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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/