Euro crisis Baldwin&Wyplosz s view

Transcription

1 Eurpean Ecnmic Integratin Givanni Di Bartlme Class verview 1. Glbal financial crisis 2. Public debt crisis 3. Plicy respnse Eurpean Ecnmic Integratin EPOS Master in Advanced Ecnmics Givanni Di Bartlme Eur crisis Baldwin&Wyplsz s view Slides are largely based n Baldwin-Wyplsz s nes (textbk) EPOS Master in Advanced Ecnmics

2 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage ne: the glbal financial crisis Fllwing Great Depressin, strict regulatin was designed t limit risk-taking by banks and financial institutins. The deregulatin phase started in the 1980s, fllwed by a rapid expansin f financial sectrs in the USA and Eurpe: Banks became active investrs: maturity mismatch; currency mismatch; Banks tk majr risks, implicitly brne by their gvernments; Huse mrtgages in the US t risky peple: subprime mrtgages, which relied n ever increasing huse prices. And these lans were sld t banks, which sld them t ther banks (i.e., securitizatin). EPOS Master in Advanced Ecnmics

3 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage ne: the glbal financial crisis Husing prices in the USA (Index: January 2000 = 100): EPOS Master in Advanced Ecnmics

4 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage ne: the glbal financial crisis -When huse prices stpped rising, securities lst their ratings and many f the wrld s largest banks (especially in US, UK, France, Germany) faced heavy lsses. April 2007: New Century Financial Crpratin (ne f the largest US mrtgage lenders) declared bankruptcy; July 2007: bank Bears Stearns annunced that it wuld stp hnring the cmmitments f ne f its SPVs; banks grew suspicius f ne anther and stpped their mutual lending that makes up the interbank market. central banks prvided liquidity directly t their banks. September 2007 spring f 2008: several majr banks failed; 15 September 2008: failure f Lehman Brthers triggered the wrst financial crisis since EPOS Master in Advanced Ecnmics

5 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage ne: the glbal financial crisis Assets f central banks (Index: January 2007 = 100): EPOS Master in Advanced Ecnmics

6 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage ne: the glbal financial crisis Plicy makers (gvernments and central banks) fllwed the lessns learned frm the Great Depressin: - rescue large financial institutins; - deep distress in the financial system is sn fllwed by a prfund and lng-lasting recessin; - central banks must prvide liquidity t the financial system and adpt sharply expansinary plicies; - gvernments must bail ut banks and ther financial institutins; - gvernments must use fiscal plicy t prevent a vicius cycle f recessin and large budget deficits. The Lndn G20 Summit in 2009 called upn all gvernments t urgently adpt expansinary plicies. EPOS Master in Advanced Ecnmics

7 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage ne: the public debt crisis These actins had dramatic impacts n budget deficits (e.g., in 2010, Irish gvernment spent almst 30% f its GDP n bank bailuts). Budget balances (% f GDP): EPOS Master in Advanced Ecnmics

8 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne The recessin has been deep but relatively shrt-lived! GDP grwth : EPOS Master in Advanced Ecnmics

9 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne Hwever negative grwth and large budget deficits have led t a fast increase in public debts: - Financial crisis has led gvernments t run budget deficits; - deficits have led financial markets t wrry abut the sustainability f public finances. Greece: - late 2007: public debt at 105% f GDP; - late 2009: public debt at 127% f GDP; - early 2010: Greek gvernment in desperate situatin; - May 2010: IMF EU ECB (called Trika) rescue peratin and creatin f Eurpean Financial Stability Facility (EFSF); : new package frm the Trika (cnditinal lans). EPOS Master in Advanced Ecnmics

10 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne Time line f financial assistance EPOS Master in Advanced Ecnmics

11 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne Bailut f Greece in May 2010 was mtivated as a way t avid highly dangerus cntagius effects but this gal prved elusive: - Ireland received a lan in Nvember 2010; - Prtugal fllwed suit with a lan in May Cntagin within the Eurzne is highly trubling since public indebtedness is nt enugh t explain why these cuntries, and nt thers, have faced the wrath f the financial markets. Pssible additinal explanatins: - membership f a mnetary unin may be a weakness (natinal central banks cannt help gvernment); - n lender f last resrt; - cmpetiveness issue; - Plicy mistakes. EPOS Master in Advanced Ecnmics

12 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne Public Debt in 2009 and 2014 (as % f GDP): EPOS Master in Advanced Ecnmics

13 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne Increases in the unit labr csts : EPOS Master in Advanced Ecnmics

14 Eurpean Ecnmic Integratin Givanni Di Bartlme Stage tw: the public debt crisis in the Eurzne Current Accunts (as % f GDP): EPOS Master in Advanced Ecnmics

15 Eurpean Ecnmic Integratin Givanni Di Bartlme Plicy respnses Step increases in interest spreads (belw) is due t plicy decisins that markets perceived as t little, t late (e.g., EFSF). Interest rate spreads (basis pints): EPOS Master in Advanced Ecnmics

16 Eurpean Ecnmic Integratin Givanni Di Bartlme Plicy respnses Fiscal plicy strategy: fiscal austerity as a mean t return t ecnmic grwth. IMF real GDP frecasts EPOS Master in Advanced Ecnmics

17 Eurpean Ecnmic Integratin Givanni Di Bartlme Plicy respnses Fiscal plicy was much less expansinary in the Eurzne. EPOS Master in Advanced Ecnmics

18 Eurpean Ecnmic Integratin Givanni Di Bartlme Bailut Institutins Plicy Respnses - Creatin f the Eurpean Financial Stability Fund (EFSF) fr availability f financial resurces in case f cntagin - Replacement with the Eurpean Stability Fund (ESM) in Based in Luxemburg - Lending capacity f 500 billin Eur - Capital can be increased up t 700 billin Eur EPOS Master in Advanced Ecnmics

19 Eurpean Ecnmic Integratin Givanni Di Bartlme Plicy Respnses Mnetary Plicy EPOS Master in Advanced Ecnmics

20 Eurpean Ecnmic Integratin Givanni Di Bartlme The Outcme EPOS Master in Advanced Ecnmics

21 Eurpean Ecnmic Integratin Givanni Di Bartlme The Outcme EPOS Master in Advanced Ecnmics

22 Eurpean Ecnmic Integratin Givanni Di Bartlme What have we learned frm the crisis? Fiscal discipline: very high debt creates serius difficulties. - limits cuntercyclical fiscal plicy - challenges mnetary plicy independence - pssibly limits grwth Eurbnds may have appealing features - element f slidarity - single Eurbnd market might challenge US Treasury Bnds (as internatinal reserves) - cnsidered t be save - end fragmentatin f Eurzne financial market - But: plitically unfeasible Debate n debt restructuring Bank fragility Gvernance EPOS Master in Advanced Ecnmics

23 Eurpean Ecnmic Integratin Givanni Di Bartlme Will the Eurzne break up? Yes: - failure t establish fiscal discipline; - gap between well-functining Nrth and badly wunded Suth; - many internatinal investrs d nt believe that the eur can survive (self-fulfilling prcess). N: - breakup wuld have catastrphic implicatins; - new currency wuld have t be printed and reintrduced; - n legal prcedure fr a cuntry t leave the Eurzne; - deeper prblem has been plitical mismanagement f the crisis. EPOS Master in Advanced Ecnmics