Unnecessary and SelfInflicted April 2013 Mark Weisbrot Center for Economic and Policy Research wwwceprnet 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 sustai ID: 545584
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Slide1
The Eurozone Crisis:Unnecessary and Self-Inflicted April 2013
Mark WeisbrotCenter for Economic and Policy Researchwww.cepr.netSlide2
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 improvesSlide3
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:Slide4
Spain: Current Account Balance
Percent of GDPSource: Eurostat.Slide5
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.Slide6
Spain: Main Fiscal Variables
Percent of GDPSource: IMF WEO.
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
90.7Slide7
Ireland: Main Fiscal Variables
Percent of GDPSource: IMF WEO.
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
117.7Slide8
Greece: Main Fiscal Variables
Percent of GDPSource: IMF WEO.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Fiscal Balance
-5.7
-7.4
-5.6
-6.0
-6.8
-9.9
-15.6
-10.5
-9.1
-7.5
Primary Balance
-0.7
-2.6
-1.0
-1.3
-2.0
-4.8
-10.4
-4.7
-2.2
-1.7
Net Interest Payments
5.0
4.9
4.7
4.7
4.8
5.1
5.1
5.8
6.9
5.9
Net Debt
97.3
98.8
101.2
107.3
107.4
112.6
129.0
144.6
165.4
170.7
Gross Debt
97.4
98.9
101.2
107.3
107.4
112.6
129.0
144.6
165.4
170.7Slide9
Italy: Main Fiscal Variables
Percent of GDPSource: IMF WEO.
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
126.3Slide10
Portugal: Main Fiscal Variables
Percent of GDPSource: IMF WEO. 2012 Article IV Consultation.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Fiscal Balance
-3.7
-4.0
-6.5
-3.8
-3.2
-3.7
-10.2
-9.8
-
4.4
-5.0
Primary Balance
-1.3
-1.7
-4.2
-1.3
-0.6
-1.0
-
7.3
-
7.0
-
0.4
-
0.8
Net Interest Payments
2.4
2.4
2.3
2.5
2.6
2.7
2.8
2.9
4.0
4.2
Net Debt
51.1
53.1
57.8
58.6
63.7
67.4
79.0
88.9
97.3
113.2
Gross Debt
55.7
57.5
62.5
63.7
68.3
71.6
83.1
93.3
108.1
120.0Slide11
Eurozone Fiscal Deficits (avg. 2005-2007)
Percent of GDP (Deficit Shown as Positive)Source: IMF WEO.Slide12
Eurozone Net Debt (avg. 2005-2007)
Percent of GDPSource: IMF WEO.Slide13
Eurozone back in recession
Last 5 quarters of real growth were negative.Why?
Pro-cyclical policy:Slide14
Growth and Austerity in the Eurozone
2008-2012Source: IMF WEO and Martin Wolf.Slide15
Unemployment in Eurozone
2005-currentSource: Eurostat.Slide16
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
Slide17
The Case of GreeceSlide18
Most important Problem:
Fiscal policy is pro-cyclical2009-2013: 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.Slide19
Greece:
Real GDP ProjectionSource: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.Slide20
Greece:
Unemployment Rate Projections
Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement
.Slide21
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).Slide22
Social costs:
“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.”
Kentikelenis
et al. 2011.
The Lancet
:
52 percent increase in HIV 2010-2011.Slide23
Greece
Employment as a Percent of Working Age PopulationSource: EurostatSlide24
Strategy
“Internal Devaluation”: how it is supposed to workNot Working
Real effective exchange rate hasn’t fallen enough to pull the economy out of recessionSlide25
Greece:
Real Effective Exchange RateSource: EurostatSlide26
Greece:
Debt as a Percent of GDPSource: IMF (various) and Weisbrot
and Montecino (2012)Slide27
EU Net Interest Burden in 2011
(Percent of GDP)Source: IMF and EurostatSlide28
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.Slide29
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.Slide30
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, 2012Slide31
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.]Slide32
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.Slide33
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.Slide34
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.Slide35
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 )Slide36
AlternativesSlide37
Alternatives
ECB, European authorities could reverse course and allow for expansionary fiscal policy in Greece and Eurozone – but won’t.Slide38
Default and Exit:
ArgentinaBanking 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.Slide39
Argentina vs. Greece
Comparative GDP Recovery Paths: Argentina (1996-2007) vs. Greece (2005-2016)
Source:
Weisbrot
and Montecino (2012)Slide40
Argentine Recovery Misunderstood
Not a commodities boom.Not even export led.
L
ed by domestic consumption and investment.
Change in macroeconomic policy was key: change from pro-cyclical to pro-growth.Slide41
Greek advantages over Argentina
Export sector twice as big.More potential sources of borrowing, if needed.
More developed economy, banking system.Slide42
Argentina vs. Greece
Exports as a Percent of GDP, Pre and Post-DevaluationSource: Eurostat and INDEC.Slide43
SpainSlide44
Spain
Debt burden is manageable at reasonable interest rates.Slide45
Spain: Quarterly Real GDP Growth
Seasonally Adjusted Annualized RatesSource: EurostatSlide46
Spain: Unemployment
Seasonally Adjusted Annualized RatesSource: EurostatSlide47
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.Slide48
Spain: Projected Interest Payments
Percent of GDPSource: IMF WEO.Slide49
ConclusionSlide50
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-makingSlide51
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