as we know itthe solution

orpart of the problem

of the debtcrisis? 2

CONTENT

1. BACKGROUND AND CAUSES FOR THE DEBTCRISIS.

2. STRATEGIES AGAINST AND SOLUTIONS FOR THE CRISIS

3. Appendix (if time): Possible scenarios for the near future?

3

-

-

4

PERSONAL PRESENTATION:

NAME: Henrik Herloev Lund.

EDUCATION: Economist, University of Roskilde in Denmark.

JOBS: Finans and administration in the public sector in Denmark 5

WHAT I STAND FOR?•Economic theoretical basis: Left keynesianism

• Ideological basis: Defense of Welfarestate and critics of neoliberalism.

•Politically independent: Belong to center - left (No member of a specifik political party) 6

-

-

7

1

BACKGROUND AND CAUSES

FOR THE DEBTCRISIS8

CONTENT1. BACKGROUND: THE FINANCIAL

CRISIS

2. THE DEBT CRISIS: NATIONAL AND GENERAL CAUSES

3. IS THE EURO –AS WE KNOW IT - PART OF THE PROBLEM?

9

1.1.

THEFINANCIAL

CRISIS10

THE FINANCIAL CRISIS IS AN IMPORTANT REASON FOR THE

DEBT CRISIS• The financial sektor and housing markets have been severely shaken by the financial crisis

• Its meant a serious set back for businesses and a sharp rise in unemployment

• There´s been large increases in public deficits and debts

11

UNEMPLOYMENT RATE 2008 -2011

(% of labour force)

12Source: Euorstat

THE FINANCIAL CRISIS ALSO HAS IMPORTANT CONSEKVENSES FOR

THE FUTURE•Because the Financial Crisis has been so

deep a shock to western economy,

• it´s going to take a long time to overcome it

• The impact will be : LOW GROWTH ”AS FAR AS THE EYE CAN SEE” 13

PROSPECT OF L – ELLER W – SHAPED CRISIS

14

2004 2009 2015/2020

Traditionally downturn

(V – shaped curve)

Longterm trend(L – shaped -

curve)

Multiple up - and downturns around a fundamentally weak

growth(w – shaped curve)

1.2.

THEDEBT CRISIS:

SPECIFIC NATIONAL AND GENERAL CAUSES

15

NATIONAL CAUSES:POLITICAL AND ECONOMIC

MISMANAGEMENT•Part of responsability for the crisis do in

some countries lie with uncontrolable debt

•due to either political mismanagement (e.g. Greece)

•or due to financial mismanagement by banks (e.g. Ireland and Spain)

16

BUT: MORE TO THE PICTURE THAN

UNCONTROLLABLE DEBT

17

•The ”Monetary” Union has from the start been born

•with a deep inequality

•in competitivenes

A LARGE INEQUALITY OF COMPETITIVENES

• There has from the start been an fatal inequalitity between

•on one side a group of ”surplus”- countries in northern Europe

•And on the other side a group of ”deficit”- countries in southern Europa

18

”SURPLUS” - COUNTRIES

• In northern - and central Europe are Germany, Netherlands, Luxembourg, Finland and Austria

• They have been characterized by having:- High productivity and competitiveness,- ”higher” growth rates, - and relatively large surplus in balance of payment.

19

”DEFICIT” - COUNTRIES

• In ”southern” and ”fringe”- Europe areGreece, Ireland, Portugal, Spain and Italy

• They have been characterized by having - Lower producitivity and competitiveness,- higher unemployment and lower growth,- large deficits in balance of payment, - large government deficits and debts 20

INEQUALITITY IN COMPETITIVENESS BETWEEN ”SURPLUS” – AND ”DEFICIT-

COUNTRIES HAVE BEEN INCREASING(balance of payment, % of GDP, EU – 12)

21

Source: Central Bank of Denmark and Eurostat

1.3.

THE EURO -

PART OF THE PROBLEM ?22

BEFORE THE EURO •On one hand it must be admitted, that this

inequalitity in competitiveness did exsist before the euro

•But at that time weak competitiveness in the South could be compensated

• through the currency markets, through exchange rates

23

THIS COMPENSATION WORKED

THROUGH EXCHANGE RATES• Low competitiveness low exchange

rate of currency, which on the other side favoured export

• High competitiveness strong currency with high exchange rates

•which then inhibited export24

DEVALUATION

• Sometimes weak competitiveness needed stronger compensation

• This could be done by devaluation

25

AFTER THE EURO:

•Countries with weak competitiveness

•no longer have the possibility of compensating

• through exchange rates 26

AND IN ADDITION: THE EURO ITSELF HAS WEAKENED

COMPETITIVENES IN SOUTHERN EUROPE FURTHER

• The exchange rate of the Euro has risen as a result of weakening of the american Dollar

•And this has led to

• a further weakening in competitivenes and exports of southern Europe

27

THE RESULT: HIGHER LEVEL OF UNEMPLOYMENT IN SOUTHERN

EUROPE

28

HIGHER GOVERNMENT DEFICITSIN SOUTHERN EUROPE

29

AND A HIGHER AND RISING LEVEL OF GOVERNMENT DEBT IN

SOUTHERN EUROPE

30

THE OTHER SIDE OF DEBT CRISIS IN SOUTHERN EUROPA:

GERMANY HAS BENEFITED FROM THE EURO

• If Germany still had D-mark, the economic strength and strong export of Germany

•would have meant an large appreciation of D-mark (probably between 20 and 30 percent)

31

WITHOUT THE EURO, A MUCH SMALLER GERMAN

EXPORTBOOM•Without the Euro D-mark would have

had an exchange rate in the neighbourhood of,

• the Schwiss Franc today

•Which would have restrainted German exports severely

32

THE EURO HAS BENEFITED GERMANY AND DAMAGED

SOUTHERN EUROPE ECONOMICALLY

33

GERMANY HAS BENEFITED FROM THE EURO

•German exports have prospered from the low exchange rate of the euro

• compared to what would have been the case if D –mark had still been around

34

BUT HASN´T GERMANY IN RETURN CONTRIBUTED MUCH

TO RESCUE SOUTHERN EUROPE? •Yes, it s correct

• that Germany has been a main contributor to the stabilisation funds

•But Germany has gained many times more than this from the euro

35

German gains and ”losses” from the

euro

36

Source: Eurostat and Wikipedia

THE CONCLUSION: THE EURO –AS KNOW IT – IS PART OF THE PROBLEM

• The euro did not create the inequalities of com-petitiveness

• But the euro has prevented southern Europe from compensating weak competiveness through exchange rates and devaluation

• And the rising exchange rate of the euro itself has enhanced this problem of competitiveness in southern Europe

37

-

-

38

2

SOLUTIONSAND STRATEGIES

FOR THE DEBT CRISIS? 39

CONTENT1. CAN THE PRESENT POLICY OF

CUTBACKS ON WELLFARE SOLVE THE CRISIS?

2. IS EUROEXIT A SOLUTION AND WITH WHAT CONSECVENSES?

3. IS A POLICY OF GROWTH - AND REDESTRIBUTION AN ALTERNATIVE?

40

2.1.

CAN THE PRESENT POLICY

OF CUTBACKS ON WELLFAREAND SALARIES

SOLVE THE CRISIS?41

POLICY OF GOVERNMENT CUTBACKS

•Most governments in the EU

•have conducted a policy of cutbacks on government expenditure on wellfare

•AND they have also focused on lowering wages and expanding labour output

42

A NEOLIBERALIST, MONETARIST STRATEGY

• This is a strategy based on

• a monetarist view of economic policy

•And the ”Financial Treaty” reflects this neoliberal economic thinking

43

PROBLEM• The problem of this strategy is

• That the cutbacks further enhances the decline of growth and of employment already caused by the debtcrisis

• Thereby the indebted countries get trapped in a combination of low growth and high debt

44

REAL GDP GROWTH RATE IN SOUTHERN EUROPEAN

COUNTRIES(2009 – 2012)

-7

-6

-5

-4

-3

-2

-1

0

1

2

Greece Spain Portugal Italy Ireland EU 27

2009 2010 2011 2012 (prognosis)

45

Source:Eurostat

LARGE FISCAL SURPLUS IS NEEDED

• To reduce the present very large government debts

• the countries in southern Europe need a large fiscal surplus

• through a long period46

CUTBACKS WILL KILL GROWTH

• If this surplus is to be created only by cutbacks in wealth and wellfare,

• it might take 10 years or more,

•where economy and wellfare in the meanwhile are brought to a standstill or even shrinks

47

Dangerous cure

•The risc is

•that the cure

•will kill the patient 48

GROWTH IS ESSENTIAL

• To escape from the combined trap of low growth and high debt

• the indebted countries must increase competitiveness

49

POSSIBLE WAYS • This can be done either

1) By regaining economic-political independence by euroexit

or

•2) By economic redistribution from the ”surplus” – countries to southern Europe + by growth policy in the EU

50

2.2.

IS EUROEXIT A SOLUTIONAND

WITH WHAT IMPACT?51

NO EASY SOLUTIONS

• The accumulated debts in Southern Europe have so large proportions

• That the costs of reducing it

•under all circumstances will be large

52

RESTORATION OF COMPETITIVENESS

NECESSARY• The indebted countries have to produce

large fiscal surpluses for a long period

• In order to be able to pay back the debts

•And this second time around requires restoration of competitiveness 53

Regaining economic and political independence

•One solution to this problem of restoring competitiveness

• could be to leave the euro (and the financial treaty)

• in order to regain (more) economic-political independence 54

Possible benefits of euroexit?

• Thereby they could implement

• a signifikant devaluation of their currency

•Which would increase competitiveness, export and employment and produce a larger surplus of balance of payment

55

State bankruptcy

•But for the worstly indebted countries it would probably further be necessary

• to implement a moratorium or even a permanent stop for paying back on loans

• in order to free themselves from the crushing burden of debts 56

Euroexit would also have disadvantedges

•An negative impact of a euroexit would surely be an excessive inflation,

•Which would erode savings and salaries

• and thereby erode wealth 57

And problems getting new loans

•Propably it would also – after a euroexit - be difficult to borrow from abroad to renew loans

•And therefore euroexit would require a tight fiscal policy for years ahead

58

RISKS OF EUROEXIT FOR THE EU

• For the EU there might be risc of a second financial crisis due to large losses of banks

•And euroexits would question the monetary union as a whole

59

1.3

A THIRD WAY: A POLICY OF

REDISTRIBUTION -AND

GROWTH? 60

A MORE EQUAL DESTRIBUTION OF BENEFITS AND RISCS FROM THE

EURO IS NECESSARY

• The European Union must realize

• that in order to have a stable common currency

• It requires a more equal destribution of benefits and disadvantedges of the euro

61

THE EU MUST REDUCE ECONOMIC INEQUALITIES

• This requires, that the EU must provide means of improving competitiveness for the indebted countries

• These means can only come from the ”surplus” in northern Europe

62

ALSO VERY IMPORTANT: GROWTH

• In order that the indebted countries can increase export to pay back debts

• they need to sell more abroad

• Therefore they need a climate of growth in the EU as a whole 63

INSTITUTIONAL CHANGE IS NECESSARY IN THE EU

• Such redistribution of surplus from Germany and other ”surplus” – countries

• to the ”indebted” countries requires institutional change in the EU:

• Eurobonds, new devellopment funds, ECB to take care of not only inflation but also growth,

64

POLITICAL CHANGE WILL ALSO BE NECESSARY

•Debts must be repaid – in time

•But the monetarist focus on primarely cutbacks and on government budget balance prevents growth

• Therefore there must be a change in the economic policy of the EU with much more focus on growth

65

-

-

66

-

END OF

MAIN PART67

-

-

68

APPENDIX – if time

POSSIBLESCENARIOS

FOR THE NEAR FUTURE 69

CONTENT

1. ”GREXIT”: WHAT HAPPENS?

2. NO ”GREXIT?

3. ”GROWTH TREATY” – CAN IT HELP?70

3.1.

”GREXIT”: WHAT HAPPENS?

71

In Greece• Reintroduction of the Drachme and

implementation of a massive devalutation heavy inflation, but in time also

possible restoration of competitiveness

• Implementation of control with capital-movements to abroad, possibly nationalisation of banks, hevy cuts in government spending

• State bankruptcy, tough negotiations with foreign banks and the EU concerning loans

72

In the European Union

• Rising interest rates on government loans in all of southern Europa and rising difficulty of renewal of loans

• Risk of exit will spread to other Southern European countries (Portugal, Spain?)

• Risk of severe financial difficulties for banks in europe, who might have hidden debts (France?)

73

3.2.

NO ”GREXIT”, AND UNCHANGED ECONOMIC

POLICYIn the European Union

74

IF GREECE REMAINS IN THE EU

• The actual crisis will surely diminish – FOR A TIME

• But IF THE MONETARIST POLICY ISN´T CHANGED in the European Union

• the fundamental problems of competitiveness in southern Europe will be UNsolved 75

EU WILL CONTINUE LEAPING FROM CRISIS TO CRISIS

• Because of the continuing lack of growth

• unemployment and government deficits and debts will by large remain

• And the conflict between governments and ”markets” will flare up from time to time in new ”crisises” 76

Next in line to confrontation ”with the

financial markets”•Greece: Because new large cuts will diminish growth further

• Spain: Because the government will have to take over bank debts sharp rise in interest rate on government loans and necessitate a EU help package

• Italy: Because of lack of growth

77

3.3.

”GROWTH TREATY”: WILL IT HELP?

78

French pressure for ”Growth Treaty”

• The new french president, Hollande,

• is pushing for addition of a ”growth dimension” to the ”Financial Treaty”

• Or more simply a new ”Growth Treaty”79

This points in the right direction, but ….

• As instruments for such a growth policy have been suggested:

- unspend funds in the EU- europrojectbonds- more investments from European Investment Bank

• This does not seem enough to make a decisive change in the south european situation

80

And there surely will be a price to pay

• The german, monetarist condition for accepting a growth policy

• Surely will be demands for a even stronger financial integration – for a banking and financial union

•Which on the contrary will lead to even stronger german and monetarist control with economic policy in the european union

81

-

-

82

THAT´S ALL

THANK YOU FOR

YOUR ATTENTION83

84