Download Issues in The Current Global Crisis and Korea`s Strategy Special

Current European Crisis and Its Impact
on US Economy
January, 2012
Hiwhoa Moon, Ph.D.
Graduate School of International Studies
Korea University, Seoul, Korea
Email: [email protected];
Order of Presentation
I. Recent European Turbulence and Its
Impact
II. Outlook of The US Economy
2
Recent European Turbulence and Its
Impact
• Economic turbulence in Southern Europe
represented by PIGS (Portugal, Italy, Greece,
and Spain ) has been casting a dark shadow
over the prospect of the early financial market
stabilization and recoveries in the European
and other global economies.
• The excessive government debts, poor
recovery performance, and lack of much
needed structural reforms have been the prime
causes of the troubles in these and other
European countries
European Turbulence 2
• The impact of the turbulence has been
of a global scale, plunging the index of
stock prices by as much as 30 percent
within two weeks’ time in all major
capital trading centers since the break of
the Greek crisis in early May 2010.
• The value of euro also was also
experiencing free falls throughout the
global financial markets for quite some
time.
4
European Turbulence 3
• The turbulence in these European countries
plus the prospect of excessive government
debts in almost all major European countries
have been persistent in causing a serious loss
of market confidence on European economy,
and subsequently the global economy as a
whole, even to date.
• The serious impact appears even more
compounded due to the fragile structure of the
euro monetary system
5
European Turbulence 4
• The euro monetary system joined by 17 EU
members revealed serious structural weakness
during the current European crisis
• Due to the common money used by these
countries, the monetary policy of a member’s
central bank or the European Central Bank is
bound to have limited impact only
• The current European monetary system
appears to have two critical structural
problems.
6
European Turbulence 5
• First problem is that, for instance, when an
additional money supply was injected into a
member’s economy for stimulation, that
economy is likely to have little impact only,
due to the easy leakages into neighboring
economies.
• The second is that the adjustment in the
balance of payments resulting from the
automatic exchange rate adjustment between
a chronic trade surplus economy and its
corresponding trading partner which
experiences persistent deficit in trade against
the other partner, cannot be expected since
the two groups are using the same currency.
European Turbulence 6
• Therefore, for the Southern PIGS countries,
despite their huge trade deficits against the
Northern European states, stimulation of
exports and the subsequent additional
increase in economic growth is hardly
expected.
• If this were not the case, i.e. they were using
different currencies with their Northern trade
partners, the current problems, including the
low growth, low employment, and large fiscal
deficits, could have been significantly relieved.
European Turbulence 7
• The impact of the current European crisis
appears a lot more serious than originally
thought since the efforts to reduce debts in
these countries, which appear essential to
contain the current crisis, is certain to delay
the global recovery or even may invite a
double-dip
• The May 2010 agreement to bailout Greece
with 110billion euro and to establish a
European common fund for emergency bailout
worth 700 billion euro, appeared initially
helping stabilize the European and global
markets, albeit moderately.
9
European Turbulence 8
• However, the structural adjustments of those
European economies appear hard to achieve
due to strong resistance by diverse interest
parties in each of those economies as
witnessed in Greece and elsewhere, plus the
extremely difficult task of reversing
government balances from chronic deficits
into sizable surpluses
• Therefore, the current European financial
difficulty are likely to cast a prolonged dark
shadow over the entire global economy.
10
European Turbulence 9
• Due to the disappointing result in the efforts of Greek
economy to reduce fiscal deficits/debt following the
bailout package of 110 billion euro in May 2010, plus
the bad signs in other PIGS economies since then,
there has been a serious fear of total meltdown of
European economy and the global economy.
• However, in October 2011, European governments,
IMF, and private holders of Greek government bonds
agreed to write off half the currently outstanding
Greek sovereign debt, to extend new additional credit
of 100 billion euro to Greece by 2014, and to utilize
the existing European Financial Stability Facility (EFSF
- 440 billion euro) to guarantee loans up to1 trillion
euro.
European Turbulence 10
• New fiscal package has been agreed on
among 26 EU members (excluding UK) toward
end 2011. This package includes provisions
that penalize members automatically that fail
to contain annual fiscal deficits within 3% of
GDP.
• In January this year, heads of France and
Germany agreed, for the first time since the
break of Greek crisis in May 2010, to place
more weight on stimulating economic growth
than the fiscal resiliency, which has been
exclusively focused to date.
European Turbulence 11
• Another emergency fund, the European
Stability Mechanism (ESM) has been
agreed on among EU members. This is
scheduled to be launched with 500
billion euro in June 2012.
• These series of measures significantly
helped weaken the fear of the melting
down of the European and global
economies.
Europe: Medium-Term Prospect 1
• As to the medium-term prospect of the
European economy, there are favorable and
unfavorable elements simultaneously.
• The favorable elements include: decision to
write off half the Greek sovereign debt; to
increase EFSF and to triple IMF capital for
timely and effective bailouts; to create another
emergency fund, the ESM; ECB’s willingness
to release almost unlimited liquidity to buy up
bonds issued by Greek and other troubled
European economies.
Europe: Medium-Term Prospect 2
• The most serious unfavorable factor is
that the fundamental causes of the
current European crisis have not been
addressed: substantive reductions of
fiscal deficits and the sovereign debt are
difficult to achieve; the structural reform
in corporate, government, and financial
sectors are not showing any sign of
meaningful progress due mainly to the
strong resistance by interest parties;
Europe: Medium-Term Prospect 3
• Growing domestic political liabilities on
the Northern European governments
resulting from the continued assistance
to Southern countries cause fear of a
sudden sharp cut-back of their
assistance to Southern counterparts;
• Continuous downgrading of credit
ratings for almost all economic entities
in Europe, including France, seriously
undermines the already fragile market
confidence in Europe and other part of
the world;
Europe: Medium-Term Prospect 4
• No signs of visible macroeconomic gains
including GDP growth, employment,
government revenue, etc. in most part of the
Europe.
• A crucial yet paradoxical point is that the
austerity program that has been called for to
the troubled economies in Southern Europe is
likely to lead to low growth and low
government revenue in the short-term, which
in turn lead to further increases in fiscal deficit
and sovereign debt.
Concluding Observation on Europe 1
• The current status of the European economy,
without noticeable improvement nor sudden
serious deterioration, is likely to hangover
there over a long-term, at least several more
years to come.
• However, the direction to which the European
economy is currently heading appears toward
the deterioration, although gradual.
• The fatal structural weakness of the current
euro monetary system plus lack of political will
to take decisive actions and moral hazard in
most Southern European countries,
outbalance those favorable factors identified
above.
Concluding Observation on Europe 2
• Therefore, European governments should unite
to take a bold policy and paradigm switch
from the current bearish protective policies
favoring fiscal contraction, which is certain to
lead to less growth and less government
revenue, to an aggressive policy seeking more
government spending on justifiable stimulation
for additional growth.
• However, they should be also aggressive in
pursuing sweeping institutional reforms to
remove the fundamental causes that invited
the current crisis.
Current Trend of US Economy 1
• Since latter half of 2009, confidence on the
market has been recovered and appreciable
improvements in macro economic indicators
have been recorded, thanks largely to the
unprecedented sizes of the bailout and
stimulus packages.
• After 2.5 percent GDP growth in 2010, a
slightly less growth is projected for 2011.
• Job market also has been showing steady
improvement: unemployment rate fell from
close to 10 percent in 2009 to current 9.1
percent.
Current Trend of US Economy 2
• Major contribution to better performance in
growth and employment came from exports
and fixed investment.
• Another favorable trend is that the US balance
of payments has been improving steadily
thanks to export increases to mainly emerging
economies such as China.
• US industrial competitiveness in general has
improved appreciably through the painful
restructuring and the weakened US dollar.
Current Trend of US Economy 3
• However, persistent challenges undermine the
potentials of the US economy.
• The housing market is still under deep trouble
continuing to generate huge foreclosures and
homeless households.
• Although open unemployment rate is slowly
falling and stands currently at 9 percent, real
unemployment rate is estimated to be around
16 percent and about 25 million people are out
of job if those part-time workers and those
who gave up seeking jobs are accounted.
Current Trend of US Economy 4
• Another serious challenge is that the political
populism has been emerging strongly in the
recent past, undermining the effectiveness of
government policies.
• The long-lasted confrontation in the US
congress over the government debt-ceiling
appears seriously affecting market confidence
as well.
• Economy of a nation can achieve its maximum
when the signal given by the government is
coherent and consistent regardless of whether
it is from the executive branch or congress.
Concluding Observation on US Economy
• The US economy is heading to improvement
obviously, unlike the European economy.
• However, the current challenges, most of
which are legacies of the crisis started in
2008, will continue to inhibit maximizing the
potentials of the US economy.
• A prolonged low growth is projected for a few
years at least unless the current challenges
including the housing market and polarization
of politics can be redressed.
• In addition, the bleak outlook of the European
economy will undoubtedly increase the
uncertainty over the US economy for some
time.
Thank You for Your
Attention!!!