AB - Europe in Transition - Political Economy of the ... · Europe in Transition – Political...

Europe in Transition –Political Economy of the Crisis

EESC GROUP II Houffalize, 28 November 2012

Andreas Botsch

Overview

I. Overview and summaryII. ImbalancesIII. Wrong questions, wrong answersIV. Balance sheet recessionV. European alternatives

I. OVERVIEW AND SUMMARY

Andreas Botsch © etui (2012)3

Four crises in Europe, one effect: accumulation of uncertainties


● Public debt crisis austerity

● Private debt crisis insolvencybanking / financial crisis collapse of

financial system● Political crisis and

architechture of EMU legitimacy crisis● Economic crisis unemployment● Social crisis poverty

Euro zone crisis

Three overlapping financial crises

● Normal or „classical“ public debt crisis (Greece, Portugal)

● Asset bubble and ensuing ● Private debt crisis

● Banking crisis ● Public debt crisis

(Spain, Ireland)● Hidden balance sheet crisis / banking crisis

(France, Germany)


Three overlapping financial crises

● Normal or „classical“ public debt crisis (Greece, Portugal)● Asset bubble and ensuing

● Private debt crisis● Banking crisis ● Public debt crisis(Spain, Ireland)

● Hidden balance sheet crisis / banking crisis (France, Germany)


Europe‘s answer 2008-2012 in one sentence

● EU policy uses the wrong macro-economic answer to structural problems …

● … and the wrong ‚structural reforms‘ to an essentially macro-economic problem


II. IMBALANCES → BALANCE OF PAYMENTS CRISIS

Let‘s get the fundamentals right


Causes (1): Imbalances

Growth models of neo-liberalism●External and internal deregulation of financial markets ●Weakening of trade unions → growing disparity of income distribution ●2 growth models: exports vs. debt (i.e. finance) driven●Both models serve to compensate weak internal demand●Problem: liquidity overhang

Andreas Botsch © etui (year)9

Debt Exports

Centre USA, UK Germany, Japan

Periphery GIIPS China

9 Andreas Botsch © etui (2012)

Growth models of neo-liberalism


Stagnating Internal Demand

Imbalances in Euro area: real economic growth


real GDP 2000-2008 real GDP 2000-2008

Germany 10% Ireland 40%

Netherlands 17% Greece 35%

Austria 19% Spain 28%

Italy 7%

Euro area 15% Portugal 8%

Growing unequal: growth components


Current account in % GDP

German capital export to euro zone


● cummulated 1999-2010

Source: M. Payandeh

Public debt 2007-2010

Andreas Botsch © etui (year) Europa in der Krise oder nur Euro-Krise ?15 Europa in der Krise oder nur Euro-Krise ?15

Veränderung der Gesamtverschuldung zum Vorkrisenniv eau (2010 zu 2007)

- in Prozentpunkten zum jeweiligen jahresspezifischen BIP -

3,9

4,3

8,7

10,8

11,1

11,5

12,5

13,8

14,4

15,3

17,3

18,1

19,2

19,5

20,1

28,3

35,2

72,4

Zypern

Estland

Malta

Deutschland

Österreich

Luxemburg

Slowakei

Finnland

Belgien

Italien

Slowenien

Eurozone

Frankreich

Niederlande

Portugal

Spanien

Griechenland

Irland

Quelle: Europäische Kommission, Herbst 2010; eigene Berechnungen

Source: M. Payandeh

Crisis related state aid 2008-2010

Andreas Botsch

EZ budget deficits 2011: justifying austerity ?

IRL

GRE

ESP

SLO CYP

FRA

SLK NLD POR ITA

BEL

AUT

MAT

GER

LUX

FIN

EST

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

IRL

GRE

ESP

SLO CYP

FRA

SLK NLD POR ITA

BEL

AUT

MAT

GER

LUX

FIN

EST

Eurozone budget deficits 2011 in %GDP

Imbalances in Euro area: unit labour costs


Unit labour cost 2000-2008

Unit labour cost 2000-2008

Germany 3% Ireland 33%

Netherlands 19% Greece 26%

Austria 9% Spain 30%

Italy 27%

Euro area (12) 16% Portugal 24%

Nominal unit labour costs 2000-2010

● ECB inflation target 2%

● Best in class: Belgium and France

● Drifting apart of inflation rates over period of 12 years is main cause of balance of payments imbalances


III. WRONG QUESTIONS →WRONG ANSWERS: A GERMAN EUROPE ??


causes (2): private, not public debt


● Profligate governments, lazy Southern europeans?

● Source: European Economy 6/2011

Budget deficit 2007 in % GDP

Budget deficit 2007 in % GDP

Germany 0,2 % Ireland 0,1 %

Netherlands 0,2 % Greece -5,4 %

Austria -0,5 % Spain 1,9 %

Italy -1,5 %

Euro area (12) -0,6 % Portugal -2,7 %

Private and public debt (euro area)


● Public and private debt in euro area

Wrong assumptions

● Main cause of crisis: private debt growth (except for Greece)

● … Result of imbalances in Euro area, characterising a neoliberal growth regime, worsened by dysfunctional economic policies in Europe

● Bundesbank dogma („stability culture‟):Price stability leading to growthAusterity key to price stability

● not price stability, but relatively lower inflation compared to trading partners responsible for growth in fixed exchange rate regime

● German monetarism = neo-mercantilism, export of unemployment


Referential wage dumping ?


ECB inflation target

Net asset and wealth distribution in Germany


Source: M. Payandeh

Productivity and real wages: Germany

● Export of dysfunctional German income distribution


Many european procedures… one answer: German Europe ?

● Many different european procedures (EU 2020/ Troika/ macro-economic imbalances)…

● … one simple message:● Crisis resolution (in particular for ‘external deficit

countries’) via devaluation of REERs, i.e. flexible wages and labour markets: moderate and lower wages will re-establish lost competitiveness

● Wage deflation in combination with private debt will lead to debt deflation (Irving Fischer 1933)

● … through joint measures in Euro area: Six Pack (Excessive Imbalances Procedure), Euro+ Pact, Two Pack, Fiscal Treaty, Euro Treaty (?)


IV. BALANCE SHEET RECESSION


Drastic Liquidity Injection Failed to Increase Money Supply

90

10 0

11 0

12 0

13 0

14 0

15 0

16 0

17 0

18 0

Base M oney

M oney Supp ly (M 3)

C redit to Eu ro Area Residents

(A u g . 2 00 8 = 10 0, S ea so n al ly A d jus ted )

0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2

08 /1 0 8 /4 0 8/7 08 /10 0 9/1 09 /4 0 9/ 7 09 /1 0 10 /1 1 0/4 10 /7 1 0/1 0 11 /1 1 1 /4 1 1/7 11 /10 1 2/1

(% , yo y)

C PI c ore

Sourc es : ECB, Euros tatNote: Base mon ey's figure s are seaso nally ad jus ted by Nomura Res earch Ins titu te.

Drastic liquidity injection failes to increase money supply:monetary transmission channels are broken

Eurozone in balance sheet recession

Spain in balance sheet recession

Ireland in balance sheet recession

Portugal in balance sheet recession

UK in balance sheet recession

Japan GDP growth despite of private sector deleveraging and major loss of private wealth

Balance sheet recession and the ‚paradox of thrift‘

• If everyone tries to save more money during times of recession, then aggregate demand will fall

• In stagnant populations, total savings in the population will fall because of the decrease in consumption and economic growth

• The paradox is that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.

• Fallacy of composition: what is true of the parts must not be true of the whole. While individual thrift is generally alleged to be good for the economy, the paradox of thrift holds that collective thrift is bad for the economy. (Keynes)


V. EUROPEAN ALTERNATIVES


Structural: Rapid growth of cross-border financial market integration

● Developments in trade and financial integration , OECD average, 1980-2008 (1980=100)

Note: Trade integration is defined as the sum of imports and exports as a percentage of GDP. Financial integration is defined as the sum of cross-border liabilities and assets as a percentage of GDP

Balance sheet composition: selected universal banks

Loans and financial assets in % of total assets (20 11)

17,4

3439,6

59

42

26

0

20

40

60

Deutsche Bank BNP Paribas Crédit Agricole

Loans Financial assets

Total domestic bank assets in % of GDP (2010)

83

164 167

304320 329

402418

493

50

150

250

350

450

USA

Italy

Belgiu

m

Germ

any

Franc

e

SpainNet

herlan

ds UKSwitz

erlan

d

Debt redistribution = Wealth redistribution

● Historical reminder: leverage ratios before WW I = 4-5

Leverage ratios of selected banks (2011)65

48,743

28,6 27,6

Dexia Axa Bank Deutsche Bank Credit Agricole BNP Pariba s

The elephant in the EU room: TBTF exclusively a US problem ?

Andreas Botsch

TBTF in UK

Andreas Botsch

TBTF Ireland

Andreas Botsch

TBTF France

Andreas Botsch

TBTF Spain

Andreas Botsch

TBTF Germany

Andreas Botsch

Shrinking balance sheets & financial markets: 5 S & D

● smaller in size

• slower in speed

• simpler in structure

• separated functionally

• less short-term oriented

• democratised

Conclusions

● Stop deflationary expectations inherent in ‘convertibility risk’(GREXIT etc)

● (Infrastructure) investment as vehicle of adjustment, not labourmarket ‘reform’ and wage deflation: Marshall plan for periphery, fiscal consolidation through growth

● Stop speculation folly of financial markets (self-fulfilling prophecy of insolvency fears)

● Repair constitutent structural flaws of euro area● Shield public debt from speculation: ECB as lender of last resort

and/or banking license to EFSF/ESM● Supplement Fiscal Treaty on revenue side● Harmonisation and cross-border transparency of corporate

taxation● Drain tax havens


Macro-economic assignment: ECB monetary policy

● Add growth and full employment to ECB objectives● 3 year Long Term Refinancing Operation (LTRO) : the

1.000 billion Euro gift to the banks and the limits of (neutrality of) monetary policy: Europe is bailing out the wealthy in South and North

● Lender of last resort function (LOLR) instead of 1. limited Securities Markets Programme (SMP) 2. pro-cyclical OMT & ESM conditionality in Fiscal Treaty and 3. LTRO deviation of banking stabilisation

● ESRB: control and monitoring of balance sheet reduction to the benefit of loan portfolios and to the detriment of proprietary trading

● ESCB and BuBa: understand eurozone properly as EMU (no securitization of target II loans)Andreas Botsch © etui (2012)51

Macro-economic assignment: fiscal policy

● European Wealth Levy● Prime role of fiscal policy in fighting uncertainties since

monetary and competition don‘t guarantee stability● Consolidation: growing out of the crisis, not aggravating it

through synchronized austerity (fixed FX rate regime)● Marshall Plan for periphery● Transfer Union as Investment Union● Financing of European Investment Fund (EIF) through

mandatory zero interest bond on wealth > 500.000€(capital levy): 10 year R provide capital stock for EIF

● Financial Transactions Tax● Stop tax competition


Macro-economic assignment: collective bargaining

● Coordination rule oriented to distribution neutrality = productivity + inflation target

● Avoidance of overload through ‚redistribution component‘● Coordination :● Euro area inflation target, not national inflation rates● Industry: cross-border collective bargaining along value

added chains and european right to strike● Strengthening of macro-economic dialogue while fully

respecting art. 138 and 152 of TFEU (no interference in free collective bargaining; autonomy of social partners)


Thank you for your attention !


AB - Europe in Transition - Political Economy of the ... · Europe in Transition – Political...

Documents

Transcript of AB - Europe in Transition - Political Economy of the ... · Europe in Transition – Political...