The politics of unequal adjustment in the Eurozone crisis Prof. Dr. University of Zurich SNIS BiennialConference 2016 Political andeconomic Inequality: Concepts, Causes, andconsequences Panel C2: EMU, the euro crisis, andinequalityin Europe 1/28
Unequal adjustment to the euro crisis The costs of resolving the euro crisis have been unequally distributed between countries within countries Deficit countries Surplus/creditor countries Questions: How have the costs been distributed? What explains these differences? 2/28
The Euro crisis: A balance-of-payments crisis Avg Current Account Deficit in % of GDP, 2003-2009 -10-5 0 5 10 Estonia Greece Portugal Spain Slovak Republic Ireland Slovenia Italy France Belgium Austria Finland Germany Netherlands Luxembourg Deficit countries Surplus countries Source: Eurostat Johnston, Hancké und Pant (2014) 3/28
Resolution strategies for normal balanceof-payments crises EXTERNAL ADJUSTMENT INTERNAL ADJUSTMENT FINANCING DEFICIT COUNTRY Exchange-rate depreciation Austerity and structuralreforms Cover funding gap through external (public) financing SURPLUS COUNTRY Exchange-rate appreciation Inflation and reforms aimed at boosting domestic demand Provide financing for deficit countries with BOP problems 4/28
How the Euro crisis is different Two features make the eurozone crisisspecial: Very high vulnerability of all eurozone members to a breakup of the euozone Strong financial and institutional integration of deficit countries with surplus countries. Implications for crisis reolution: Possibility to share adjustment burden Adjustment surplus countries can lessen adjustment burden in deficit states. Better access toexternal financing fordeficit countries Target2, ELA, OMT, QE... potentially EMU-wide transfer schemes, fiscal union, banking union etc. 5/28
Responding to the Euro crisis Medium- to long-term options INTERNAL ADJUSTMENT FINANCING EXTERNAL ADJUSTMENT Convergence: Structural reform+austerity in deficit countries Higher inflation + domestic demandin surpluscountries More permanent financing Transfer/fiscal union EU-wide welfare programs Debt restructuring etc... Euro-Breakup Different variants possible: single-country exit currency blocs parallel currencies... Problems: increasingly unpopular resistance in surpluscountries long-term feasibility unclear Problems: unpopular in both North and South requiresmore political integration Problem: Not an option...or is it? 6/28
Solving the euro crisis Finding a solution to the ongoing euro crisis has proven very difficult. High level of uncertainty regarding different policy options Complex political structures Sharp distributive conflict both between and within the eurozone economies. 7/28
Distributive conflict between countries 8/28
Distributive conflict between countries Preferences deficit countries Adjustment More adjustment in surpluscountries flexibility in choosing domestic adjustment measures. Financing More and more permanent financing Financing tied to no/low conditionality Preferences surplus countries Adjustment Adjustmentshouldoccur predominantly in deficit countries Financing Lessand only temporaryfinancing Financing tied to strong conditionality Bargaining power depends on Extent of BOP pressure/financing needs Vulnerability to euro-breakup and default 9/28
Adjustment Unequal distributionof adjustment burdenbetween states I Deficit countries Surplus countries 10/28
Adjustment Unequal distributionof adjustment burdenbetween states II Inflation Tax reforms Surplus countries Deficit countries Surplus countries Deficit countries 11/28
Unequal distribution of adjustment burden Deficit states have been much more negatively affected 12/28
Financing Compared to other IMF programs, euro crisis countries got larger bailouts with comparatively low conditionality Greece 2012 Portugal 2011 Greece 2010 Ireland 2010 Copelovitch & Enderlein (2014) 13/28
Financing Exposure-related bargaining power of select creditor states 14/28
Distributive conflict within countries 15/28
Distributive conflict within countries Deficit countries Internal adjustment Whose jobs, wages, benefits, subsidies, privileges are cut, whose taxes are increased? Financing Who benefits most/least from financing Who is hurt by conditionality? Surplus countries Internal adjustment Higher inflation vs increased domestic spending (on what?) Financing Who pays (financial sector vs. taxpayers etc.) Who benefits fromconditionality? Bargaining power depends on Political power/influence of respective groups Vulnerability to euro-breakup 16/28
Implications for Inequality Inequality stagnant or on the rise in surplus and deficit states Surplus countries Deficit countries 17/28
Deficit countries 18/28
Dilemma in deficit countries High costs of both internal and external adjustment Example: Vulnerability to internal and externaladjustment in Greece, December 2015 strongly disagree frequency somehow disagree Austerity "I expecta significantreduction in mypersonal income if the government implements the austeritymeasures. neither somehow agree strongly agree str. disagree disagree neither agree str. agree Grexit maximum: 474 "I expecta significantreduction in my income if Greece leavesthe euro. Dinas, Jurado, Konstantini dis & Walter (2015). Original telephone survey of 985 respondents, conducted in Greece on 2 Dec 2016 19/28
Adjustment burden: High group-level inequality Internal adjustment can be targeted towards specific groups Example: Change in poverty rates in Greece by group, 2009-12 Employee (public incl. banking) Rent or mortgage 30 44 Unemployed 18 29 0 17 Student Employee (private excl. banking) Athens Men Self-employed All Rural/semi-rural areas 45 64 Women Other cities No housing costs Liberal profession Others not in the labour force Farmer Pensioner 65+ Truncated, 250% increase -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% % in extreme poverty 2009-12 Change in percent living in poverty, using standard definition Author s calculations based on Matsaganis & Leventi (2014) 20/28
Example: Pensioners vs. Workers Usually one group carries more of the burden, but there is considerable variation in burden sharing Public pensions Income tax and individual social insurance contributions Greece Spain Greece Spain Italy Italy Portugal Portugal Percentage changein household disposableincomedue tosimulated household income-based fiscal consolidation measuresby type of measure and household incomedecilegroup, based on EU-SILC data, calculated for 2012 values. Avram et al. (2013) 21/28
Bargaining Power: Political influence Government voters tend to be affected less by crisis Example: Self-perceived effect of 2008-10 BOP crises in four Eastern European countries Estonia Internal adjustment Rightist government Hungary Mixed adjustment Leftist government Estonia Hungary Czech Republic External adjustment Center(-right) government Czech Rep. Poland External adjustment Center-right government Poland Non-voter Voter Opposition Voter Government Non-voter Voter Opposition Voter Government Non-voter Voter Opposition Voter Government Non-voter Voter Opposition Voter Government not at all 1 2 3 4 5 a great deal Respo. had to draw on savings/debt to cover ordinary living expenses Respondent had to manage on lower household income Walter (2013, 2016) 22/28
Bargaining power: Blackmail potential Wish to stay in euro makes people willing to accept austerity Resultsofsurvey experimentaboutcost ofkeepingthe euro July 2015 Control group Euro-membership requires more pension cuts and tax increases for the next months Euro-membership requires more pension cuts and tax increases for the next 4-5 years 0.0% 20.0% 40.0% 60.0% 80.0% Don't Know/No answer Adopt National Currency Stay in euro Dinas, Jurado, Konstantini dis & Walter (2015). Original telephone surveys of 989 (July) /985 (December)respondents, conducted in Greece on 4 July and 2 Dec 2016 23/28
Aside: Why do Greeks want to keep the euro? Greece should stay in the euro Grexit would significantly reduce my income Grexit is beginning of end for Greek EU membership Greece should never have joined the euro Greek gov would not implement reforms w/o EU pressure We should keep euro b/c of Grexit-related uncertainty Being in EMU forces Greek politicians to act responsibly Membership in EMU is irreversible Euro means Greece is part of Europe's heart Strong pre-crisis growth shows that euro is good In long-run my income will be more stable if Greece keeps euro Grexit would mean less austerity The Eurozone would be better off without Greece 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Percent strongly disagreeing with statement Percent strongly agreeing with statement Dinas, Jurado, Konstantini dis & Walter (2015). Original telephone survey of 985 respondents, conducted in Greece on 2 Dec 2016 24/28
Surplus/Creditor countries 25/28
Beneficiaries of crisis management Banks and export sector Finance has been able to offload risks to taxpayers Exports have increased in surpluscountries 1400000 Exports of goods and services in million EUR 1200000 1000000 800000 600000 400000 200000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Germany Netherlands Austria Finland Luxembourg 26/28
Crisis management disfavors others Example Germany: taxpayers, workers, savers pay or benefit less, especially in the long run Financingstrategy fundedby taxpayers Nosignificant real wage increases Bechtel et al. (2014) http://www.imf.or g/exter nal/pubs /ft/scr/2015/cr15187.pdf 27/28
Conclusion In the eurozone crisis, the adjustment burden has been unequally distributed: Among states, surplus (and creditor) countries have been able to shift the adjustment burden mostly onto deficit countries. have been willingto heavily finance deficit countries, but on their terms. Within both surplus and deficit states, politically more influential groups have been able to shift crisis costs onto others. aversion to euro break-up has increased the willingness to accept painful reforms (deficit countries) or to provide financial support (surplus countries). 28/28
References Avram, Silvia, Figari, Francesco, Leventi, Chrysa, Levy, Horacio, Navicke, Jekaterina, Matsaganis, Manos, et al. (2013). The distributional effects of fiscalconsolidation in nineeu countries: Euromod Working Paper. Bechtel, Michael M, Hainmueller, Jens, & Margalit, Yotam. (2014). Preferences for international redistribution: The divide over the Eurozone bailouts. American Journal of Political Science, 58(4), 835-856. Copelovitch, Mark, & Enderlein, Henrik. (2014). Kicking the Can Down the Road: The Euro Crisis and the Political Economy of Troika Bailouts. Conference paper, The Political Economy of the Euro Crisis Workshop, Berlin, June 2014. Johnston, Alison, Hancké, Bob, & Pant, Suman. (2014). Comparative institutionaladvantage in the European sovereign debt crisis. ComparativePolitical Studies, 47(13), 1771-1800. Walter, Stefanie. (2013). Financial CrisesandthePolitics of Macroeconomic Adjustment. Cambridge: Cambridge University Press. Walter, Stefanie (2016). Crisis politics in Europe: Why austerity is easier to implement in some countries than in others. ComparativePolitical Studies. doi: 10.1177/0010414015617967 29/28