The European Economic Crisis

Transcription

1 The European Economic Crisis Patrick Leblond Teaching about the EU in the Classroom Centre for European Studies Carleton University, 25 November 2013

2 Outline Before the crisis European economic integration European monetary union The European economic crisis Conclusion Appendix: EU/Eurozone economic governance

3 EUROPEAN ECONOMIC INTEGRATION 3

4 4 types of regional economic integration arrangements Free Trade Area Elimination of tariffs and non-tariff barriers between signatory states Each country upholds its own external trade policy E.g., NAFTA Customs Union Free trade area + common external tariffs E.g., Mercosur Common Market Customs union + free movement factor inputs (labor and capital) Harmonization of industrial regulations E.g., European Economic Area Economic Union Common market + harmonized monetary, financial and social policies E.g., European Union 4

5 The four freedoms Goods Services Capital People 5

6 3 phases of economic integration Phase I ( ) Years of strong growth Progressive elimination of tariffs and restrictions on quantity of goods traded Establishment of a common exterior tariff Implementation of a common agricultural policy Phase II ( ) Stagnation (or consolidation?) Failed attempt at monetary integration (Werner Plan) Phase III (1986-present) Important push for integration Liberalization of trade in services (e.g., financial services) Broadening of areas of policy competencies (e.g., Social Charter) Standardization of regulations and norms Monetary integration Significant increase in the number of members 6

7 EUROPEAN MONETARY UNION 7

8 EMU timeline November 1, 1993 Maastricht Treaty on European Union, signed in Feb Denmark and UK obtain a derogation January 1, 1994 European Monetary Institute European Commission January 1, 1999 Birth of the euro European Central Bank 11 founding members January 1, 2002 Euro notes and coins Today 17 members (Latvia to join on January 1, 2014) 8

9 Economic rationale for EMU Next logical step after the Single Market Benefits Lower transaction costs Price stability Lower interest rates Lower economic volatility Lower official reserves International reserve currency Costs Loss of monetary authority (but was already very limited) 9

10 Political rationale for EMU France and Italy no longer wanted to follow Germany s monetary policy leadership Provide a credible counterweight to the US dollar Bargain between France and Germany Anchor Germany more strongly into Europe 10

11 European Central Bank s mandate The primary objective of the ECB s monetary policy is to maintain price stability The ECB aims at inflation rates of below, but close to, 2% over the medium term 11

12 Inflation Source: European Central Bank ( 12

13 Economic growth Real GDP Growth (by volume) % f Source: Eurostat EU-27 Euro

14 The euro s exchange rate vs. the US dollar Source: European Central Bank 14 14

15 THE EUROPEAN ECONOMIC CRISIS 15

16 How do we explain this? Kal s Cartoon,The Economist, April 28th,

17 Two crises, not one! The banking crisis Government rescue packages Monetary rescue by central banks Stimulus packages The debt crisis Market worry about mounting debts Panic in the markets Rescue operations (Greece and EFSF) ECB purchase of sovereign bonds Austerity packages 17

18 Sovereign Debt Crisis: Two Ways Cheap Credit Cheap Credit Low Competitiveness Bank Leverage Real Estate Bubble Fiscal Deficits Bank Failures Bubble Bursts High Public Debt Bank Bailouts Sovereign Debt Crisis Sovereign Debt Crisis Ireland Spain Portugal Italy Greece 18

19 Banks & Sovereign Debt Banks Member States Debt Central Banks (ECB) 19

20 The banking crisis led to fiscal deficits Source: Eurostat

21 So public debts went up! (But some had a head start ) Source: Eurostat 21

22 Greece: A classic debt crisis Too much government borrowing in good times Fixed exchange rate regime Overvalued exchange rate: loss of competitiveness External shock The global financial crisis slows external demand Interest rates begin increasing Investors get nervous: higher risk premium Self-fulfilling prophecy? Debt financing becomes more and more expensive Sudden Stop : sovereign bond investors panic EU/IMF bails out the government 22

23 Ireland: A classic banking crisis that became a debt crisis The economy grows very rapidly Credit is cheap Banks leverage themselves People buy real estate and create a bubble Sudden stop in credit Economy slows down rapidly Subprime mortgage defaults Government bails out the banks and guarantees all deposits Sovereign bond investors panic EU/IMF bails out the government 23

24 Who is to blame? Pretty much everyone! The obvious ones: Banking regulators in Ireland, Portugal and Spain Successive governments in Greece, Italy and Portugal But also the less obvious ones: Sovereign bond investors Germany and France 24

25 CONCLUSION 25

26 Market confidence has been improving, but for how long? 10-year sovereign bond yields Failure of Lehman Brothers Greek Debt Crisis Begins Source: European Central Bank 26

27 Recovery takes time sadly! That s what history teaches us Fiscal consolidations are particularly painful when everyone is doing it at the same time It is even more difficult when the world economy is sluggish (e.g., China and the US) A lower euro might help a bit

28 The politics may have been messy but they have nevertheless worked Crisis management European Central Bank and the use of nonstandard monetary policy instruments European Financial Stability Facility /European Stability Mechanism Sovereign (and soon bank) bailouts Crisis prevention Fiscal compact (completed) Banking union (in progress) Common bonds/fiscal union (?)

29 What does it mean for Canada? Canada has not been much affected by the euro area crisis Our banks had limited exposure to eurozone sovereign debt Our exports to the EU have remained relatively stable The real risk has been indirect Another global recession as a result of a freeze in the interbank credit market The dwindling of available AAA financial assets makes it cheap for the federal government to finance its growing debt A more economically stable and productive EU can only be good news for the Canadian economy Especially in light of the CETA 29

30 THANK YOU! 30

31 APPENDIX EU/EUROZONE ECONOMIC GOVERNANCE 31

32 EU/Eurozone Economic Governance Banking Monetary Fiscal 32

33 Banking Governance EU-level coordination of national regulators European Banking Authority (EBA) Banking union for the eurozone (and participating member states) Single Supervisory Mechanism (ECB in 2014) Single Resolution Mechanism (in progress) Direct bank recapitalization by ESM (in progress) Single Deposit Guarantee Scheme (not yet) Conflicts between the EBA and the ECB? 33

34 Monetary Governance ECB has become a lender of last resort Outright Monetary Transactions (OMT) Whatever it takes! (Draghi, July 2012) Must be on an ESM program Not used until now ( probably the most successful monetary policy measure in recent times [Draghi, June 2013]) 34

35 Fiscal Governance (I) Six-Pack EU law (5 regulations and 1 directive) Fiscal surveillance (strengthen the Stability and Growth Pact) Macroeconomic imbalance surveillance Treaty on Stability, Coordination and Governance Intergovernmental treaty not part of EU law (17 eurozone members + 8 other EU members) Fiscal Compact Also includes reinforced surveillance of coordination of economic policies 35

36 Fiscal Governance (II) Two-Pack EU law (2 regulations) Euro area supplementary budgetary coordination and surveillance (beyond the Six-Pack) Enshrines parts of TSCG into EU law European Stability Mechanism (ESM) Permanent bailout fund for eurozone member states Eurobonds? Mutualization of eurozone sovereign bonds (in part or in whole) Only once the other fiscal governance measures have proved effective 36

37 European Semester Two-Pack fits here