The current state of the Euro and its future

Transcription

1 The current state of the Euro and its future Volker Wieland IMFS, Goethe University Frankfurt Seminar Municipal Guarantee Board, Helsinki, Finland September 12, 2013

2 Some of the questions raised.. Which kind of currency regime would be more suitable for the euro area (if any), compared to the prevailing one? Is it technically feasible to change the currency regime of the euro area to a better one? Yes, no? Why? How? Is there a way out to prosperity for Europe with the current regime? What should Germany do? Economic and political issues? And Finland? 2

3 The current state of the Euro and its future 1. Macroeconomic adjustment and monetary union: Some basic issues 2. Light at the end of the tunnel: Options for the longrun 3. Euro crisis onwards 4. Some recent monetary policy issues 5. Some recent fiscal policy issues 6. Upcoming German elections and the politics of monetary union 3

4 1. Macroeconomic adjustment and monetary union: Some basic issues 4

5 1.1. Joining monetary union means giving up nominal exchange rate as adjustment mechanism to temporary shocks, e FF/DM P DM /P FF. choice of trend inflation and trend depreciation / repetitive devaluation as a tool for gaining competitiveness. control of seigniorage. independent monetary policy and interest rate adjustments for pursuing national stabilization.. 5

6 1.2. Joining means benefitting from possibly more stable prices and lower inflation (tying one s hands) than in EMS. possibly lower nominal interest rates on average. possibly more influence over monetary policy and interest rate decisions than in EMS. reduced exchange rate uncertainty and fluctuations that might otherwise disrupt trade and investment flows. more integrated markets for goods and services (trade). more integrated financial markets (credit access). 6

7 1.3. Living in monetary union is easier if remaining adjustment mechanisms are used more than previously such as price and wage flexibility to mirror real exchange rate adjustment previously possible via nominal rate. intertemporal fiscal adjustment, borrow in bad times, save in good times. Needs lower average than previously (Maastricht criteria helpful). labor mobility. Reduce formal and informal barriers. or if additional public cross border transfer and credit systems are created. 7

8 1.4. Things that went wrong in EMU Excessive public borrowing at unusually low rates possible reasons: anticipation of future transfers, preferred treatment of government, wrong expectations, market failure. Excessive private borrowing at unusually low rates possible reasons: insufficient supervision and regulation, loose monetary policy, wrong expectations, market failure. Loss of competitiveness Possible reasons: nominal wage and prices upwardly flexible in boom, insufficient downward flexibility when needed. Low sustainable growth Possible reasons: labor and goods market regulations, inefficient use of resources, reform pressure absent in boom periods, political opposition in crisis periods leads to delay and lobbying for external help. 8

9 1.5. Adjustment mechanisms used and measures taken. Intertemporal fiscal adjustment, in several cases to the maximum. Labor mobility, a little. Wage and price flexibility, some gains of competitiveness. Market-oriented reforms, some. Inter-governmental credit (EFSF, ESM), central bank credit (LTRO s, ELA, OMT). Transfers (lower rates also through guarantees and central bank interventions, public participation in haircuts, OMT promise of participation). 9

10 1.6. Fiscal adjustment: deficits (old chart) IfW Advanced Studies, Feb 2011 Monetary and Fiscal Policies Volker Wieland Goethe University of Frankfurt Section 7: Debt Dynamics and Crisis 10

11 1.7. Fiscal adjustment: debt (old chart) IfW Advanced Studies, Feb 2011 Monetary and Fiscal Policies Volker Wieland Goethe University of Frankfurt Section 7: Debt Dynamics and Crisis 11

12 1.8. Net migration to Germany: EU, EU14, Crisis Countries EU without Germany EU14* Crisis countries** Data has been provided by the Statistisches Bundesamt. Note that 2012 is preliminary as December 2012 is estimated (final numbers for 2012 will be available in May 2013) ** Crisis countries refers to Italy, Greece, Spain, and Portugal. * EU14: Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Italy, Luxembourg, Netherlands, Portugal, Spain, and Sweden. 12

13 2. Light at the end of the tunnel: Options for the long-run 13

14 2.1. Light at the end of the tunnel: Options for the long run More Europe but of what nature? Two consistent long-run options: (A) Fiscal and political union (B) Maastricht

15 2.2. Option A: Fiscal and political union Substantial transfer of power to supra-national level, joint debt and taxes, restrictions on national budgets, less room for national preferences in a wide range of policies. Needs much greater role of parliament on European level, much reduced on national level. Little or no taste for this among governments. Little taste for this among populations of member countries. Depends on the questions asked. Unrealistic. If pursued it may end in out-of-control debtor s union and increasing political conflict. 15

16 2.3. Option B: Maastricht 2.0 Keep maximum room for national sovereignty. Budget and wide policy-making responsibilities on national level. Market reforms to make adjustment mechanisms more effective. Ensure fiscal sustainability on national level with more effective, more harmonized and monitored rules. Use new credit and transfer systems to further better regulations and rules, and to help increased national responsibility instead of creating more moral hazard. Requires popular und sustained support by electorates. Exit from the monetary union to re-gain exchange rate based adjustment mechanisms should remain an option. 16

17 2.4. German Council of Economic Experts Proposal 17

18 3. Euro crisis onwards 18

19 3.1. Euro crisis onwards Some improvements visible Driving factors: OMT + interest rate policy + euro governance and banking union plans + some progress on fiscal consolidation & competitiveness & bank and household deleveraging & reform in crisis countries. Crisis not over. Risk of relapse depends on importance of the real improvements relative to ECB measures. 19

20 3.2. Euro crisis onwards: Government bond yields differences to Germany 20

21 3.3. Euro crisis onwards: Target 2 balances 21

22 3.4. EU Reviews: Example Spain - wages and competitiveness 22

23 3.5. Example Spain: Household indebtedness 23

24 3.6. Euro area: Business cycle dynamics 24

25 3.7. Germany: Business cycle dynamics 25

26 3.8. EU Commission potential growth estimates: Euro area versus Germany 2,5 2,0 1,5 1,0 0,5 Euro Area Germany 0, * Source: European Commission, AMECO May 2013 (* indictes forecast) Estimates in % as of May

27 4. Recent monetary policy issues 27

28 4.1. Outright monetary transactions, OMT Substantial impact yes, but not surprising. Big step into terrain of fiscal policy. Questionable if it was necessary. Conditionality difficult to enforce, only protection from fiscal dominance. Potential cause for delays in efforts to restructure and reduce banking sector, reforms, consolidations, euro governance. Not comparable to U.S. style QE policies. Different objective, direct benefit to selected member states. Challenge in German Constitutional Court. 28

29 4.2. ECB policy rates and Eonia 29

30 4.3. Money market: (A) 1-12month Euribor (B) Implied forward overnight rates (A) (B) 30

31 4.4. Central bank assets / GDP 31

32 4.5. ECB forward guidance July 4: Looking ahead, our monetary policy stance will remain accommodative as long as necessary. The Governing Council expects the ECB interest rates to remain at present or lower levels for an extended period of time. This expectation is based on the overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the real economy and subdued monetary dynamics. Draghi: there is no precise deadline for this extended period of time. As a matter of fact, you can extract a reaction function and, from there, estimate what would be a reasonable extended period of time. 32

33 4.6. A reaction function (Orphanides- Wieland 2013) i i 0.5( ) 0.5( q q ) * * t t 1 t 3 t t 2 t t 2 t 33

34 4.7. A projection (Bletzinger Wieland 2013) 34

35 5. Recent fiscal policy issues 35

36 5.1. Draghi on fiscal consolidation May 2: fiscal consolidation is contractionary in the short and medium term. Therefore, you may want to take action to mitigate the contractionary effects. fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes. Unfortunately, many of the fiscal consolidation measures were implemented in an emergency situation, with most governments choosing the simplest route, which was to raise taxes. And here we are talking about raising taxes in an area of the world where taxes are already very high, so it is no wonder that this had a contractionary effect. However, now that there is more time, there could be a shift towards reducing current government expenditure and lowering taxes. 36

37 5.2. Burgert and Wieland (2013) on fiscal consolidation strategies Contractionary fiscal consolidation: Increase tax rate and borrow to finance higher expenditure (transfers). Stabilize debt at higher level with interest covered by additional tax revenue. Expansionary fiscal consolidation: Reduce labor tax rate and cut expenditures (transfers). Stabilize government debt at lower level, such that interest savings just make up for lost tax revenue. 37

38 5.3. Contractionary consolidation: Permanent increase in labor income tax rate, stabilization at higher government debt 38

39 5.4. Expansionary consolidation: Permanent reduction in labor income tax rate, stabilization at lower government debt. 39

40 5.5. Findings Distortive effect of taxes depresses economic activity in the long-run. Permanent tax reduction and debt consolidation financed by temporary transfer cuts leads to expansionary consolidation. Well designed expenditure-revenue program for consolidation can stimulate growth in the short-run and long-run. 40

41 5.6. Euro area consolidation plans

42 6. Upcoming German elections and the politics of monetary union 42

43 6.1. Who would you prefer as chancellor? 43

44 6.2. But, election is still wide open, because 5 % threshold creates uncertainty about which small parties make it (FDP, AfD, Pirates...) Option 1: current coalition, CDU/CSU + FDP Option 2: grand coalition, CDU/CSU + SPD Option 3: red-red-green, SPD + Greens + Left CDU/CSU + FDP + AfD? 44

45 6.3.Who would you vote for this Sunday? (FWG/ZDF) : CDU 41, SPD 26, Green 10, Left 8, Pirat<3, FDP 6, AFD : CDU 42, SPD 27, Green 14, Left 6, Pirat<3, FDP : CDU 38, SPD 29, Green 14, Left 7, Pirat 4, FDP : CDU 36, SPD 29, Green 12, Left 6, Pirat 6, FDP 5 45

46 6.4. Issues of concern to Voters? Unemployment Economic situatio Education Pensions Euro crisis 46

47 6.5. Potential for Anti- party AfD: Infratest-Dimap/ARD Could you imagine voting for a -critical party such as AfD at the federal election? 7% yes sure, 17% yes, maybe, 15% probably not, 59% surely not, 2% no answer. Composition of yes sure and maybe votes: Supporters of the Left 29%, SPD 21%, CDU/CSU 19%, Greens 14%, undecided 32%, non-voters 31%. BUT so far in election question 3-4 %, below threshold. 47

48 6.6. Implications of potential new governing coalitions for euro area issues 48