CHALLENGES OF THE EUROZONE CAN THE EURO SURVIVE?

Transcription

1 CHALLENGES OF THE EUROZONE CAN THE EURO SURVIVE? Peter Bofinger Universität Würzburg German Council of Economic Experts Presented at the 2017 Annual Lecture in Economics of the Cyprus Economic Society Nicosia, 25 May 2017

2 Outline I. Euro crisis: What went wrong? II. How the Euro was saved, so far at least III. How effective are structural reforms? III. The great divide: Maastricht 2.0 versus Euro 2.0 IV. Intermediate solutions 2

3 I. What went wrong? 3

4 Dismal growth performance of the EZ since 2007 GDP Growth GDP (2007=100) United States Euro area United States Euro area Source: OECD, Economic Outlook Annex Tables 4

5 Fiscal policy response was too weak 0 Fiscal balances (percent of GDP) United States Euro area Source: OECD, Economic Outlook Annex Tables 5

6 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 % ECB policy rate was too high 6 Short-term interest rates (1-month LIBOR) Euro Area USA Source: FRED, Federal Reserve Bank of St. Louis 6

7 Jan-99 Dec-99 Nov-00 Oct-01 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Aug-14 Jul-15 Jun-16 Percent Quantitative easing was delayed year bond yield Bond holdings of central banks (percent of GDP) Euro-Benchmark 10-year US Treasury ECB Federal Reserve Sources: ECB, Federal Reserve Bank of St. Louis, Board of Governors 7

8 The Euro Area s main problem 8

9 Basis points Bond-Run: Financial markets in panic year bond spreads over German Bunds Italy Spain Source: Thomson Reuters Datastream 9

10 Vicious circle of the problem countries. Banking crisis Government debt crisis Macroeconomic crisis 10

11 II. How the Euro was saved so far at least 11

12 Mario Draghi s magic moment "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." 12

13 Basis points Risk premia declined substantially year bond spreads over German Bunds Italy Spain Source. Thomson Reuter Datastream 13

14 Silent paradigm change in Change in structural balance (percentage points) GDP (2010=100) France Germany Greece Italy France Germany Greece Italy Portugal Spain Euro area Portugal Spain Euro area Source: OECD, Economic Outlook, Annex Tables 14

15 Jan 1999 Jun 1999 Nov 1999 Apr 2000 Sep 2000 Feb 2001 Jul 2001 Dec 2001 May 2002 Oct 2002 Mar 2003 Aug 2003 Jan 2004 Jun 2004 Nov 2004 Apr 2005 Sep 2005 Feb 2006 Jul 2006 Dec 2006 May 2007 Oct 2007 Mar 2008 Aug 2008 Jan 2009 Jun 2009 Nov 2009 Apr 2010 Sep 2010 Feb 2011 Jul 2011 Dec 2011 May 2012 Oct 2012 Mar 2013 Aug 2013 Jan 2014 Jun 2014 Nov 2014 Apr 2015 Sep 2015 Feb 2016 Jul 2016 Dec 2016 The risk of deflation in the euro area 5 4 HICP Inflation Rate Inflation rate Core inflation ECB inflation target Source: ECB 15

16 No indications of a new financial bubble in the EZ 600 MFI loans to the private sector (January 1999=100) Euro area Germany Spain Italy France Ireland Source: ECB 16

17 III. How effective are reforms? 17

18 Responsiveness to reforms is not so bad 80,0 Responsiveness to OECD Going for Growth recommendations 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 Responsiveness rate, Responsiveness rate, Source: OECD Going for Growth 18

19 Employment protection legislation I 3,50 Protection of permanent workers against individual and collective dismissals 3,00 2,50 2,00 1,50 1,00 0,50 0,00 Source: OECD 19

20 Employment protection legislation II 6,00 Regulation on temporary forms of employment 5,00 4,00 3,00 2,00 1,00 0,00 Source: OECD 20

21 GRC KOR AUS TUR USA NZL LTU CHL EST GBR POL HUN SWE SVK FRA OECD ESP AUT DEU EU ITA CZE CAN NOR IRL JPN ISL PRT BEL NLD LVA CHE SVN FIN DNK ISR LUX ITA TUR CHL GRC USA HUN LTU PRT ESP KOR ISR SVK EST LVA POL OECD CAN EU AUS FRA NZL CZE BEL SVN DEU SWE GBR JPN NOR CHE DNK ISL NLD LUX AUT FIN IRL Are Hartz IV reforms a model for other countries? Net income replacement rates for unemployment (percent) Initial 60th month Average (2014) Average (2014) Source: OECD, Going for Growth

22 Wage moderation for all? 160 Unit labour costs (1999=100) Germany Ireland Greece Spain France Italy Netherlands ECB-Norm Source: AMECO Database 22

23 German wage increases are still too low 8,0 Increase in Unit Labour Costs and ECB Inflation Target (percent) 6,0 4,0 2,0 0,0-2,0-4, Unit Labour Costs (per hour) ECB Inflation Target Source: Destatis 23

24 Greece Michigan Italy Portugal Louisiana Mississippi Maine Ohio Missouri Connecticut Kentucky West Virginia Delaware Illinois New Jersey Rhode Island Alabama Germany France Indiana Netherlands Wisconsin Georgia Finland South Carolina Austria New York Vermont Belgium Arkansas Kansas New Mexico Tennessee Pennsylvania Spain New Hampshire Nevada North Carolina Florida Minnesota Virginia Alaska Washington Massachusetts Arizona Hawaii District of Columbia Colorado Iowa Maryland Montana Idaho Nebraska California Wyoming Oklahoma Utah South Dakota Oregon Texas Ireland North Dakota Does Michigan need structural reforms? Average GDP growth rates ( ) Source: Ameco and Bureau of Economic Analysis 24

25 IV. The great divide: Maastricht 2.0 versus Euro

26 Polar views on the insolvency problem Maastricht 2.0: Insolvency risk is a positive feature: necessary for achieving full market discipline Strict no-bail out and formal insolvency procedures for sovereigns Fiscal competences at the national level Euro 2.0 Insolvency risk is a negative feature: exposes member states to unpredictable effects of market forces Debt mutualisation Transfer of fiscal competences to EZ-level (EMF, EFI, European Finance Minister) 26

27 Two views on market discipline Feld et al. (2016, p.55): An insolvency mechanism for sovereigns that credibly stipulates a creditor bail-in would not only help with burden sharing (similar to the bail-in rules for the banking sector), but also give creditors incentives to assess the default risks of government bonds and loans accurately and factor them in when calculating risk premiums. This should result in ex -ante disciplining of government budgetary policy and would, thus, support crisis prevention. Delors-Report (1989): ( ), experience suggests that market perceptions do not necessarily provide strong and compelling signals and that access to a large capital market may for some time even facilitate the financing of economic imbalances. Rather than leading to a gradual adaptation of borrowing costs, market views about the creditworthiness of official borrowers tend to change abruptly and result in the closure of access to market financing. The constraints imposed by market forces might either be too slow and weak or too sudden and disruptive. 27

28 Underlying assumptions of reform proposals More political integration is not possible More political integration is possible Market discipline more effective than political discipline/markets self-stabilizing Political discipline more effective than market discipline/markets need stabilization by state Maastricht 2.0: Insolvency regime for Euro area (German Council of Economic Experts majority) Muddling through Stabilising the the Status quo which relies on heavy ECB support (QE/OMT) Hybrid forms of Maastricht2.0/Euro 2.0 Euro 2.0: Some form of debt mutualisation. Transfer of policy competences to the Euro area level 28

29 V. Intermediate solutions 29

30 Intermediate solutions More effective fiscal policy coordination in the European Semester Golden rule for the Stability and Growth Pact Debt mutualisation for new debt, related to joint investment projects or for debt raised in exceptional conditions EZ unemployment insurance EZ budget 30

31 Main challenges of the Eurozone Insolvency risk Insufficient fiscal policy coordination Beggar-my-neighbour policies Compensation of regions which are negatively affected by trade shocks Willingness to reform detrimental political and economic structures 31

32 Can the Euro survive? 32