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Europe between integration and disintegration
Britain, Greece and Europe
Where will the journey end?
David Marsh, Managing Director, OMFIF
27 June 2016, Athens
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‘Europe will be forged in
crises and will be the sum of
the solutions adopted for
these crises.’
Jean Monet (1976)
‘Monetary union without
political union will be a
castle in the air.’
Helmut Kohl (1991)
2
‘As we all know from the
Roman empire, big empires
go down if the borders are
not well protected.’
Mark Rutte (2015)
‘Spectre of a break-up is
haunting Europe… a vision
of a federation doesn’t
seem the best answer.’
Donald Tusk (2016)
3
European politics moves against integration
• Uncertainty post-Brexit: political, financial, constitutional crisis; two big UK parties rudderless
• Italian bank moves, Renzi weakness herald Rome upsets – suspension of European rules?
• Spanish election results a relief for Berlin and Brussels: ‘flight to safety’ after Brexit vote
• Question marks over referendum moves in Denmark, the Netherlands, and elsewhere.
• Germany, France, Italy, Spain all in fraught circumstances: French resistance to Commission
interference on budget vs. German obsession with moral hazard
• Unresolved question marks over Greece amplified by UK move
• New German emphasis on meeting Maastricht targets based on lack of trust in partners
• Teetering world growth, stagnation / fragile recovery in euro area - explosive mix
• Europe again centre of global risks, with some of the world’s biggest creditor-debtor
imbalances. Debtors vs. creditors conflict over very different views inflation vs. deflation
Reasons for the UK exit vote
• History has made UK lukewarm member of a Community greatly changed since 1973
• Poor record of EU on growth and employment, together with continuing euro problems
– less than compelling credentials for continued membership
• Euro bloc needs strong political cohesion / union to survive – UK wishes to be outside
• Referendum domestic political gamble that misfired. Cameron probably never believed
he would carry out referendum promise, and Leave never thought it could win
• Referendums can be misused as ‘protest vote’ against general government policies,
‘elites out of touch with ordinary people’
• Poorly obstructed Remain campaign, relying too much on fear and other negative
messages, with emotion on side of the Leavers
• Many Leavers ignorant of repercussions, many uncertainties in store - Remain majority
in parliament – so autumn general election possible (despite fixed term parliament)
5
Repercussions on EU
• European stock market weakness on Friday was far more marked than for UK
• Britain/ its institutions can survive Brexit – euro area could prove far more vulnerable.
No appetite for further large-scale integration: what Brexiteers fear and euro needs
• Germany and France bound together by magnetic attraction of strength and weakness
• Both EU’s largest members need UK for equal and opposite reasons – but are now back
to relying on each other
• Rerun of history (but in reverse) to UK membership of European Community in 1973 –
driven by French alarm in 1968-69 over growing German strength
• Germany now alone in defending Maastricht-style rules approach
• Merkel likely to take patient approach and await change of UK leader and possible new
government after autumn election
• Doubts over Juncker as Commission president - unlikely to serve full term until 2019
6
Greece now a sideshow
• Greece a sideshow in drama in the five main EU economies – Athens should emphasise
economic policy positives and avoid any return to the theatricals of 2015-16
• Some small consolation to be out of the eye of the storm – but Friday's sharp Athens
stock and bond market fall not a good augury
• Recommendation for Greece – keep house (reasonably) in order, maintain cordial
relations with US, China and Russia as well as German, EU, UK institutions
• Eurogroup will return eventually to debt restructuring (as promised in Nov 2012) –
opportunity for improvement in Geek debt fundamentals in next six months
• Government and other authorities should do everything possible to use leeway of
reinstated ECB measures for Greek banks to help liquidity , tackle NPLs, try to engineer
bond market return
• Emphasis needed on private sector renaissance, tax incentives, corporate
competitiveness and market access, large-scale infrastructure debt/ equity (China?)
7
Better Greek external payments in line with Europe
10
5
0
-5
-10
-15
1999
2000
2001
2002
2003
France
2004
Germany
2005
Greece
2006
2007
Ireland
2008
Italy
2009
Netherlands
2010
Portugal
2011
2012
2013
2014
2015
Spain
Source: IMF, World Economic Outlook database
Improvement in external accounts: depressed demand as well as better competitiveness – German and Dutch surpluses have risen
8
Large differences in the largest four members
Real GDP per capita – largest euro are member states, 2004-15
115
GDP per capita Index 2007=100
110
105
100
95
90
85
80
75
1997
Source: IMF
1998
1999
2000
2001
2002
2003
2004
2005
2006
Germany
2007
2008
France
2009
Italy
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Spain
Greece’s entanglement with economic and monetary union: just one element in a chronicle of growing disequilibrium.
9
Winners and losers of the euro crisis
Real GDP per capita – Germany, Greece and the euro area, 2004-15
105
GDP per capita Index 2007=100
100
95
90
85
80
75
70
2004
Source: IMF
2005
2006
2007
2008
2009
Germany
2010
Euro area
2011
2012
2013
2014
Greece
Real GDP in Greece declined by more than a quarter, a destruction of Great Depression proportions.
10
2015
Euro mismanagement has benefited Germany
Real GDP per capita – Germany, Greece and euro area, 1999-2015
115
110
Real GDP Index 2007=100
105
100
95
90
85
80
1997
Source: IMF
1998
1999
2000
2001
2002
2003
2004
2005
US
2006
2007
Germany
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Euro area excl. Germany
Economic performance of the US and euro area developed in parallel during the first decade. Crisis mismanagement
generated a sustained annual loss of about 10% of GDP per person; Germany converged to the US benchmark level.
11
Projected and actual paths of Greek government
deficit and debt-to-GDP projections
Deficit-to-GDP ratio, 1999-2015
0
180
Debt-to-GDP ratio, 1999-2015
170
-2
160
-4
Percent of GDP
Percent of GDP
150
-6
-8
-10
140
130
120
110
-12
100
-14
90
-16
80
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: IMF
2015
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2010
2015
2010
Deficits were deeper, and the debt ratios widened considerably, compared with 2010 IMF predictions. Greece’s rescue plan from 2009-10
and later bail-outs offer case study in how not to restore ailing country to health; although Greece has made creditable efforts to balance
its books both internally and externally, IMF and other creditor grotesquely underestimated economic impact of depressed demand.
12
Greece: 2010 projection and 2015 actual pathway
Real GDP, 1999-2015
Unemployment rate, 1999-2015
260
30
250
25
230
Percent
Real GDP, €bn
240
220
210
20
15
200
190
10
180
170
5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: IMF
2015
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2010
2015
2010
Greece’s real GDP did not return to pre-crisis level as projected but continued to decline. Unemployment jumped over
25% , rather than peaking at 15% assumed by the May 2010 programme.
13
Euro area in next five years
Real GDP per capita – US vs euro area, 1997-2015
115
110
GDP per capita Index 2007=100
105
100
95
90
85
80
1997
Source: IMF
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
US
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Euro area (12)
IMF estimates on euro area growth are likely once again to turn out to be overly optimistic.
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2018
2019
2020
Quantitative easing at leading central banks
Pursuit of quantitative easing – central bank assets, national currencies, 1 Jan 2008 = 100
470
High point of euro
crisis so far
420
Collapse of Lehman Brothers
370
New
wave of
Fed QE
320
270
220
Banks start
repaying
ECB
liquidity
New wave of BoE QE
170
New
wave of
BoJ QE
120
70
Fed announces ‘tapering’
20
2008
2009
Source: FRED, ECB
2010
2011
Bank of Japan
2012
Bank of England
2013
ECB
2014
2015
Federal Reserve
The four premier industrialised world central banks have followed different approaches to QE since the financial crisis. The US and
UK have ended QE, while the Bank of Japan is continuing. The ECB started late, in March 2015, and is proceeding actively to 2017.
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Eurosystem emerges as key source of risk
Net Target-2 balances within the Eurosystem (€bn)
1000
800
600
400
200
0
-200
-400
-600
2001
2003
2005
Germany
Spain
2007
Finland
France
2009
Greece
Ireland
2011
Italy
Luxembourg
2013
Netherlands
2015
Portugal
Source: Euro Crisis Monitor, Institute of Empirical Economic Research, Osnabrück University
After a honeymoon to 2007, euro area suffered severe buffeting, with marked increase in intra-euro Target-2 central bank balances,
which have not normalised despite reduced tension since 2012. German, Italian and Spanish imbalances started to rise again.
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Time of reckoning after the honeymoon
Euro area 10-year government bond yields, Jan 1993 to Oct 2014
35
Germany
France
Greece
Italy
10-year bond yield (%)
30
25
20
15
10
5
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Eurostat
The euro area lull until 2008 gave way to marked bond market pressure on the peripheral economies, threatening euro break-up
until Mario Draghi’s ‘do whatever it takes’ speech in July 2012. The politics behind that speech has not yet been tested.
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17
German and other creditors gain ground
Net international investment position of world’s three largest creditors 1997-2015, % of GDP
175%
Jan 1999 - euro introduced
125%
75%
25%
-25%
1997
1998
1999
2000
2001
2002
Japan
2003
2004
Germany
2005
2006
China
Taiwan
18
2007
2008
Norway
2009
2010
Saudi Arabia
2011
2012
2013
2014
2015
Spain, Italy and France among largest debtors
Net international investment position of Spain, Italy, US, France and UK 1997-2015, % of GDP
20%
0%
-20%
-40%
-60%
-80%
Jan 1999 - euro introduced
-100%
-120%
1997
1998
1999
2000
2001
2002
2003
United States
2004
Spain
2005
2006
Australia
Source: IMF, World Economic Outlook database
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2007
Italy
2008
Brazil
2009
France
2010
2011
2012
2013
2014
2015
How the stocks of world debt have changed
Largest debtor economies
Largest creditor economies
NIIP ($bn)
NIIP ($bn)
NIIP (% of GDP)
NIIP (% of GDP)
2015
2014
2015
2014
US
-7,357
-7,020
-41
-40.5
+37.5
Spain
-1,065
-1,208
-88.8
-87.3
+14.5
+17
Brazil
-799
-723
-26.6
-50.1
+878
+180.5
+171.5
Australia
-689
-553
-56.3
-25.9
+708
+708
+181.8
+141.5
Italy
-475
-799
-26.2
-33.1
+703
+792
+107.7
+105
France
-416
-508
-17.2
-17.9
2015
2014
2015
2014
Japan
+2,888
+3,041
+70.1
+66.2
Germany
+1,620
+1,452
+48.3
China
+1,596
+1,776
Taiwan
+957
Norway
Saudi Arabia
There have been important shifts in world debtor-creditor imbalances since 1999. Asia and Middle East remain large net creditors,
but the biggest build-up of credits and liabilities has been in Europe.
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ACKNOWLEDGEMENTS
• The data on past and present IMF projections draw heavily on material assembled by
Athanasios Orphanides, Professor of the Practice of Global Economics and Management,
Sloan School of Management at Massachusetts Institute of Technology, and a member of
the OMFIF Advisory Board, in ‘The Euro Area Crisis Five Years After the Original Sin,’ the
author’s Credit and Capital Markets Lecture presented at the 14th Annual Conference of the
European Economics and Finance Society in Brussels on 13 June 2015. See January 2016
OMFIF Bulletin and http://ssrn.com/abstract=2676103.
• The author thanks Bhavin Patel and Ben Robinson of OMFIF for help in drawing up and
updating the presentation.
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