Download The Eurozone Crisis: Unnecessary and Self

The Eurozone Crisis:
Unnecessary and Self-Inflicted
April 2013
Mark Weisbrot
Center for Economic and Policy Research
www.cepr.net
Debt crisis or policy crisis?
Conventional wisdom: Eurozone governments
have borrowed too much, must reduce debt (and
therefore annual deficits) in order to get back to a
sustainable debt level and restore growth.
“Confidence fairies” (Krugman) – idea that
reducing budget deficit will inspire so much
confidence that growth improves
• Alternative: debt and deficits are the result of
the world financial crisis and recession.
• Bubble growth – overborrowing was in the
private sector.
• This shows up in the Eurozone countries’
current account balances:
Spain: Current Account Balance
Percent of GDP
10
6.2
0.8
0
-5
Spain
-10
Germany
2012
2011
2010
2009
2008
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Source: Eurostat.
2007
-11.8
-15
1995
Percent of GDP
5
• Recession cuts revenues and increases
spending.
• Before the crisis Spain and Ireland were
reducing their Debt/GDP ratio and Italy’s was
stable.
• Spain and Ireland were running fiscal surpluses
and had lower debt than Germany and France.
Spain: Main Fiscal Variables
Percent of GDP
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fiscal Balance
-0.2 -0.3 1.0 2.0 1.9 -4.2 -11.2 -9.4 -8.9 -7.0
Primary Balance
1.9 1.5 2.5 3.3 3.0 -3.1 -9.9 -7.9 -7.0 -4.5
Net Interest Payments
2.1 1.8 1.6 1.3 1.1 1.1 1.3 1.4 1.9 2.5
Net Debt
41.4 38.6 34.9 30.7 26.7 30.8 42.5 49.8 57.5 78.6
Gross Debt
48.8 46.3 43.2 39.7 36.3 40.2 53.9 61.3 69.1 90.7
Source: IMF WEO.
Ireland: Main Fiscal Variables
Percent of GDP
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fiscal Balance
0.3 1.3 1.7 2.9 0.1 -7.3 -13.9 -30.9 -12.8 -8.3
Primary Balance
1.6 2.4 2.7 3.9 1.0 -6.2 -12.1 -27.9 -9.6 -4.4
Net Interest Payments
1.2 1.1 1.0 1.0 0.9 1.1 1.8 3.1 3.1 3.9
Net Debt
22.6 19.8 15.8 12.1 11.1 24.6 42.0 74.7 94.9 103.0
Gross Debt
30.8 29.2 27.1 24.8 25.0 44.5 64.9 92.2 106.5 117.7
Source: IMF WEO.
Greece: Main Fiscal Variables
Percent of GDP
2003 2004 2005 2006 2007 2008 2009
Fiscal Balance
-5.7 -7.4 -5.6 -6.0 -6.8 -9.9 -15.6
Primary Balance
-0.7 -2.6 -1.0 -1.3 -2.0 -4.8 -10.4
Net Interest Payments
5.0 4.9 4.7 4.7 4.8 5.1 5.1
Net Debt
97.3 98.8 101.2 107.3 107.4 112.6 129.0
Gross Debt
97.4 98.9 101.2 107.3 107.4 112.6 129.0
Source: IMF WEO.
2010 2011 2012
-10.5 -9.1 -7.5
-4.7 -2.2 -1.7
5.8 6.9 5.9
144.6 165.4 170.7
144.6 165.4 170.7
Italy: Main Fiscal Variables
Percent of GDP
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fiscal Balance
-3.6 -3.6 -4.5 -3.4 -1.6 -2.7 -5.4 -4.5 -3.8 -2.7
Primary Balance
1.3 1.1 0.1 1.0 3.1 2.2 -1.0 -0.3 0.8 2.6
Net Interest Payments
4.9 4.6 4.6 4.4 4.7 4.9 4.4 4.2 4.6 5.4
Net Debt
88.4 88.0 88.9 89.3 86.9 88.8 97.2 99.1 99.6 103.1
Gross Debt
103.9 103.4 105.4 106.1 103.1 105.7 116.0 118.6 120.1 126.3
Source: IMF WEO.
Portugal: Main Fiscal Variables
Percent of GDP
Fiscal Balance
Primary Balance
Net Interest Payments
Net Debt
Gross Debt
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-3.7 -4.0 -6.5 -3.8 -3.2 -3.7 -10.2 -9.8 -4.4 -5.0
-1.3 -1.7 -4.2 -1.3 -0.6 -1.0 -7.3 -7.0 -0.4 -0.8
2.4 2.4 2.3 2.5 2.6 2.7 2.8 2.9 4.0 4.2
51.1 53.1 57.8 58.6 63.7 67.4 79.0 88.9 97.3 113.2
55.7 57.5 62.5 63.7 68.3 71.6 83.1 93.3 108.1 120.0
Source: IMF WEO. 2012 Article IV Consultation.
-2
Source: IMF WEO.
Spain
Ireland
Estonia
Finland
-6
Luxembourg
-4
Slovak Republic
Cyprus
Slovenia
Belgium
Austria
Germany
2
Malta
France
Italy
4
Portugal
6
Greece
8
Netherlands
Percent of GDP
Eurozone Fiscal Deficits (avg. 2005-2007)
Percent of GDP (Deficit Shown as Positive)
0
-40
-80
Source: IMF WEO.
Finland
-20
Germany
France
Netherlands
Ireland
20
Spain
40
Estonia
60
Portugal
Belgium
80
Italy
100
Greece
120
Austria
Percent of GDP
Eurozone Net Debt (avg. 2005-2007)
Percent of GDP
0
-60
Eurozone back in recession
• Last 5 quarters of real growth were negative.
• Why?
• Pro-cyclical policy:
Growth and Austerity in the Eurozone
2008-2012
Forecast % Change in GDP (2008-2012)
10
SVK
5
MLT
DEU
BEL
AUT
0
FRA
NLD
FIN
IRL
CYP
-5
ESP
ITA
PRT
SVN
-10
y = -1.0969x - 1.564
R² = 0.4134
-15
GRC
-20
-4
-2
0
2
4
2008-2012 Change in Structural Fiscal Balance (% Potential GDP)
Source: IMF WEO and Martin Wolf.
6
8
10
Unemployment in Eurozone
2005-current
13.0
12.0
12.0
Percent of Total Workforce
11.0
10.0
9.0
8.0
7.0
7.3
6.0
5.0
2005
2006
Source: Eurostat.
2007
2008
2009
2010
2011
2012
2013
Compare to Europe and ECB
• Note the political irony: Europe has bigger
left, socialist parties, but much more right-wing
fiscal and monetary policy.
• (More on this topic later.)
• Result: U.S. still down about 10 million jobs;
but economy is growing.
• 2.1% annual average GDP growth since June
2009 – not enough to get close to full
employment, but a much better story than
eurozone
The Case of Greece
Most important Problem:
Fiscal policy is pro-cyclical
• 2009-2013: Greece attempts to reduce debt,
cutting its structural balance by 18.7 percent.
• (For comparison: $2.9 trillion in the U.S.)
• As the economy shrinks, it becomes harder to
make the revenue targets
• IMF has been way off in its projections and
getting worse.
Greece:
Real GDP Projection
220
209.5
210
198.9
billions of 2005 constant euros
200
190
180
170
1st Review
164.0
2nd Review
160
3rd Review
4th Review
5th Review
150
Latest Review
Actual
140
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement .
Greece:
Unemployment Rate Projections
30
2013, 26.6
1st Review
2nd Review
25
2012, 24.4
3rd Review
percent of total workforce
4th Review
5th Review
20
Latest Review
Actual
15
2020, 11.3
10
5
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement .
Economic costs so far:
• Loss of 20.1 percent of GDP (among worst of
past century’s financial crises), 2008 to 2012
• 27 percent unemployment for 2013; still more
than 16 percent by 2018 (April 2013 WEO)
• Minimum wage cut 32 percent for youth (under
the age of 25) and 22 percent for older workers
• Mass layoffs (150,000 public workers by 2015)
• Cuts to health and education
• Mass privatization totaling $30.77 billion
projected ($2.09 billion realized to date).
Social costs:
Kentikelenis et al. 2011. The Lancet:
“Suicides rose by 17% in 2009 from 2007 and unofficial 2010 data
quoted in parliament mention a 25% rise compared with 2009. The
Minister of Health reported a 40% rise in the first half of 2011
compared with the same period in 2010 […] Violence has also risen,
and homicide and theft rates nearly doubled between 2007 and 2009.”
• 52 percent increase in HIV 2010-2011.
Greece
Employment as a Percent of Working Age Population
EPOP Yearly
49
47
45
43
41
39
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Eurostat
Strategy
• “Internal Devaluation”: how it is supposed to
work
• Not Working
• Real effective exchange rate hasn’t fallen enough
to pull the economy out of recession
Greece:
Real Effective Exchange Rate
110
REER Deflated by CPI
REER Deflated by ULC
108
106
104
102
100
98
96
94
92
90
1
2
3
4
1
2004
Source: Eurostat
2
3
2005
4
1
2
3
2006
4
1
2
3
2007
4
1
2
3
2008
4
1
2
3
2009
4
1
2
3
2010
4
1
2
3
2011
4
1
2
2012
Greece:
Debt as a Percent of GDP
2
2013, 179%
1.8
2011, 171%
1.6
2012, 158%
1.4
1.2
2020, 124%
1
Haircut on Private Debt
0.8
0.6
0.4
0.2
0
2008
2009
2010
2011
2012
2013
2014
2015
Source: IMF (various) and Weisbrot and Montecino (2012)
2016
2017
2018
2019
2020
Malta
Belgium
Hungary
Ireland
Portugal
-4
Source: IMF and Eurostat
0
Norway
Sweden
Finland
Luxembourg
2
Euro area
Estonia
Bulgaria
Denmark
Slovakia
Czech Republic
Slovenia
Spain
Latvia
Netherlands
Romania
Lithuania
Germany
Austria
Cyprus
France
Poland
United Kingdom
-2
Italy
Greece
percent of GDP
EU Net Interest Burden in 2011
(Percent of GDP)
8
6
4
The Troika and the World
• Troika is slowing the world economy for
second time since last year.
•
•
•
2010 growth  5.2 percent
2011 growth  4.0 percent
2012 growth  3.2 percent
• IMF projections for world GDP growth in
2013 have been revised downward:
•
•
•
April 2012 projection  4.1 percent
October 2012 projection  3.6 percent
April 2013 projection  3.3 percent
• The ILO estimates a record 202 million people
could be unemployed in 2013.
The Troika and the World
• How to explain the Troika’s behavior?
• They see the crisis as an opportunity to remake
European social democracy.
• Neoliberal “reforms.”
• When crisis ends, they lose their leverage over
weaker Eurozone economies.
• A delicate balance: they don’t want to end
crisis without achieving their political goals;
but don’t want a meltdown either.
The Troika and the World
• ECB executive board member Jörg Asmussen,
the most senior German at the bank “said it
was crucial to ensure that ECB decisions
did not reduce pressure on governments to
reform. That is one reason why the central
bank is unlikely to reveal all details of the
plan on Thursday.”
-- Reuters, Sep 4, 2012
The Troika and the World
• The policy advice given by the IMF to
European Union countries in 67 Article IV
agreements for the four years 2008-2011
shows a consistent pattern of policy
recommendations:
• (1) a macroeconomic policy that focuses on
reducing spending and shrinking the size of
government, in many cases regardless of
whether this is appropriate or necessary, or
may even exacerbate an economic downturn;
[cont.]
The Troika and the World
• (2) a focus on other policy issues that would
tend to reduce social protections for broad
sectors of the population (including public
pensions, health care, and employment
protections), reduce labor’s share of national
income, and possibly increase poverty, social
exclusion, and economic and social inequality
as a result.
Recent History
• First crisis around Greek debt because ECB
refused to buy sovereign bonds (May 2010)
• Continuing crises, partly because Troika
insisted no haircut for creditors.
• But each time they compromised to avoid
worse crisis.
• 8 aid packages, increasing in size, between May
2010 and December 2011.
• A small problem in early 2010 was made very
big.
Recent History
• Mario Draghi takes office as ECB President
last November
• Draghi is different from Trichet.
• Long Term Refinancing Operation (LTRO): €1
trillion for banks since December 2011.
• Despite compromises, Troika still pushed
Europe into recession: this is a huge policy
failure.
• Troika willing to take great risks to further
their neoliberal political agenda.
The Troika and the World
• Financial markets are a problem too, but the
ECB can overpower them
• ECB is therefore the main problem, as well as
the potential solution.
• In 2011, it became clear that governments
were tightening budgets – pro-cyclical policy –
to satisfy the ECB, not to satisfy financial
markets, which were increasingly ambivalent
about fiscal tightening (e.g S &P’s latest
downgrade of Spanish debt )
Alternatives
Alternatives
• ECB, European authorities could reverse course
and allow for expansionary fiscal policy in
Greece and Eurozone – but won’t.
Default and Exit:
Argentina
• Banking system collapsed, but only one quarter
of continued recession.
• Then growth: 63 percent in six years.
• Recovers pre-crisis GDP within 3 years.
• Allow 2/3 reduction in poverty and extreme
poverty.
• Large increases in social spending, reduced
inequality.
• Huge Success.
Argentina vs. Greece
Comparative GDP Recovery Paths: Argentina (1996-2007)
vs. Greece (2005-2016)
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2014
2015
2016
130
Argentina Historical Trend
120
Greece Historical Trend
Index: peak GDP = 100
110
100
90
80
70
2005
2006
2007
2008
2009
2010
Source: Weisbrot and Montecino (2012)
2011
2012
2013
Argentine Recovery Misunderstood
•
•
•
•
Not a commodities boom.
Not even export led.
Led by domestic consumption and investment.
Change in macroeconomic policy was key:
change from pro-cyclical to pro-growth.
Greek advantages over Argentina
• Export sector twice as big.
• More potential sources of borrowing, if
needed.
• More developed economy, banking system.
Argentina vs. Greece
Exports as a Percent of GDP, Pre and Post-Devaluation
30
25.9
24
25
Percent of GDP
20
15
11.6
10
5
0
2001
2003
Argentina
Source: Eurostat and INDEC.
2011
Greece
Spain
Spain
• Debt burden is manageable at reasonable
interest rates.
Spain: Quarterly Real GDP Growth
Seasonally Adjusted Annualized Rates
0.4
0.3
0.2
0.2
0.2
0.1
0.1
0.0
Percent Change
0.0
-0.1
-0.2
-0.3
-0.4
-0.4
-0.4
-0.5
-0.6
-0.8
-0.8
-1.0
2010Q1
2010Q2
2010Q3
Source: Eurostat
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
Spain: Unemployment
Seasonally Adjusted Annualized Rates
30.0
26.3
Percent of Total Workforce
25.0
20.0
15.0
10.0
5.0
0.0
2005
2006
Source: Eurostat
2007
2008
2009
2010
2011
2012
2013
Spain
• The IMF's latest (July 2012) Article IV
consultation has Spain with 20.5 percent
unemployment in 2017, despite the fact that it
is, by the IMF estimation, operating at just
about potential GDP.
Spain: Projected Interest Payments
Percent of GDP
5.0
4.5
4.5
4.2
4.0
4.0
3.8
3.5
3.5
3.0
2.5
2.5
2.1
1.9
1.8
2.0
1.6
1.3
1.5
1.3
1.1
1.1
2007
2008
1.4
1.0
0.5
0.0
2003
2004
2005
2006
2009
2010
2011
2012
2013
Projections
Source: IMF WEO.
2014
2015
2016
2017
Conclusion
Conclusion
• Last fall: Draghi makes statement interpreted
as commitment to stabilize Italian and Spanish
bonds
• This put an end to the acute crisis – a
significant step
• But recession continues because of fiscal
tightening
• Note difference from U.S. : Because eurozone
citizens have lost any democratic input into
economic policy-making
Conclusion
• Lack of democracy is key
• Without credible threat to leave euro, weaker
countries are subject to Troika’s decisions
• High unemployment, needless suffering will
continue for many years or until Troika is
forced to retreat