Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Straining the Bond: Europe in Crisis Evening at the Fed December 2012 Mark A. Wynne Vice President FRB Dallas Director Globalization & Monetary Policy Institute Overview • The story so far… • The (increasingly global) fallout – Contagion from periphery to core – Contagion to the rest of the world • The fundamental challenges – Burned ships (the Cortes strategy) – The world’s greatest game of chicken • Lessons from history • End game – Move to a political union? – Or lost decade(s) à la Japan? The euro crisis: a chronology • • • • • • • May 2010: Greek bailout €110 bn November 2010: Irish bailout €85 bn April 2011: Portuguese bailout €78 bn July 2011: Second Greek bailout €130 bn December 2011: Fiscal compact agreed; ECB LTROs April 2012: Greek default Summer 2012 – – – – Yields on Spanish government debt reach record highs €100 bn bailout of Spanish banks Yields on stronger sovereigns go negative on safe-haven flows ECB cuts deposit rates to zero • July 26: “…the euro is irreversible…. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” – ECB President Mario Draghi Major developments AugustDecember 2012 • September – ECB announces plans to conduct Outright Monetary Transactions (OMTs) “…to safeguard the monetary policy transmission mechanism in all countries of the euro area” and “…address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro” • One dissenting vote: Bundesbank President Weidmann – German constitutional court rules that Germany can contribute to the European Stability Mechanism – European Commission publishes proposals for a European banking union • Focus on bank supervision; issues of deposit insurance and bank resolution unaddressed • October – S&P downgrades Spain to BBB– European Union wins Nobel Peace Prize • November – Third Greek “bailout” • Lower interest rates & extended terms on loans; recycling of SMP profits back to Greece The story so far (10-year government interest rates) Percent 30 Greece Jan 1, 1999 Euro launched 25 Portugal Spain Jan 1, 2001 Greece joins 20 Ireland Italy 15 Belgium France 10 Austria Netherlands 5 Finland 0 1990 Germany 1995 2000 2005 2010 Greece: in depression Millions 4.6 Bil. Ch. 2005 euros 220 Peak-to-trough decline through 2011: 10.2% 200 4.4 Peak-to-trough decline through 2011: 14.6% 4.2 180 4.0 160 Aug 2012 UR: 25.4% Aug 2012 youth UR: 57.0% 3.8 140 3.6 120 Employment GDP 3.4 100 1999 2001 2003 2005 2007 2009 2011 Note: Diamonds indicate OECD November 2012 forecasts. Dashed lines indicate OECD forecasts in June 2012. 2013 Gross government debt as a percentage of GDP Greek budget report Oct. 31, 2012 IMF's World Economic Outlook October 2012 Review of bailout program March 2012 (Estimates overlap with 2012 IMF data for 20092011) Original bailout program May 2010 Percent 200 Estimates Projections 180 160 140 120 100 2009 2010 2011 2012 2013 2014 2015 2016 Ireland: life after austerity? Millions 2.2 Bil. Ch. 2009 euros 180 Peak-to-trough decline through 2011: 6.9% 160 July 26, 2012: Ireland returns to financial markets for first time since September 2010 2.0 Peak-to-trough decline through 2011: 14.5% Sep 2012 UR: 15.1% Sep 2012 youth UR: 34.5% 1.8 Employment 140 120 GDP 1.6 100 1999 2001 2003 2005 2007 2009 2011 2013 Note: Diamonds indicate OECD November 2012 forecasts. Dashed lines indicate OECD forecasts in June 2012. Portugal: further contraction expected Bil. Ch. 2006 euros 165 Millions 5.2 Peak-to-trough decline through 2011: 7.0% 5.0 160 Peak-to-trough decline through 2011: 3.2% 4.8 155 Sep 2012 UR: 15.7% Sep 2012 youth UR: 35.1% 4.6 Employment 150 GDP 4.4 145 1999 2001 2003 2005 2007 2009 2011 2013 Note: Diamonds indicate OECD November 2012 forecasts. Dashed lines indicate OECD forecasts in June 2012. Spain: latest bailout request Millions 21 Bil. Ch. 2008 euros 1125 Peak-to-trough decline through 2011: 3.7% 1050 20 19 Peak-to-trough decline through 2011: 11.1% 18 17 975 900 16 Sep 2012 UR: 25.8% Sep 2012 youth UR: 54.2% 15 Employment 825 GDP 14 750 1999 2001 2003 2005 2007 2009 2011 2013 Note: Diamonds indicate OECD November 2012 forecasts. Dashed lines indicate OECD forecasts in June 2012. OECD NEET Ratios, 15 to 24 Years Percent Change Q1 2007 to Q1 2011 Q1 2007 Q1 2011 1.0 0.3 0.6 1.4 1.1 0.8 1.4 0.3 0.4 2.1 1.2 3.5 1.0 2.7 2.7 2.0 2.1 1.8 1.7 1.0 0.4 1.7 1.9 1.0 -0.1 -0.3 7.4 5.9 2.5 3.4 -0.9 -4.1 -8.1 Netherlands Denmark Iceland Switzerland Sweden Austria Slovenia Luxembourg Finland Norway Germany Japan Canada Czech Republic Estonia Poland Australia France Portugal Euro area 17 EU27 Britain Hungary New Zealand USA Slovakia Belgium OECD Ireland Spain Greece Italy Mexico Turkey 40 35 30 25 20 15 10 5 0 -5 -10 OECD = Organization for Economic Cooperation and Development NEET = not in education, employment, or training Source: OECD Employment Outlook 2012 Housing booms and busts Residential investment as a share of GDP Percent 14 12 10 8 6 4 U.S. 2 1980 1985 1990 1995 2000 2005 2010 Housing booms and busts Residential investment as a share of GDP Percent 14 Nevada 12 10 8 6 4 Arizona Florida 2 U.S. 1980 1985 1990 1995 2000 2005 2010 Housing booms and busts Residential investment as a share of GDP Ireland Percent 14 Nevada 12 10 8 6 4 Spain Arizona Florida 2 U.S. 1980 1985 1990 1995 2000 2005 2010 Germany PMI in contraction phase Index 65 60 Expansion 55 50 45 Services Composite Contraction Manufacturing 40 35 30 2005 2006 2007 2008 2009 2010 2011 2012 Broader euro-area PMI also in negative territory Index 65 60 Expansion 55 50 45 Services Composite Contraction Manufacturing 40 35 30 2005 2006 2007 2008 2009 2010 2011 2012 Global fallout Exports to the U.S. and euro area: share of world total Percent 18 16 Euro area 14 12 10 U.S. 8 6 1980 1985 1990 1995 2000 2005 2010 Global fallout • United Kingdom – 50 percent of exports to euro area – “The greatest threat to the recovery stems from the risk that an effective policy response is not implemented sufficiently promptly in the euro area” (Bank of England) • China – EU is China’s largest export market, overtaking U.S. in 2007 – “capricious development of the European debt crisis” as drag on growth (People’s Bank of China) • United States – 20 percent of exports to Europe – “…strains in global financial markets continue to pose significant downside risks to the economic outlook” (FOMC) German cross-border lending Net Balance Bil. euros 500 450 400 350 300 250 200 Ireland 150 Portugal 100 Greece Italy 50 Spain 0 1999 2001 2003 2005 2007 2009 2011 The story so far (10-year government interest rates) Percent 30 Greece Jan 1, 1999 Euro launched 25 Portugal Spain Jan 1, 2001 Greece joins 20 Ireland Italy 15 Belgium France 10 Austria Netherlands 5 Finland 0 1990 Germany 1995 2000 2005 2010 One-size-fits-all monetary policy: Euro & U.S. (Taylor rate range) Percent 20 Euro area average range (1999-2011) = 10.6 U.S. regions average range (1987-2011) = 5.2 15 10 5 0 -5 -10 Euro area Taylor rate range U.S. regions Taylor rate range ECB policy rate Federal funds rate -15 1999 2001 2003 2005 2007 2009 2011 Labor mobility a hindrance to a common monetary policy (Regional variation in unemployment rates) Percent 30 Euro area average range (1999-2012) = 10.0 U.S. regions average range (1999-2012) = 2.6 25 20 15 Euro area unemployment range U.S. regions unemployment range 10 5 0 1999 2001 2003 2005 2007 2009 2011 Fixes • Monetary union can exist without a fiscal union – But need rules to make it work – Tried and failed in Europe • Fiscal & political union along U.S. lines – Tighter constraints on ability of member states to run deficits – Pooling of regional risks, especially of banking system risks Lessons from history • The United States in 1780s – Fiscal crisis associated with servicing debt incurred during Revolutionary War • Solution: strengthen powers of federal government (replace Articles of Confederation with U.S. Constitution) – Federal government assumed debts of states – One-time bailout: states allowed to default in 1840s – States adopted balanced budget rules thereafter Deficits in peripheral European countries comparable to U.S. deficits Budget deficits as a share of GDP Percent 4 2 0 Peripheral Europe: GDP-weighted fiscal balance -2 -4 -6 -8 -10 U.S. -12 -14 1999 2001 2003 2005 2007 2009 2011 Fiscal situation of Europe as a whole relatively sound Percent Government debt as a share of GDP 100 U.S. 90 80 70 60 Euro area 50 40 30 1999 2001 2003 2005 Note: Diamonds indicate OECD forecasts. 2007 2009 2011 2013 Disunion • Declining trust in European institutions – Just 31 percent compared to 57 percent before crisis • Less favorable image of the EU • Majority (52 percent) still support the single currency – Down from 61 percent before crisis Conclusions • Euro crisis is spreading from the periphery to the core, and increasingly weighing on global economic activity • LTROs of December 2011 and February 2012 have bought time – ECB rate reduction and possible revival of securities market program can ease strains – ECB is involved in a game of chicken with national governments • OMTs will also buy time when implemented • New “fiscal compact” – A significant improvement over earlier Stability and Growth Pact? – EMU 2.0 workable? • Challenges – – – – Achieving consensus on new rules: loss of sovereignty Market rigidities Austerity programs Potential for social unrest • Europe 1914