Download The systemic crisis of the euro-zone A result of internal

The systemic crisis of the euro-zone:
A result of internal contradictions
Robert Guttmann (Hofstra; UP13-CEPN)
Joint Seminar–EPOG (04/11/2015)
The European Union : a logic of
continuous integration for 60 years
• European Coal and Steel Community (1950).
• European Economic Community (1957) =>
customs union with common trade policy.
• Single European Market (1987) -> common
market, free movement of L and K.
• Maastricht Treaty (1992) => Economic &
Monetary Union => intro of euro in 1999.
• Lisbon Constitutional Treaty (2009) => new
governance for the European Union.
Systemic contradictions within the
European integration process
• Contradiction between the simultaneous
deepening of the EU (=> United States of
Europe) and its widening (consecutive steps
from 6 to 28 country members).
• Conflicting views about the nature of Europe’s
federalism : market-oriented approach vs a
strong policy role for governments.
Two major biases at the center of the
EU’s modus operandi (I)
I/ The monetarist bias (& anti-Keynesian
philosophy)
• « Political independence » of the ECB.
• Inflation = the primary evil to be avoided.
• « Hard money » policy by the ECB.
• Balanced government budgets & « no bail out »
clause => no help for countries with large deficits.
• Preference for overvalued currency.
• Prohibition against central bank’s monetization of
government debt.
Two major biases at the center of the
EU’s modus operandi (II)
II/ The mercantilist bias
• Market-oriented view has been gaining ground.
• Export-led growth strategy by dominant countries
: Germany & neighbors (Austria, Netherlands,
Denmark)
=> high-saving rates, large trading surpluses, fiscal
discipline
=> non cooperative tax & social policies based on
competition
The €-zone is facing a dramatic challenge
of adjustment among its members
1) The €-zone does not meet Mundell’s criteria for an optimal
currency area which becomes a problem when a
heterogenous « union » is hit with a shock.
2) Need for alternative adjustment mechanism when ER and
IR no longer available. Mundell specified following:
• A high degree of labor mobility
• Wage and price flexibility
• Fiscal transfers from stronger to weaker states
• Synchronized business cycles among OCA members
3) In absence of those, only alternative is painful « internal
devaluation » (i.e. depression of deficit countries) made worse
when surplus countries refuse their share of adjusting.
Divergent evolution of EMU countries
following the launch of the euro
Two groups of countries :
• « mercantilist countries » (Germany &
neighbors) : low inflation, undervalued currency,
export-led growth, trade surpluses
• « southern countries » (PIGS) : higher inflation,
low real interest rates, overvalued currency,
higher debt, consumption-led growth, large
macroeconomic and external imbalances
Table 1 : Major macroeconomic indicators
Source : H. Mathieu & H. Sterdyniak (2010)
GDP
growth
rate
Domestic
demand
growth
rate
Inflation
rate
(GDP
deflator)
Real
interest
rate
(long term)
1999 2007
2.2
1.6
1999 2007
2.7
0.7
1999 2007
1.8
0.8
1999 2007
2.4
3.1
1998 2007
-0.2
-3.9
2007
2007
2007
-2.7
0.2
34.0
42.9
-2.2
7.9
Netherlands
2.5
2.0
2.6
1.5
-2.7
0.2
28.0
8.1
Austria
Ireland
Italy
Spain
Greece
Eurozone
2.5
6.6
1.5
3.7
4.1
2.1
1.6
6.2
1.7
4.6
4.2
1.7
1.5
3.5
2.4
3.9
3.2
2.0
3.0
1.4
2.2
0.8
1.0
2.1
-4.4
-2.1
-0.5
-4.3
-2.1
-2.3
-0.7
0.2
-1.7
1.9
-5.1
-0.6
30.7
19.8
89.6
18.7
70.4
43.3
3.3
-5.3
-1.7
-9.6
-12.5
UK
United
States
2.8
3.0
3.5
3.1
2.4
2.4
2.3
2.5
0.6
-1.9
-2.7
-2.8
28.8
47.2
-2.5
France
Germany
Wage
share in
GDP
Change
in perc.
point
Public
balance
% GDP
Net public Current
debt
account
% GDP
balance
% GDP
EU government debt crisis (2010 - 2012) =
Stage II of global systemic crisis
• Contrary to expectations, the euro-zone has been
hit harder by the financial crisis than the US : the
Greek crisis was first stage of a crisis-contagion
process to hit the most fragile €-zone countries
• Two major causes :
– The subprime crisis = an asymmetric shock due to
strong heterogeneity among countries in €-zone ->
widening gap between both groups of countries.
– There has been inadequate crisis management:
• Lack of solidarity, strong political divergencies.
• European institutions not adapted to tackle the crisis.
Bail-Out and Adjustment Programs
1) Greece -> three bail-out packages and one
extension. Second bail-out imposed losses on
creditors -> triggered banking crisis.
2) Ireland -> has made a lot of post-bailout
adjustment progress.
3) Portugal -> adjustment progress, but slow growth
and lack of competitiveness.
4) Spain -> just banking bailout, but worked due to
macro-econ. adjustment -> rebalance success.
5) Cyprus -> bank bail-out + public-sector debt.
EU Crisis Management Tools and
Structural Reform Initiatives
1) ECB programs: LTRO, OMT, huge bond-purchase program
2) 750bn€ EFSF (2010) + 500bn€ ESM (2013): bail-out funds
3) Pact for euro (2011): strengthen fiscal-policy SGP (“fiscal
pact”), structural labor-market reforms.
4) Banking Union: single banking supervisor (ECB), unified
deposit insurance, EU-wide resolution regime.
5) Further reforms: EIB-issued project bonds bought by ECB
for infrastructure investment; capital-market union.
6) More ambitious reform ideas: bigger EU budget (with
mutualized Eurobonds and ECB monetization) for transfer
union; debt restructuring (with Eurobonds);
Is the crisis of €-zone behind us?
The answer is yes and no.
=> YES, because:
•sovereign-bond yields have fallen across board to low levels
and are stable (even amidst Greece crisis of ‘15);
• euro is at much more competitive level;
• bailout countries have succeeded with difficult adjustments.
=> NO, because:
•necessary reforms, even though already gone half-way, are not
enough to allow for more coherent and growth-oriented EU;
•macro-economic policy mix keeps EU in managed depression;
•political sentiments are shifting in the wrong direction;
•EU is only one shock away from a dangerous debt-deflation
spiral.
Conclusion
• The crisis raises the question of the long-term
viability of €, even EU (amidst other divisions,
like crisis of migrants undoing Schengen).
• €-zone crisis revealed incomplete institutional
architecture of the euro’s construction.
• Political biases and institutional constraints
continue to feed slow growth and unsustainable
imbalances in EU.
• While worst has been averted so far, it is not
clear that the current calm will prevail.