Download The EU Financial Crisis and the Middle East

The EU Financial Crisis
and the Middle East
Don’t bother?
Dr. Rolf Freier
FNF Jerusalem May 2012
Ludwig von Mises
Austrian Liberal Economist
1881 – 1973
„...the housewife is the only rational
economic being, she usually does not
spend more than she has got...“
The Debt Champions
2010 Public debts
in billion €
What constitutes financial crisis
is not just debt alone:
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Lack of restraint
Lack of regulation
Easy money
Private debt
Public debt
Lack of trust of lenders
Lack of credit for business
Lack of growth
watch: The Crisis of Credit, splendid video
animation under http://vimeo.com/3261363
The Eurozone and the Debt Crisis
EU Countries International Credit Ratings
both in % of GDP
Budget deficits
Public debts
Returns on state bonds 10 years in %
GDP since pre-crisis 2008 = 100%
Economic growth in Germany GDP change in %
Elements of the Euro Debt Crisis
• Bank crisis (debts, high risk assets, bank
interdependence)
• Public debts (national and foreign debts)
• Private debts
• Real estate bubble (Spain)
• EU Target accounts ‘pre-finance’ balance of payment
deficits
• Trade imbalances
• ECB: indirect state financing (state bond buying)
• Governance deficiencies
• Cultural incompatibilities (institutions & preferences) ?
Four Scenarios
Scenario 1 EU manages crisis
• Euro Zone remains as it is
• Fiscal pact and austerity work (Maastricht
criteria: budget deficit <3%, Sovereign debt
<60% GDP
• Markets regain trust
• Euro Zone stabilises
• Continuing reform efforts
Scenario 1 Probability
• Fiscal Pact not yet ratified
• Elections dooming, politicians want to be reelected
• It needs a change in governments/voters
attitudes
• Austerity without growth measures a painful
long-term cure without success guaranteed?
Scenario 2 EU introduces Eurobonds
• Countries do not (re)finance debt by national
bonds but through collective bonds (no ECEP)
• Harmonizing effect on interests to be paid by
successful and less successful economies
• Structural imbalances could grow long term
(no reform discipline enforced on crisis
countries)
Scenario 2 Probability
• Eurobonds violate existing EU-law (no bailout)
• Germany still resists, would have to foot the
bill
• To maintain reform pressure on PIGSF need to
advance with controversial ECEP
• Higher probability of so called ‚project bonds‘
intended to spur growth in EU countries
(highly problematic because of its focus on
infrastructure)
Scenario 3 ECEP
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Eurozone becomes political union
Eurozone becomes fiscal union
Harmonizing tax systems
Harmonizing social security
Union issues Eurobonds
Eurozone could stabilise and Euro probably
appreciate
Scenario 3 Probability
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Differences in political culture
Differences in social policies
Differences in savings
Differences in political and economic weight
and size
• Differences in preferences?
• Long term goal or European pipe dream?
Scenario 4 Eurozone Breaking
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Individual PIGS countries departing from Eurozone
Northern core Eurozone?
Loss of credits and guarantees
Capital flight
International containment possible?
Bank and state insolvencies
Monetary renationalisation = political
renationalisation?
• Europe fractious and inward looking?
Scenario 4 Probabiliy
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Possible but not high probability
Risk of 20% or higher???
Eurozone fragmenting or only weakest go?
Greek could go and the rest gets the act
together??
• Should Germany foot the big bill to keep
everybody happy and going????
Why bother, nothing to
loose for the Middle
East?
Israel Budget 2013 ??
• Increases in government outlays
2011: 18 Billion NIS
2012: 15 Billion NIS
Needs > 6% growth to be accommodated
Growth currently 3%
Balance of payment negative
Sovereign debt currently 72% of GDP
EU Programmes incl. MENA
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ECFR
FRIDE (EU Democracy/ Human Rights)
Tempus (Higher education)
Middle East watch E-Mail service
Pegase (Palestine socio-economic)
ENPI (refugees)
PfP
Last but not least
The European Unions Role in the Middle East
Quartet dealing with the conflict