Download exchange rate

The Euro has generated an unsustainable
divergence of productive systems and
national trajectories
Robert Boyer
Institut des Amériques
Conference Erasmus Mundus, Paris, September 10th
2015
Introduction
Two conventional explanations
1.A simple first generation crisis (fix exchange rate,
capital mobility and public deficit)
2.No money without sovereign state
They have a point, but are not all:
1.Why ten years of apparent success?
2.Monocausal, a-historical, normative approaches
The orientation of this presentation
1. Replace the concept of equilibrium by an analysis
of interdependent social, political and economic
processes
2. Replace exogenous adverse shocks leading to the
crisis by the unfolding of endogenous trends
generated by the Euro
3. Put in historical perspective half a century of
European Integration
4. Recognize the strategic role of key collective
actors at odds with a technocratic quasi
determinist way out of the crisis
The argument of this presentation
1. The neglected intellectual origins of the Euro-zone
crisis.
2. An institutional and historical analysis allowed to
anticipate the current euro-zone crisis
3. A benign neglect for political legitimacy of the euro
within democratic societies
4. The role of financial globalisation in the genesis and
unfolding of the euro-zone crisis
5. The end of the euro or a united states of Europe? A
future open to a large variety of configurations
I. THE NEGLECTED
INTELLECTUAL ORIGINS OF
THE EURO-ZONE CRISIS
1. New classical macroeconomics at odds with
the major issues about the Euro
Hypotheses
Table 1 - The
consequences of the
new classical
macroeconomics
upon the assessment
of the viability of the
Euro
Mechanisms
involved
Consequences
of Euro
Degree
of realism
1. Exogenous money
created by Central
Bank
Typical
monetarism
Neutrality of
money in the long
run
Price stability is
the first
objective of
Central Bank
In modern
financial system,
endogenous money
creation
2. Full employment
equilibrium
Perfect adjustment
by prices and wage
flexibility
Only voluntary
unemployment
Basically no
inflation /
unemployment
trade off
Large and steady
involuntary
unemployment in
many EU
economies
3. Symmetric shocks
will prevail over
asymmetric,
country specific
shocks
Thus a common
monetary policy
will fulfil the bulk
of macroeconomic
adjustments
Euro-zone can
be viable even
if it is not an
optimum for
monetary
unification
Significant
endogeneity of
productivity at the
national level
4. Rational
expectations for all
actors:
- Firms,
households
- governments
The economic
policy rule
associated to the
Euro will affect all
private and public
strategies
The
irreversibility of
Euro is crucial
for its
credibility
Adaptation of
firms and banks…
But governments
play a domestic
political games
5. The same size for
all
Existence of
generic economic
adjustments
common to all
member-States
The Euro will
speed up a
nominal and
possibly real
convergence
The Single Market
has generated a
deeper division of
labour, hence
heterogeneity
2. A polarization over the relative frequency of
symmetric and asymmetric shocks.
3. Governments as servants of economic
rationality: they had to comply with the
reforms required by the irreversibility of Euro
membership.
4. The benign neglect for dissenting but probably
more relevant theories and analyses
Table 2 - A more
accurate and fair
assessment by
alternative
approaches
Approach
Core
mechanisms
Consequences for
Euro
Degree of realism
1. Keynesian
Theory
Generally effective
demand is the key
determinant of
employment
Orthodox restrictive
monetary policy and
limits to public deficit
will imply high
unemployment
Realist for the
period 1993-1999,
but not from 2000 to
2008
2. NeoSchumpeteria
n Theory
Innovation is the
engine of growth
The knowledge
based economy is
the new paradigm
Speed up innovation
via RD and structural
reforms
Growth is the
condition for the
success of the Euro
Germany and
Northern Europe,
good pupils of the
Euro
Lagging Southern
Europe
3. New
Economic
Geography
Increasing returns
imply geographical
polarization
The Euro triggers a
deeper division of
labour among regions
and countries, hence
larger national
heterogeneity
The productive
unbalances put the
Euro at risk, in
absence of fiscal
federalism / large
labour mobility
4. Post
Keynesian
Theories
Built in instability of
finance in the
context of
liberalisation,
innovation and
globalisation
Need to build the
credibility of the Euro
with respect to
international finance,
at the cost of lower
growth
A typical sequence
of optimism (20022007) and recurring
pessimism (20082012)
5. Early warnings about the difficulties in
implementing the Excessive Deficit
Procedure
Table 3 - The drift of public finance could be (and has
been) anticipated
Approach
Core
mechanism
Consequence for
Euro
Degree
of realism
Public finance
Theoretical
conditions for
public finance
sustainability
The criteria selected
by the Stability and
Growth Pact
extrapolate past
growth patterns
Any growth slowdown
implies a frequent
violation
Better rules are
available
Econometric
analyses
The rules of SGP
have been
frequently violated
in the past
It will be difficult to
enforce
Actually many countries
have been unable to
stick to the rule since
2003, including France
and Germany
Political
economy
Politicians respond Public deficits will
to domestic social expand in economies
demands
with major adjustment
problems to the Euro
Virtuous competitive
Northern Europe versus
lagging Southern
economies
II. AN INSTITUTIONAL AND
HISTORICAL ANALYSIS
ALLOWED TO ANTICIPATE THE
CURRENT EURO-ZONE CRISIS
1. Back to the basic principles about the viability
of any economic policy regime
Table 4 – J. Tinbergen’s analysis of economic policy: the Euro means the
loss of two key instruments and the ability to refinance public debt via the
Central Bank
Instruments
The Golden Age
The route
Towards
the Euro
1.Inflation
Autonomous monetary
policy
Eventually income
policy
Restriction upon
monetary policy
(defence of
exchange rate)
Mainly the objective of the
European Central Bank
Interdiction of the refinancing of
national public debts
1.Full employment
Mainly Budgetary policy
Sometimes Social
Pacts
Restriction upon
budgetary policy
(lower public deficit)
Budgetary policy restricted by the
Stability and Growth Pact
Structural reforms (competition,
labour market)
1.External equilibrium
Adjustment by
political decisions
upon the exchange rate
Exchange rates
become financial
market variables,
tentatively controlled
by the Central Bank
No more formal external constraint
for Member States
The Euro/$/Yen exchange rates as
pure market variables
Innovation and
industrial policy
Primacy of
macroeconomic
approach
Objectives
1.Growth
After the Euro
Enforcement of competition, as
alternative of industrial policy
Complemented by the Lisbon
Agenda
2. European Integration is a process of progressive
institution building around basic public goods:
financial stability was the next step after monetary
stability.
Figure 1 – A bird’s view of half century of European integration
Collapse of the
IMS
Prevention of
European
Wars
Coal and Steel
markets
European
Markets
Lowering of
internal
customs duties
European
Directives
Recurring
exchange rate
crisis
Common
customs tariff
Security, new public
good?
Impact of financial
liberalization
Competition, a
European public
good
Single Act: revival
of the common
market
European Monetary
System
Worsening of exchange
rate crises
Strengthening of the
competition principle
Financial stability, a
neglected public good?
Financial
integration
Single currency and
ECB: monetary stability
3. Significant transformations in “regulation” modes,
especially difficult for some economies, poorly
internationalised.
Table 5 - The Euro means an epochal change for national modes of
“régulation”
Periods
Level of
institutional forms
“Golden Age”
1945-1971
The painful
decades
1972-1999
The happy days of
the Euro 2000-2009
The decade of reckoning
2010 - …..
The loss of efficiency of
ECB confronted with national
banking and sovereign debts
crises
Major concern for financial
stability
1.
Monetary
Regime /
Credit
National
More and more
constraints upon
national monetary
autonomy
The same European
monetary policy for all
members
2.
Wage labour
nexus
National
National, but
transformations in
reaction to fiercer
competition
Still national but
« benchmarking » at the
European level
3.
Nature of
competition
Mainly national
Growing impact of
European
competition policy
Stricter enforcement
of competition at the
European level
Overcapacity at the world level
triggers fiercer competition
4.
Insertion into
the world
economy,
exchange rate
regime
Exchange rate is
the outcome of
political decisions
Financial markets
tend more and
more to set
exchange rates
A single common
exchange rate set by
financial markets
Promotion of internal
devaluations via wage austerity
and welfare slimming down
5.
Link State /
Economy
Large welfare State
Recurring public
and welfare deficits
Diverging evolution of
public deficits
Sovereign debt crisis, diverging
trends across the Euro-zone
Labour market and welfare
reforms in order to restore
national competitiveness
4. The long legacy of a North/South divide in
productive capacity and competitiveness
Greece

Figure 2 – How
do the factors of
crisis differ across
the Euro-zone
Poor quality of State /
Government
management
Spain

Italy

Portugal


Ireland
France

Germany


Finland
The Greek
exceptionalism
France as a barycentre
between North and
South
Ireland victim of an
unwise financial
liberalisation
Netherland 
Light touch
regulation of
finance
Virtuous Northern
Europe
Poor Structural
Competitiveness
The ailing Southern
economy
III. A BENIGN NEGLECT FOR
POLITICAL LEGITIMACY OF THE
EURO WITHIN DEMOCRATIC
SOCIETIES
1. From the start, a polarisation of the perception of
the Euro by various social groups
Table 6 – France: the Euro is perceived to have different consequences for
various social groups.
Question: What are likely consequences of EURO for each of the following
groups?
Not too many
problems
Transitory
difficult
ies only
Long
lasting
problems
Without
ant
opinion
Large firms
100 %
62
32
4
2
Younger people
60
31
7
2
Small and medium
size enterprises
37
53
6
4
Retailers
22
65
11
2
Savers
20
51
21
8
People with low
incomes
7
49
41
3
Old people
1
8
90
1
Sources: SOFRES [1997]: 110.
2. Enter or not the Euro: the nature of the political
process matters.
ASSESSMENT
CRITERIA
Table 7 - How a
pluralist debate led
Sweden not to join
the Euro
SOCIAL EFFICIENCY
ADVANTAGES
DRAWBACKS
1.
Transaction costs

Saving 0,2 % of GDP with EMU

2.
Short term fluctuations in exchange
rates

Less uncertainty would benefit to trade
and investment

3.
Interest rates

4.
Competition in the single market

5.
Inflation

Lower real interest rates, similar tp the 
German one
No more unexpected shift in national 
competitiveness
due
to
exchange
variations, less protectionnist pressures
Given ECB strong independence, lower 
Large efficiency effects are unlikely
inflation is expected
Probably a positive impact for Sweden….
….but many other policies (tax, education, welfare) have much more impact
ASSESSMENT ON SOCIAL FFICIENCY
Extra
costs
for
accounting
and
conversion costs (probably inferior to
the gains)
Total uncertainty may increase (third
countries exchange rate, future of
national policy)
In the long run, no relation between the
Euro and the real interest rate
Mainly valid for the financial sector,
not so much product market
STABILISATION POLICY
6.
Symmetrical and asymmetrical shocks
7.


Other adjustment mechanisms
International labour mobility
Nominal wage flexibility

Internal exchange rate changes (by
shifting the tax burden)
Monetary policy autonomy outside the
currency union
Macroeconomic
imbalances
and
exchange rates
Fiscal policy
8.
9.
10.

The greater credibility of ECB would
allow a stronger response to a common
recession




Possible wage moderation





Reduction in the swings in nominal and
real exchange rate.
The excessive deficit procedure helps
in curbing down public debt
Need for some transfers between
countries


The lack of synchronisation with the
core of Europe and possible asymmetric
shocks are very costly for Sweden
Few and small impact of the Euro per
se
Very difficult to increase (not observed
in the US)
Limited size of these adjustment
compared with external exchange
Less
possibility
to
stabilise
the
economy
Interference with the role of fiscal
policy as an automatic stabiliser
…but political objections

OVER ALL NEGATIVE IMPACT
The loss of autonomy in off setting country specific shocks is not compensated by the
general expected decline in the frequency of asymmetric shocks in the EU
The Euro does not make easier labour market and supply side reforms.

A step towards political integration

ASSESSMENT ON STABILISATION
POLITICAL IMPACT
11.
The role of EMU in the European
integration
12.
Democratic control and accountability
13.
Legitimacy of a decision on the Euro
14.
National influences within the EU
ASSESSMENT ON POLITICAL IMPACT

Strains on Unity between IN’s and
OUT’s

Conflict upon ECB policy

Unpopular national policy in order to
cope
with
EMU,
specially
if
unemployment is high

Some (limited) control over ECB

Opposition
between
an
intergovernmental model (national parlia
Report to the European Council,
ment control) and a federal project
ECOFIN Council at the Commission
(strengthening of European parliament)

Formal possibility to change the ECB’s

Small
influence
of any
national
statutes by a new treaty
parliament

Euro is seen as a project for the
“political and economic elite”

Risk of political polarisation

Time is required to organise a democratic debate

Larger if the country joins the EMU 
…but in any case limited influence of
(“give and take” process) and the
any single country
common foreign and security policy 
possible opposition between national
(CFSP)
preferred policy and EU’s position
Joining the Euro increase, the country’s influences within the EU, at the cost of less
democratic control upon monetary policy.
OVER ALL ASSESSMENT
Small but certain efficiency gains, reduced macroeconomic imbalances but less ability to cope with country specific disturbances, a
positive contribution to European political integration but possible conflicts.
“It is difficult to see that the advantages of the EMU are very substantial and unequivocal”….but a failure to implement would create
acute credibility problems.
Source: built upon Calmfors & alii (1997:305-339)
Figure 3 – Is the Euro-zone politically viable in the mediumlong run? An analytical framework
3. The resilience of the Euro versus a renationalisation
of economic policy? A permanent threat.
Figure 4 – Success of the Euro…or renationalisation of national
policies?
Divided arena for
European policy
making
Democratic gap
A renationalisation of
polity
Problematic
democratic
legitimacy
Europeanization of
regulation and
monetary policy
A premium to
protest parties and
Anti-European
movements
New context for
national policy
making
Less autonomy
A premium to
more
Europeanised
groups and actors
Forging a new
national/European
political constituency
Erosion/Breaking
up of past
national coalitions
4. Europeanization as a modernisation process and a
burgeoning of European procedures in order to
legitimize possibly unpopular domestic reforms
Figure 5 – The use of European Union as constraints or
incentives to reforms blocked at home
5. The same European Treaties but contrasted national
interpretations: why rescue plans recurrently fail
Figure 6 – The same European treaties…but conflicting
visions of the dynamics it implies
Source: Boyer (2000)
Table 8 – The
paradox of the
launching of the
Euro: fear in the
North, enthusiasm
in the South
IV. THE ROLE OF FINANCIAL
GLOBALISATION IN THE GENESIS
AND UNFOLDING OF THE EUROZONE CRISIS
1. The surprising appraisal by international finance: all
public debts are now equivalent from Germany to
Greece
Graph 1 – A convergence of 10 years Treasury bonds interest
rate
Source : Patrick Artus (2010), « Quelle perspective à long terme pour la zone euro ?, Flash Economie, n° 158,
12 Avril, p. 4.
2. Beneath nominal convergence, divergence in
specialisations and domestic growth regimes: a
structural complementarity accelerated by the
Euro….
Graph 2 – A deepening of intra-European specialization: manufacturing in
the North, service in the South
A – Share of manufacturing in total value added
B – Employment in domestic services (100 in
1999.1)
Source: Patrick Artus (2011) “Pourquoi n’a-t-on pas vu, de 1999 à 2007, les problèmes de l’Espagne, du
Portugal, de l’Irlande, de la Grèce? »”, Flash Economie, n° 534, 9 juillet, p. 5.
…and a polarization of trade balance surpluses and
deficits.
Graph 3 – A polarisation of external balance within the Euro zone
Current balance / PIB (%)
3. The ambiguous blessing of Euro credibility: its
appreciation puts at risk the competitiveness of
many national economies
Graph 4 – The evolution of Euro/dollar/yen exchange rates. Current
balance / PIB (%)
4. The consequences of the subprime world
crisis: a brutal wakeup call by international
finance in response to the deterioration of
public finances…
Graph 5 – The deepening of public deficits after 2008: selected
countries.
… With the explosion of the refinancing costs of
public debt for Greece, Portugal, Ireland
Graph 6 – The brutal explosion of the cost of refinancing of
public debt of Southern Europe economies
Figure 8 – Financial speculation reveals some of the
institutional unbalances of European governance
Launching of the Euro
The same monetary policy for all
Too restrictive for the
most competitive
economies
Slow Growth for the
European EU.
IMPACT OF
THE
SUBPRISES
CRISIS
Too soft for poorly
competitive economies
Catching up but real estate
bubbles and/or public
deficit
Booming public
deficits
Speculative attack upon
higher public debt countries
Lagging and
uncertain responses
of EU authorities
Again doubts upon the
viability of the Euro without
fiscal federalism
5. From the Greek to the Euro crisis: a complex web of
factors and responsibilities
Figure 9 –
Disentangling
the various
causes of the
Euro zone crisis
Figure 15 – The North / South divide is an obstacle to the
building of new federalist institutions
V. THE FUTURE OF THE EURO :
open to the strategic behavior of a
complex web of actors
Prolonging the past has become impossible
“Europeans would be as strong as if Europe was
united, retain as much sovereignty as if it was not.
This contradiction has become untenable.”
Sylvie Goulard and Mario Monti (2012), De la
démocratie en Europe, Flammarion.
Table 9– A tentative assessment of the seven scenarii
SCENARIO
POLITICAL VIABILITY
/ LEGITIMACY
STRENGTHS
WEAKNESSES
Search for coherence
and resynchronization
of EU institutions
New reduction in
national sovereignty
Weak unless strong
political impulse by a
charismatic leader
2. “ORDOLIBERALISMUS Integration without
FÜR ALLE”: A
fiscal federalism
GERMAN EUROPE
Does not overcome
North/South
structural unbalances
Deepening of the
Maastricht Treaty
principles that failed
3. “A NORTH/SOUTH
Overcomes the basic
DIVIDE”: A FLEXIBLE present unbalances by
EXCHANGE RATE
a return to growth in
BETWEEN TWO
Southern Europe
EUROS
A de facto breaking
down of the EMU
A partial recovery of
national autonomy but
large political costs for
federalists
4. “CHACUN POUR SOI”:
A WAVE OF
Possible large
economic costs
A response to both left
and ultra right
demands
1. “FEDERALISM BY
TECHNOCRATIC
RATIONALITY”
NATIONALISM AND
PROTECTIONISM
Recovery of national
sovereignty
Table 3 (follows) – A tentative assessment of the seven scenarii
SCENARIO
5. “A BRITISH
VICTORY”: FREE
TRADE ZONE + AD
STRENGTHS
WEAKNESSES
POLITICAL VIABILITY
/ LEGITIMACY
A reconciliation of the The end of the
diversity of national
political federalism in
interests
Europe
A third way between
complete collapse and
a federalist Europe
A response to the
erosion of EU
legitimacy
Assumes that an
European citizenship
can be the
cornerstone of a new
EU
Dubious in the midst
of economic
depression
Puts a pressure upon
an unsustainable
European
configuration
Puts at risk the very
basic European
project
The real economic
global power: complete
mobility of huge
amount of capital
HOC PARTNERSHIP
6. “MORE
DEMOCRACY”: AS A
CONDITION FOR A
PATH TOWARDS A
FEDERAL
EUROPE
7. “INTERNATIONAL
FINANCE STRIKES
BACK”: THE STORM
AFTER THE CALM
This is an abstraction of the sequence observed since
2010
North/South
Divide
Impulse of
finance
Under the
scrutiny of
Reaction of
ECB
Conflict with
ordoliberalism
British
victory
Federalism with
democracy
Chacun
pour soi
Exit from
Euro
The end of
the Euro
But many other patterns may happen: an example
Calms market
ECB
leadership
Slower
national
reforms
Assessment
by finance
New wave of
speculation
Bank
Union
Exit
Agreement
Need for
fiscal
federalism
Exit
Agreement
Lack of
agreement
Exit
CONCLUSION
C1. The Euro crisis was largely undetected because the
paradigm shift to the new classical macroeconomics
made such an event impossible: structural stability
of a market economy, full rationality of private and
public actors, neutrality of the money, absence of
any bank or financial markets. By contrast,
institutional analyses could anticipate the adverse
consequences of the loss of autonomy of national
“régulation” modes for the weakest economies.
C2. The structure of polity matters. It has played
a major role in the decision to adopt or not the
Euro, given the diversity of its impact upon
various domestic socio-economic groups.
Technocratic approaches have favored the
adhesion, whereas some social democratic
societies have favored a wide deliberation,
leading to the statu quo, given the large
uncertainties associated to the Euro.
C3. Financial globalization and innovations have
too a clear responsibility in the genesis and
the unfolding of the Euro-zone crisis.
Basically they have removed the inter
temporal constraints for households and State
and generated real estate bubbles (Spain,
Ireland). Unfortunately, the governments had
delegated to international finance the control
and monitoring of their public finances.
Therefore, finance has first fuelled an
economic boom and then revealed the nonsustainability of the sovereign debt of the
weakest economies.
C4. Beneath the veil of smooth monetary
integration, financial deregulation has
temporarily hidden the diverging economic
specialization between Northern and Southern
countries. This is a major obstacle to the
viability of a federalism built upon the
absence of solidarity via a fully fledged fiscal
federalism.
C5. There are as many futures as collective actors
able to shape the strategy of others towards
more coherent repartition of competences.
Partial or full collapse of the Euro under the
pressure of finance, North / South divide,
possible decisive impulsion of the ECB,
rebirth of an European community approach
as an alternative to inter-governmentalism,
last but not least, a new path for a more
democratic control of the economy at the
national and European levels.
Thanks for your attention
and patience
Robert BOYER
INSTITUT DES AMERIQUES
175, rue du Chevaleret
75013 PARIS (France)
e-mail : [email protected]
web sites : http://www.jourdan.ens.fr/~boyer/