Download EU446 Patterns of economic integration in Europe

Recent Reforms to Deal with
Recurrent Sovereign Debt Crisis in the
Euro Area
Waltraud Schelkle
[email protected]
LSBU Centre for International Business
22 February, 2011
Overview
What is this a crisis of?



Competitiveness
Private Debt
Sovereign Debt
How promising are reforms and proposals?




‘Strengthening economic governance’
The proposed Pact for Competitiveness
The proposed Eurobond
Ideas for debt reduction
Conclusion
Competitiveness (1): How bad are
divergences?
Nominal Unit Labour Costs (2000=100)
115
110
105
100
95
90
85
80
1997
1998
1999
2000
2001
2002
2003
Belgium
France
Germany
Italy
Portugal
Spain
2004
Greece
2005
2006
Ireland
2007
..but who paid for rising NULC – firms or
workers?
Real compensation per employee (2000=100)
120
110
100
90
80
1997
1998
1999
2000
2001
2002
2003
Belgium
France
Germany
Italy
Portugal
Spain
2004
Greece
2005
2006
2007
Ireland
In SP, PT and IT, the worsening performance was ‘paid for’ by workers, ie
lower real wages.
Competitiveness: Growth
Annual Real Growth Rates
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
1998
1999
2000
2001
2002
2003
Belgium
France
Germany
Italy
Portugal
Spain
2004
IR, GR and SP grew fastest, IT and GE grew least..
Greece
2005
2006
Ireland
2007
Private Debt (1): Asset bubbles
Index, 2000 = 100
Graph I.1.6: Real house prices, 2000-09
190
180
170
160
150
140
130
120
110
100
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
United States
euro area
United Kingdom
euro area excl. Germany
Source: OECD
..driven by high lending to households
y-o-y percentage change
Graph I.1.4: Bank lending to private economy in
the euro area, 2000-09
16
14
12
10
8
6
4
2
0
house purchases
households
Non-financial corporations
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: European Central Bank
..while current account deficits were high
only in some.
Current Account Balances
Belgium
France
Germany
Italy
Portugal
Spain
Greece
Ireland
10.0
% of GDP
5.0
0.0
-5.0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-10.0
-15.0
GR and PT had high current account deficits, SP only more recently and IR
had sustainable ones; BE had a higher surplus on average than GE
Private Debt (2): When the bubble burst, central
banks became the lender of last resort..
20.00
18.00
16.00
Aug-07
14.00
Dec-07
12.00
Jun/Jul-08
10.00
Sept/Oct-08
8.00
Dec-08
6.00
Jun-09
4.00
2.00
0.00
ECB credit as share of GDP
Reserve Bank credit as share of GDP
25.00
20.00
Aug-07
Dec-07
15.00
Jun/Jul-08
Sept/Oct-08
10.00
Dec-08
Jun-09
5.00
0.00
ECB credit as share of euro area
bank credit
Reserve Bank credit as share of
commercial bank credit
Private Debt  Public Debt:
Fiscal authorities had
to step in where
the bursting bubble
became a solvency
problem for banks.
Acknowledgement: Some of the
following graphs are taken from a
presentation by Lorenzo BiniSmaghi (ECB), February 2011.
Public Debt (1): After 2009, the banking
crisis became a sovereign debt crisis
..for some in the Euro area more so than
others.
But a virtual banking crisis it still is.
Exposure of banks by nationality (bn US-$, 6/2010)
German
GRE
Spanish
French
Other
Euro
British All
banks
65.4
1.3
83.1
38.4
17.0
252.1
186.4
17.7
77.3
88.9
187.5
746.8
POR
44.3
98.3
48.5
28.9
29.0
292.6
SPA
216.6
n.a.
201.3
300.6
136.5
989.8
IRL
Source: BIS Quarterly Review December 2010
Public Debt (2): How about growing out
of your difficulties?
A bit difficult at these interest rates..
..and these growth rates, in normal times.
Summary on the first question:
What is this a crisis of ?



No simple answer: the four or six at risk have
very different growth-debt-competitiveness
patterns.
For the Euro area as a whole, it is a banking
crisis in disguise, turned into and dealt with
as a sovereign debt crisis.
Debt levels in GR and IR are now clearly
unsustainable and only some relief will help
to get them – and the Euro area – back on
track.
Reforms already decided (Dec 2011):
‘Strengthening economic governance’

A European Stability Mechanism, replacing the
present EFSF, from 2013 onwards




Bailing in of private creditors on a case by case
basis (Collective Action Clauses in bond issues)
Strict conditionality of the loan
An excessive debt and an excessive
imbalances procedure (asymmetric)
A ‘European Semester’: scrutiny of draft
budgets before they go to national parliaments
Sealed with a kiss: The proposed ‘Pact for
Competitiveness’
Franco-German 'Pact for Competitiveness' hits
immediate opposition
4 Feb 2011 (Photo: consilium.europa.eu)
..to be decided at a special summit in March 2011
Six points that will do exactly nothing to
deal with a Euro crisis..






Abolishing indexation of wages to inflation
A recognition agreement for educational
diplomas and vocational certifications
Raising retirement ages
Harmonizing the corporate tax base
Implementation of legal “debt-brakes”
Establishment of a national crisis regime for
banks
A Eurobond (proposed by Juncker and
Tremonti in Dec 2010)
A bond issue that is collectively guaranteed by
all Euro area member states
 To ensure market access, albeit served at
the national interest rate (De Grauwe and
Moesen 2009)
 To ensure fiscal coordination for the Euro
area as a whole, rewarded by a low common
interest rate (Mabbett and Schelkle 2010)
Proposals for reducing existing debt (Gros
and Meyer 2011)


Force banks to mark to market their bond holdings
Exchange of country bonds against bonds by EFSF
(European Financial Stabilisation Facility)



at market prices before country came under the umbrella of
the EFSF
EFSF then negotiates with the country a reduction in
the nominal value of its debt and a fiscal adjustment
programme
No financial commitment of other member states to
the extent that the debt reduction does not exceed
the discount in the banks-EFSF exchange
Summary on the second question:
How promising are reform proposals?




The ESM is a way forward, although possibly
destabilising until bondholders know how it will work
in a default.
The entire Pact for Competitiveness is useless,
addressing an overrated problem in a counterproductive way.
Relevant problems are: liquidity and solvency of
banks and countries, coordinated counter-cyclical
fiscal policy for the Euro area as a whole.
A Eurobond plus an orderly debt reduction
mechanism would go a long way to alleviate all
three of these problems.