The Euro in Crisis Uri Dadush Carnegie Endowment for International Peace Chicago, June 14, 2010.
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Transcript of The Euro in Crisis Uri Dadush Carnegie Endowment for International Peace Chicago, June 14, 2010.
The Euro in Crisis
Uri Dadush
Carnegie Endowment for International PeaceChicago, June 14, 2010
Main Points
1. Resource misallocation and competitiveness central
2. Fiscal is most immediate risk
3. EMU poses big constraints
4. …Requiring aggressive use of available policy tools
Inflation and Interest Rates ConvergeAnnual Inflation and Long-term
Government Bond Yields
Source: IMF.
0
5
10
15
20
1980 1985 1990 1995 2000 2005
GIIPS EUN GIIPS EUNBond Yields Inflation
Source: Eurostat.
Total Increase in Prices of Goods and ServicesPercent increase, 1997 – 2007
0
15
30
45
60
Ireland Greece Portugal Spain Italy Germany
ServicesGoods
Prices of Non-tradables rise
Source: Ahrend, Cournède, and Price, “Monetary Policy, Market Excesses and Financial Turmoil,” OECD, 2008.
Divergence of Policy Interest Rates from Taylor Rule
Basis points, 2001 – 2006
Appropriateness of Monetary Policy
-100 0 100 200 300 400 500
Germany
Spain
Greece
Ireland
Competitiveness Loss
* Actual value: - 45
Source: European Commission.
Change in Real Effective Exchange Rate Based on unit labor costs, percent change, 2001 – 2008
-20
-10
0
10
20
30
40
Irelan
dIta
lySp
ain
Greece
France
Portuga
lUK
Austria
German
yUSA
Japan
*
0
3
6
9
12
Ireland Spain Greece Portugal Italy Germany
Governments Grow Rapidly
Source: Eurostat.
Annual Growth of Government ExpenditureCurrent Euros, average percent increase, 1997 – 2007
0 3 6 9 12 15
Austria
Germany
Portugal
Greece
Spain
Ireland
Source: Eurostat.
Increase in Government Deficit
Percent of GDP, 2007 – 2009
Deficits Increase in Crisis
EMU Constraints
• Wide differences in income, economic structure
• Weak equilibrating mechanisms (labor mobility, fiscal transfers, shared financing)
• Rigidities in labor and product markets
• ..but with loss of monetary and exchange rate autonomy…
Use Available Instruments Aggressively
• Restructure Greek debts
• In troubled countries: cut deficit (stabilize debt/GDP in 3 years); recover competitiveness (6% over 3 years).
• Euro zone: maintain low policy interest rates; promote lower Euro; Germany and others adopt expansionary policy (stimulus worth 1% of euro zone GDP).
• IMF, US provide support