Future Scenarios: Europe in Prof. Michael C. Burda, Ph.D. Humboldt-Universität zu Berlin Keynote Speech, ITB Berlin 6 March 2013

Transcription

1 Prof. Michael C. Burda, Ph.D. Humboldt-Universität zu Berlin Keynote Speech, ITB Berlin 6 March

2 Overview Macroeconomic stability is essential for a thriving tourism business. Despite the calm in financial markets, we are still in a mess. Where are we going? Everything has been said, but not by everybody (not yet). There are no simple solutions, and most are painful. Three scenarios: Europe in ten years time. These are fantasies, which might become reality. 2

3 Three scenarios for 2023 Optimistic Pessimistic Realistic The good The bad The ugly 3

4 Scenario I in 2023: The good In 2023, the Euro still exists and is counts as a central reserve currency in international payments. The European Union remains the largest internal market in the world. A functioning banking union counts as one of the most effective of trans-european institutions Sustained growth returns to Europe, and a reliable supply of bank credit transcends national boundaries. HOW DID WE GET THERE? 4

5 Scenario I in 2023: The good After tough negotiations and in return for a deep forgiveness of debt, Greece pursues tight fiscal policy, especially the reduction of government spending. Privatization and reforms of product and labor markets, land registry, and tax administration lay the basis for sustained economic growth. In 2015 some taxes are even reduced. By 2016 the Troika-Program bears fruit: Greece grows like Ireland in the 1990s. Portugal returns to growth in 2014, driven by exports and investment, also from Germany. Spain and Italy are also recovering. 5

6 Scenario I in 2023: The good European sovereign debt trades at different yields, which is accepted as fair and justified by national risk. The No-Bailout-Clause (Art 125 Vert.AEU) has a legal renaissance. EU citizens regain confidence that neither the Commission nor Germany will deprive them of their sovereignty. All EU banks obey rules laid down by an impartial, but tough European banking regulator. Deposit insurance is comprised of a hybrid system of national and trans-european insurance funds. 6

7 Scenario I in 2023: The good After a decade of consolidation, roughly 15 trans- European banks emerge, active in all countries. The refinancing of commerical banks is nonpolitical, and follows principles of good banking, independent of the financial institution s provenance. A reformed Eurozone consists of five EZ districts: EZ Ouest, EZ North, EZ Midi, Mitte-Sud, and EU-East, cutting across political boundaries. Political coalitions in the ECB Governing Council are no longer possible. 7

8 Scenario I in 2023: The good That sounds wonderful! Presupposes patience and trust on the part of the creditor nations and institutions. Presumes the real willingness of the crisis nations to reform. Will only happen if countries realize that such reforms are in their own interest to preserve sovereignty vis-a-vis the EU commission (and Germany!) 8

9 Scenario II in 2023: The bad Not only Greece, but also Portugal, Italy and Spain have returned to the national currencies they used a quarter-century ago. The Euro survives in the form of a Rump-Euro affectionally called the Nordeuro by Germans and NEURO by neighbors: F, NL, B, L, DK, PL Trade and financial integration of the 1990s and 2000s is stopped in its tracks. Export shares across EZ countries decline sharply. Autarky returns. HOW DID THAT HAPPEN? 9

10 Scenario II in 2023: The bad The Troika gave Greece another bailout in Strong lobbying efforts across the EU and EZ prevented further debt restructuring or forgiveness. The recession persists. Wages and prices do not fall because of expected bailouts and reforms on paper are not carried out. Uncompetitiveness persists. Political frustration of southern EU countries gains upper hand. Resentiment against the Euro, die EU und German grow. 10

11 Scenario II in 2023: The bad Financial markets bet against Greece and co. Sovereign bond yields rise again, reflecting bad expectations and renewed capital flight The ECB turns off the monetary spigot. Politicians blame the ECB for renewed stagnation. In 2016 Greece starts using scrip for money and exits the EZ shortly afterwards. The new currency drops in value precipitously. Greek banks fall by the dozens, and must apply for assistance from the EU. 11

12 Scenario II in 2023: The bad Yet three years after the devaluation of more than 60%, Greece grows again, in 2018 at rates like in Iceland after the financial crisis. As in December 2009, financial markets punish Portugal, Spain and Italy despite their progress, due to expectations that they will do the same. The sharp rise in sovereign bond yields is too much for the governments of P, S, and I to bear and they capitulate. By 2020, the EMU as it was is dead in the water. The Euro is used only by Germany and neighbors. 12

13 Scenario II in 2023: The bad That sounds really awful! But not for everyone. Re-introduction of the drachma, peseta, escudo and lira has a positive effect in the medium term but with significant collateral damage. Banks all over Europe must be recapitalized or even nationalized. Political entrepreneurs recognized a market for an exit option and profited from it. Fears of Brussels and speaking German are on the rise. 13

14 Scenario III in 2023: The ugly In 2023 the Euro is still in use, by all the countries we know and love. Even Greece is still on board. Weiterwurschteln à la européenne is the strategy (muddling through) An unintended sequences of transfers has become permanent fixtures of the EU plumbing system. Resentment against Brussels increases everywhere, but especially from the northern part of Europe. An anti-euro exit movement starts in Germany and Holland, with Europe more unpopular than ever. WHAT HAPPENED? 14

15 Scenario III in 2023: The ugly The Greek government demands and gets debt relief of 40-50%. Greece keeps the Euro. Reforms are continued only half-heartedly and without any real new incentives Necessary adjustments (decline in nontraded goods prices, moving resources to traded goods sectors) do not occur... Essential real investment flows from abroad do not materialize. Greece retains transfer assistance and endures significant political intervention from Brüssels and Germany 15

16 Scenario III in 2023: The ugly The spoiler: a series of supply shocks in lead to significantly higher inflation rates in all countries, also in Germany. Given all the political constraints, it is hard for the ECB to get inflation under control because raising interest rates is devastating for the highly indebted EZ countries, with their mountains of short term debt Higher inflation stokes anti-euro sentiments in Germany Well before 2023, the government in Berlin passes a German exit from the EZ 16

17 Which scenario will it be in 2023? Weighty decisions will or will not be taken in the next twelve months, everywhere in Europe. The long-run durability of the Eurozone requires the return of the No-Bailout-Principle! Less Europe is better than more Europe. It is a question of political economy. Does Germany want No-Bailout? Can Germany find allies? Germany should invest heavily in this option and leverage an already negative view of Europe s ability to do anything properly. 17

18 Last Observations Monetary union is like having a roommate: Not about family Each person has his own room, but there are shared areas (kitchen, living room, WC, etc) Everyone has to clean up after themselves, wash their hands, stay healthy There are often fights and the longer people room together, the harder it is to separate It can all end very badly (Feldstein) 18

19 Conclusion It was a cardinal mistake to introduce the Euro as widely as it was but the Euro was not a mistake. It is too late to turn back in midstream. The credibility of a monetary union requires that it not be decided over the heads of the people. More democracy is only possible paradoxically through a renewed No-Bailout-Principle each member must be made responsible for its own fate. Not the financial capital of the ESM, but rather the fear of too much Europe should be leveraged. 19