The US versus the EU economies. 1. Cross-cultural management issues 2. State intervention 3. Welfare programs v competition

Transcription

1 The US versus the EU economies 1. Cross-cultural management issues 2. State intervention 3. Welfare programs v competition

2 1 Cross-cultural management issues Main differences in the role of public sector in the economy: -How big should be the public sector? -The bigger is the privet sector the higher will be the productivity? Is the public sector in the EU more economically and politically important than in US? The US is growing faster than the EU. Why? 2

3 Growth and public intervention Main differences in the role of public sector in the economy: -How big should be the public sector? -The bigger is the privet sector the higher will be the productivity? Is the public sector in the EU more economically and politically important than in US? The US is growing faster than the EU. Why? 3

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6 Change in unemployment US versus EU 6

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9 Comsunption versus Investiment: Spain % of GDP 9

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11 Bigger welfare State in the EU v. US In the EU welfare State is historically more important than in the US (maximum size of the EU public sector in the 70 ) In Spain the public sector is growing over the time (see the following graphs) Public Debt is an issue during the recessions (see the following graphs) Social Security is an important part of the welfare State in the EU & Spain (see the following graphs) Higher percentage of public expenditure in military expenses in the US than in the EU 11

12 Saving and retirement founds less important in Spain than in the US In Spain during the last 15 years ( ) the average annual profitability of: The IBEX 35 (Madrid Stock Market 35 selected Co. Of ) was 3.28% The Treasure Bonds profitability was 5.83% The average profitability of the pension founds was 1.2% Currently pension funds holders are only 7,8 mill. (with a capital of 63,930 mill. ) the rest of the population trust on the Social Security system of public pensions Retairement pensions are universal and finance by the working population Privet funds use as complementary income on top of public pension, in most cases 12

13 L, K Foreign Investors Public Debt Source: Mankiw Chapter 3: National Carlos Income. III de Madrid Lecture 1 and CSJ 13 slide 13

14 Supply of funds: Saving The supply of loanable funds comes from saving: Households use their saving to make bank deposits, purchase bonds and other assets. These funds become available to firms to borrow to finance investment spending. Public sector also borrow selling debt (bonds) The government may also contribute to saving if it does not spend all of the tax revenue it receives. Source: Mankiw Chapter 3: National Carlos Income. III de Madrid Lecture 1 and CSJ 14

15 2 STATE INTERVENTION 15

16 Who are the holders of U.S. debt?/1 Source: 16

17 Who are the holders of U.S. debt?/2 The largest portion of the total debt about 40 percent was held by federal government accounts plus the Federal Reserve banks. Since 2009, the Federal Reserve banks have been sharply increasing their holdings of Treasury securities to stimulate the economy, and as of March 31, they held just under $2 trillion of the national debt, or about 12 percent. Asian countries 15% Meaning who, exactly does a country of US size borrow money from? 1. The biggest are the Social Security trust funds (16 percent), 2. The Federal Reserve banks (12 percent), 3. China (8 percent), 4. Japan (7 percent) and 5. Mutual funds including money-market funds (6 percent). Source: 17

18 Who are the holders of U.S. debt?/3 Other major foreign lenders 34 percent of total federal debt is owed to foreigners Other major foreign lenders (apart from China and Japan) are: Various Caribbean banking centers [fiscal paradise] including the Cayman Islands (2 percent altogether), Various oil-exporting nations including Saudi Arabia (2 percent altogether) and Brazil (2 percent). The remainder of the total federal debt is spread among mostly private, domestic investors, including 6 percent owned through mutual funds, such as moneymarket funds. Source: 18

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20 Public debt GDP/ratio, Spain At the start of the crisis, public debt was nevertheless low, from both an historical and international standpoint; but during the crisis, budget deficits and general government debt rose swiftly. At end-2013, in Spain the public debt/gdp ratio stood at 93.9%, far exceeding the 60% benchmark set under the Maastricht Treaty and slightly above the average euro area level (see Chart 2.1) (BdE, 2014). 20

21 Public Debt/GDP ratio and International Investment position For Spain, the increase in public and private debt, which has not been accompanied by a comparable rise in the financial assets of these sectors, has translated into a towering figure for the nation s net debt vis-à-vis the rest of the world: 98% of GDP at end-2013, a figure substantially higher than that of other advanced economies (see Chart 2.1). This high dependence on external saving is a considerable factor of vulnerability, as highlighted during the collapse in the financing of the balance of payments in summer (BdE, 2014) 21

22 Capital inflows in Spain Growing weight of the public funds after 2009 Tensions' because public debt market attacks against PIIGS After 2011: financial support of the EU to save banks Source: COMMISSION STAFF WORKING DOCUMENT. Country Report Spain 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances. {COM(2015) 85 final} Source: Commission Report Spain

23 Financial exposure UK, US, France, Netherlands, Mexico, Chile, Argentina and Brazil Spain has a large financial exposure to noneuro area countries, implying that, beyond price effects, it is also exposed to exchange rate movements. Spanish foreign financial assets are largest in the UK (17 % of Spanish GDP), but also the USA, France and the Netherlands (about 8 % of Spanish GDP each). However, Spain also has a large exposure to Latin American countries, with a combined exposure to Mexico, Chile, Argentina, and Brazil of almost 12 % of its GDP. Foreign claims of Spanish banks are also the largest in non-euro area countries. According to BIS data, the Spanish banking sector was highly exposed to the UK, with claims worth approximately 30 % of Spanish GDP, which were concentrated on the non-bank private sector. Banking sector exposure to the USA, Brazil and Mexico is also high. Source: COMMISSION STAFF WORKING DOCUMENT. Country Report Spain 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances. {COM(2015) 85 final} 23

24 International comparisons of the private Debt/GDP ratios Private Debt/GDP ratios rose during the crises Households investing mainly in housing Big companies borrowing in capital markets to survive the recession Deteriorating de international investment position Source: BdE,

25 Strong growth in households debt From 1995 to 2007, credit raised by Spanish households increased at an annual average rate of 17%, compared with an average increase in nominal GDP of 7.5% (see Chart 2.2). House purchase is the main propose in Spain (BdE, 2014) 25

26 The private sector is reducing their debt overhang (Spain) Total private debt is (2014-III) 182 % GDP: 72.4% household % non financial corporations Mining a reduction of 36.8% GDP since the pick in 2010-II Mainly due to reduction in non financial corporations 26

27 What is public debt? Public debt is the outstanding amount of money the government has borrowed to cover its spending G. Deficit, the public debt grows when there is a budget deficit. The government, through the U.S. Treasury, borrows money to finance the deficit by selling Treasury securities. The EU budget is balance by definition only MS finance national deficits by selling public debt. 27

28 Interest and public surpluses R, The government then has to pay interest to the people and organizations it borrows from, just like when businesses and consumers get a loan from their bank. SURPLUSES: Often the government runs an annual deficit, but not always; budget surpluses, as occurred from 1998 to 2001 (in the US), may be used to pay back that debt, and reduce the total amount of outstanding public debt. 28

29 Government spending, G G includes government spending on goods and services. G excludes transfer payments Z (e.g. Unemployment benefits, Public Pensions Public Health or Social Security) Assume government spending and total taxes are exogenous: G G and T T Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 29

30 The market for goods & services Agg. demand: C ( Y T ) I ( r ) G Agg. supply: Y F ( K, L) Equilibrium: Y = C ( Y T ) I ( r ) G The real interest rate adjusts to equate demand with supply. Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 30

31 The loanable funds market A simple supply-demand model of the financial system. One asset: loanable funds demand for funds: investment I supply of funds: saving S price of funds: real interest rate R Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 31

32 Demand for funds: Investment The demand for loanable funds comes from investment: Firms borrow to finance spending on plant & equipment, new office buildings, etc. Consumers borrow to buy new houses. depends negatively on r, the price of loanable funds (the cost of borrowing). Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 32

33 Investment, I Make investment if its return exceeds its cost Interest rate is the cost of borrowing the opportunity cost of using one s own funds to finance investment spending Nominal or Real interest rate The investment function is I = I (r ), where r denotes the real interest rate, the nominal interest rate corrected for inflation. r I Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 33

34 The investment function r Spending on investment goods is a downwardsloping function of the real interest rate I (r ) I Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 34

35 The Public Sector budgetary restriction G + Z + R = T + D Were: G Public expenditure Z Public transfers R interest of public debt T taxes D Debt THE KEY QUESTION IS: HOW TO FINANCE THE PUBLIC EXPENDITURE? Fiscal orthodoxy means (G+Z+R-T)= deficit = public debt 35

36 Loanable funds demand curve r The investment curve is also the demand curve for loanable funds. I (r ) I Source: Mankiw Chapter 3: National Income. Lecture 1 and CSJ 36

37 Privet sector budgetary restriction Privet sector C + S = (Y + Z + R) T C consumption S Savings Y income Z Transfers from public sector R real interest rate T Taxes Crowding out effect: the biggest the public debt is the more expensive will funds for the privet sector (competition for savings & loanable founds) 37

38 Debt, consumption and vulnerability Debt, along with saving, is the instrument economic agents use to optimize their expenditure time profiles without being constrained by the distribution of their income over time. Thus, for example, in the initial stages of their life cycle, households usually incur higher expenses relative to their income than in later stages, meaning that debt levels are relatively higher among younger households. (e.g.: buying a home) Likewise, companies resort in the short term to external funds to finance investment projects that generate earnings in the medium and long term, and General government uses debt so that the profile of public spending is less volatile over the course of the business cycle than that of revenue, which is highly sensitive to economic fluctuations (BdE, 2014). 38

39 Debt, consumption and vulnerability Given that debt enables borrowers either to attain the expenditure time profile they wish or to undertake profitable investment projects, the resort to debt helps increase social wellbeing. At the same time, however, debt increases their vulnerability to unforeseen shocks that constrain current or expected revenue, reduce wealth and worsen financing conditions. The readjustment of consumption and investment plans prompted by these adverse changes will tend to be greater the higher the accumulated debt. In turn, the perception by lenders that borrowers level of debt may be excessive raises the cost of new loans and diminishes loan availability, which likewise restricts the possibilities of expanding expenditure (BdE, 2014). 39

40 Public Debt in the EU in GDP % UE Suecia Reino Unido Dinamarca ZONA EURO Portugal Países Bajos Luxemburgo Italia Irlanda Grecia Francia Finlandia ESPAÑA Bélgica Austria Alemania PAISES 40

41 The restructuring of the banking system and the public debt The excessive size of the Spanish banking system, along with the bias of its portfolios towards real estate sector-related activities, made it vulnerable to adverse macroeconomic shocks, and in particular to those linked to the real estate market. In these circumstances, the economic crisis that broke in 2008 ultimately undermined the financial and balance sheet position of the banking system, albeit with a very mixed degree of incidence from bank to bank. As a result, it was necessary to overhaul the banking system by means of a four-pronged reform: 1. restructuring, 2. recapitalization, 3. balance sheet clean-up and 4. the reform of the 5. regulatory and supervisory framework 41

42 GENERAL GOVERNMENT BUDGET BALANCE AND DETERMINANTS (Spain) State aid for the restructuring of the banking system came on top of growing general government financing requirements. The banking system clean-up and restructuring measures required public injections of capital. The necessary resources were obtained, in part, from a specific European support programme totaling 41 billion, which was requested in July 2012 and successfully concluded in early (BdE, 2014) 42

43 Public Debt: Spain in GDP % The financing of these capital injections came on top of growing general government financial requirements in the wake of the crisis, linked essentially to the operation of the automatic stabilisers and to the expansionary discretionary measures adopted (see Chart 2.6). The sustainability of the external financial position depends ultimately on the ability to meet the periodic payments associated therewith, their repayment at maturity and, also, potential withdrawals of funds by foreign investors or the nonrollover of the operations which, at the time of maturing, need to be rolled over. Accordingly, what is important is not only the volume of foreign liabilities, but also their composition in terms of maturities and instruments, e.g.: FDI are less risky. 43

44 The assistance and stimuli to the private sector The assistance and stimuli to the private sector, set against the strong decline in tax receipts, translated into growing budget deficits and into a rapid increase in public debt. It was through all these measures that the link between both sectors progressively increased, in such a way that a portion of the private-sector adjustment costs ultimately passed through to the public sector (BdE, 2014). 44

45 Budget balance in GDP percentage. Spain before recession (Income Expenditures) start 1999; GSP The GSP: force the MS to have a deficit less than -3% GDP 45

46 The increase in public debt had to be financed through resort to the rest of the world Most of the increase in the Spanish public debt had to be financed through resort to the rest of the world and to the banking system itself, through which 31% and 47%, respectively, of new funds were raised. As a result, there was a rise not only in the Spanish economy s external debt but also a sizable increase in banks exposure to the public sector. The combination of both situations with the worsening macroeconomic outlook shaped the three sides of a triangle of negative interactions. These were particularly acute at the height of the tension on financial markets during the European debt crisis and they ultimately highlighted the difficulty of maintaining a single currency in the presence of highly integrated financial markets if, at the same time, supervisory and banking resolution policies remained in the hands of the national authorities.(17) (BdE, 2014) 46

47 EXTERNAL DEBT SPAIN As a result of the changes in the financial position of the different sectors and of their interrelatedness, the nation s debt increased strongly (BdE, 2014) But Spanish ratio is lower than the UK, France, Portugal and close to Germany. Although the bulk of external financing corresponds to longterm portfolio investment and refinancing risks in the short term are limited for Spain. (BdE, 2014) The US ratio is lower than the EU countries in the chart. 47

48 Income Tax and Social Security, Taxes on output and imports, Spain in GDP % IMPUESTOS SOBRE LA RENTA Y PATRIMONIO, SOBRE LA PRODUCCION E IMPORTACION (IN CLUID O IVA) Y COTIZACION ES SOCIALES (EN PORCENTAJE DEL PIB) Cotizaciones sociales Producción e importación Renta y patrimonio 48

49 Public Expenditure: Spain PRINCIPALES PARTIDAS DE GASTO DE LAS AAPP (EN PORCENTAJE DEL PIB) Prestaciones sociales 5 Benefits SS Consumo Formación bruta de capital 4 3 Consumption Interest Gross Capital Formation Intereses Subvenciones de exp lotación 1 Subsides

50 Expansive fiscal policy/1 G Demand Y & P Key question: How to finance? Increasing tax T C & S, the expansive effects will be lower because G substitutes C If uses debt increase Db i I (crowding out). Additionally Db means that more debt modify the privet expectations because in the future will T or G Decreasing transfers from public to privet sector Z C & S, the expansive effects will be lower and G substitutes C 50

51 Expansive fiscal policy/2 Tax reductions T= t x B (t = tax rate, B = tax base ) Always when t B & t B In some exceptional cases t T (Laffer curve) But normally t T T C Demand Y & P 51

52 Effects of a Fiscal and Monetary Expansion Fiscal Expansion Monetary Expansion R LM R LM LM R R* R* R IS IS IS Y* Y Y Y* Y In both policies R below since Y output expand 52

53 Crisis management in the EU IMK recommendations* The MS and Commission fail in follow the recommendations of several experts in 20010: e.g. the IMK Report No. 51 July 2010 clearly diagnostic: Public debt is not the only factor, privet debt counts as well This perspective allows us to define requirements for the shortterm crisis management in the euro area as well as for permanent reforms of the SGP (Stability and Growth Pact). The shortterm crisis management requires the following: 1. The fiscal policy of the euro area has to remain more expansionary than the stability programmes of the member states for the years specify, and more expansionary than the requirements of the rescue package for obtaining credit designate (see Brecht et al. 2010). Given the considerable under-utilisation of production capacities in Europe and the high unemployment rates, even a significant economic upturn would not be inflationary in the next two years. In the case of a strong self-supporting boom, fiscal policy could quickly finance the expansionary measures through tax increases, accelerating budget consolidation along the way. *Source: Reforming the European Stability and Growth Pact: Public Debt is Not the Only Factor, Private Debt Counts as Well Authors:Horn, Gustav A., Niechoj, Torsten, Tober, Silke, van Treeck, Till Truger, AchimIssue. Date: 2010Series/Report no. 51:IMK Report ttps:// 53

54 Crisis management in the EU IMK recommendations* 2. To help an economic upturn and reduce imbalances, countries with an excessive current account surplus should introduce further expansionary stimulus packages. a) This holds especially true for Germany, the largest EMU country with an alarming backlog in public investments. b) A cooperative fiscal strategy like this would mean net advantages for the EMU, and for every member country alike. 3. The ECB has to guarantee the solvency of its member states. Therefore the ECB should continue its willingness to buy long-term government bonds until the current crisis is resolved. *Source: Reforming the European Stability and Growth Pact: Public Debt is Not the Only Factor, Private Debt Counts as Well Authors: Horn, Gustav A., Niechoj, Torsten, Tober, Silke, van Treeck, Till Truger, AchimIssue. Date: 2010Series/Report no. 51:IMK Report ttps:// 54

55 Council decision: expansionary austerity PD > -3% Force to reduce public deficit to 3% the D/GDP ratio to fast R&D expenditure as well as public systems of pension deficit included in the In fact <<expansionary austerity>> policies generate a double deep recession in certain MS (Spain, Italy Greece, Portugal, Ireland) Will see later on. 55

56 Crisis management in the EU Is working the GSP? The examples of Spain and Ireland illustrate this clearly: Both countries have never violated the 3 % deficit criterion between 1999 and 2007, their debt-to-gdp ratio was in Spain after 2000 below the 60 percent margin and had decreased over time notably. But both suffer stress on the public debt markets after 2009 Source: IMK report,

57 Crisis management in the EU IMK recomendations IMK Conclusions: The present Stability and Growth Pact focuses on the wrong criterion. Instead of its fixation on public deficits, the pact should have concentrated on current account balances these reflect developments in the public and the private sector alike. If this had been taken into account, the extensive economic imbalances in the euro area could not have soared the way they did, and the effects of the financial crisis would have been dampened. 57

58 Crisis management in the EU IMK recomendations In the present situation of a fragile economic recovery (2010), the planned tough consolidation programmes would be counterproductive and could even undermine any recovery. Initially, the focus on current account balances implicates higher public budget deficits in some countries [Germany]. 58

59 Crisis management in the EU IMK recomendations In the long term, the proposed limits for current account balances also curb public deficits. Another advantage of the proposed strategy is that the macroeconomic imbalances in the euro area are finally tackled systematically. Deficit as well as surplus countries would have to contribute to the reduction of these imbalances. 59

60 Piketty: the obligation of fast deficit reduction had terrible consequences for growth The EU needs a fiscal union and a budgetary harmonization We need a common found for the Public Debt s amortization Each MS should repay his debt and is responsible for it but should be a common interest rate for the Eurobonds use for the Public Debt re-financing This communitarization of Debt should be democratically legitimated [EU Parliament] The policy response to the crisis in the EU has been simply catastrophic Unemployment rate and public debt, five years ago, were at the same level in the EU and US Currently the EU unemployment is on her top levels [US unemployment rate reach 5.5 in 2015 when 5% is consider full employment] and the GDP is below 2007 levels Since Spain and Greece suffer contractions of 10% and 25% respectively 60

61 Growth and deficit In 2012 IMF concluded that austerity policies were excessive and with terrible consequences for growth. The SGP is catastrophic and agree fiscal rules for future may not work The reduction of deficit requires GDP growth (Piketty, 2015) Since 1945 neither France or Germany has fully re-pay their debts (historic amnesia with hard consequences) But now ask shouter countries to pay their debt euro by euro The EU needs the fiscal union and Eurobonds to refinance the national debs. Source: "Der Spiegel 07/03/2015 Pikkety interview 61

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63 The debate about the SGP REFERENCES Fiscal imbalances and output crises in Europe: will the fiscal compact help or hinder?- > p?article630 What Have we Learnt about Monetary Integration since the Maastricht Treaty? De Grauwe, P. (2006) JCMS 2006 Volume 44. Number 4. pp > /Degrauwe_2006.pdf 63

64 Company size and Competitiveness Small and Medium Size Enterprise And the employment policy Source: {COM(2015) 85 final} Country Report Spain Including an In-Depth Review on the prevention and correction of macroeconomic imbalances

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66 Average company size in Spain Average company size in Spain is below other European countries. Over 90 % of firms are microfirms (less than 9 employees) (Graph ). 66

67 Spanish SMEs & jobs Spanish SMEs provide almost three quarters of all private sector jobs and 64 % of value added by SMEs, rates that significantly surpass the EU average. This is in particular because of the group of microenterprises that account for 40 % of the Spanish private sector workforce and 28 % of value added by microenterprises. 67

68 Small and Medium Size Enterprise more relevant in Spain & Mediterranean countries SMEs = PYMEs = Pequeñas y medianas empresas, Small and Medium Size Business: more relevant in Spain than in the US from the point of view of employment ICO = Instituto de Crédito Oficial Public Bank financing certain privet projects and Small and Medium Size Business in Spain helping overpass credit crunch. Lower R for SMEs Limited results (criticism about the red tape) 68

69 Spanish SMEs perform below the EU average on innovation Contrary to their larger peers, Spanish SMEs perform below the EU average in terms of product/ process innovations, according to the European Commission 2014 Innovation Union Scoreboard. The high price-elasticity of Spanish exports reveals a specialization pattern skewed towards labor-intensive products but with medium-high technological content. 69

70 The employment creation s of small firms The employment creation of small firms (by both new firms and of small established firms) in Spain is much larger than their corresponding share in employment, a pattern that broadly holds across sectors. However, new Spanish firms seem to grow more slowly than in other European countries. 70

71 Challenge for SMEs policy The challenge for SMEs policy is to support company creation while at the same time setting out the conditions for company growth. 71

72 Number of SMEs Employment in Small and Medium Size Enterprise (SMEs) Value Added by SME Spain ace.jpg 72

73 Contribución al empleo según el tamaño de las empresas. España 2010 Productividad del trabajo por tamaño de la empresa, Industria y Servicios. España 73

74 Small size plays a role explaining lower productivity of Spanish firms Economic policy has actively supported the creation, survival and expansion of SMEs Policy interventions aims at addressing market failures for those companies: Such difficulties in accessing credit Lake of resources to optimize their tax burden Challenge: Support SMEs creation, operate and growth Operate with tradable goods Employment creation Source: COMMISSION STAFF WORKING DOCUMENT. Country Report Spain 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances. {COM(2015) 85 final} 74

75 SMEs protection and growth Supporting the creation, survival and expansion of SMEs This would support the ongoing internal and external rebalancing process by facilitating the reallocation of resources from the non-tradable to the tradable sectors of the economy, Thereby enhancing economic efficiency.(12) But several issues must be solve regarding the SMEs credit supply (see next graphs) (12) Almunia, M. and D. Lopez-Rodriguez, (2013), Firms Responses to Tax Enforcement Strategies: Evidence from Spain, MPRA Paper, No , University Library of Munich; Garicano, L., C. Lelarge and J. Van Reenen (2012), Firm Size Distortions and the Productivity Distribution: Evidence from France, CEP Discussion 75

76 Interest rates rising for Small and Medium Size Business in Mediterranean Countries after the enforcement of the austerity measures by the Commission in

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78 To be continue Pending: Business cycle in Spain and the economic policy The EU institutions Monetary policy in the Eurozone Fiscal policy and the SGP Thanks for your attention 78