Transcript EUROPE – A CHRONOLOGY

Mr. Massimo M Beber
Senior Tutor
College Lecturer in Economics
Sidney Sussex College
Cambridge CB2 3HU
[email protected]
http://people.ds.cam.ac.uk/mb65/
Arts, Humanities and Social Sciences Summer School 2013
One Market, One Money?
The Economics and Politics of European Monetary Union
(http://people.ds.cam.ac.uk/mb65/OneMarketOneMoney.htm)
ECONOMIC INTEGRATION: A CLASSIFICATION
Trade in Goods and Services
Mobility of
Capital and
Labour
Microeconomic
Common
Policy CoMacroeconomic
ordination
Policy
No internal
tariffs
Common
External Tariff
FREE TRADE AREA
y
n
n
n
n
CUSTOMS UNION
y
y
n
n
n
COMMON MARKET
y
y
y
n
n
SINGLE MARKET
y
y
y
y
n
EMU
y
y
y
y
y
Source: a version of a Table introduced by Bela Balassa in The Economics of Integration (1961)
EUROPE – A CHRONOLOGY
• 1945-51: HEGEMON LED INTEGRATION (Marshall
Plan, OEEC-OECD, EPU)
• 1951-1973 (ECSC to EEC – customs union, single
market in agricuture and coal/steel, first MU
blueprint – Werner and MacDougall Reports)
• 1973-1984 “devil take the hindmost”
• 1985-1999: One Market (“1992”); One Money?
• 2008-?? “Make (banking & fiscal union) or Break”
COSTS AND BENEFITS OF EMU
PRODUCTIVITY SLOWDOWN AND RECOVERY
Source: The Kok Report (2004)
AVERAGE EU INCOME PER PERSON AS % OF THAT OF USA
Source: High Level Group (2004): Figure 1
Source: Commission of the European Union (2003) Second Progress Report on Economic and Social Cohesion.
Communication from the Commission, Brussels, Commission of the European Union: COMM (2003) 34 Final): Maps
The Growth of Structural Funds, 1975-2006
0.45
Berlin
39%
0.4
37%
Delors II
0.35
Agreement
35%
32%
30%
% of EU Budget
0.3
Delors I
25%
0.25
0.2
0.15
9%
0.1
7%
0.05
5%
0
1975
1981
1987
1992
1998
2002
Source: adapted from Allan (2003), p. 244
2002(enl.)
2006
2006(enl.)
“GREED IS GOOD”
Source: Lane (2012) “The European Sovereign Debt Crisis”, p. 52.
The Lender of Last Resort (LLR)
• Liquidity: money back today
• Solvency: money back in full
• The fire-sale problem
• “to lend freely on good security at a time of
crisis” (Walter Bagehot, Lombard Street)
THE POLITICS OF LLR LENDING
The central bank creates its own IOUs. As a result it does not need equity at
all to support its activities. Central banks can live without equity because
they cannot default. The only support a central bank needs is the political
support of the sovereign that guarantees the legal tender nature of the
money issued by the central bank. This political support does not need any
equity stake of the sovereign. In fact it is quite ludicrous to believe that
governments that can, and sometimes do, default are needed to provide
the capital of an institution that cannot default
Paul De Grauwe (July 2012)
Source: Lane (2012) “The European Sovereign Debt Crisis”, p. 53.
WHEN PRIVATE FINANCE STOPS
while Germany is running a big trade surplus with the rest of the eurozone
which Germany's private sector is no longer willing to finance, transfers of
one sort or another are inevitable. But no-one should be under any
illusions about how difficult this is for politicians to explain to their
electorates, even if they understand themselves. In the public's eyes and in
the minds of many politicians, a trade surplus just shows that their country
is more competitive. What could be wrong with that?
Simon Tilford, July 2012
Eurozone Sovereign Debt Crisis:
Greece
•
•
•
•
Focus on ECB’s liquidity management 2007-9
October 2009 – Greek general election
Budget revises deficit from 6 to 12.7% of GDP
Earlier years’ budgets (and thus debt) also
revised up
• Rising cost of servicing debt forces first Greek
bailout in May 2010
Eurozone’s Sovereign Debt Crisis:
continued
•
•
•
•
Ireland (November 2010)
Portugal (April 2011)
Greece again (March 2012)
Spain, Cyprus (June 2012)
ECB’S COSTLY INDEPENDENCE
In contrast to the central banks of the US, the UK and Japan, the ECB is not
allowed to finance treasuries in the member states. It cannot therefore act
as a lender of last resort for governments. This dividing line between
monetary and fiscal policy was drawn by the Maastricht Treaty to ensure
price stability and, given the experience with monetisation of fiscal deficits
in Europe’s history, should remain in place. But it induces an implicit
insolvency risk for investors financing sovereign debt of EZ countries...
Peter Bofinger, July 2012
The trouble with consolidation
• The “denominator effect” of low growth, low
inflation limit the “natural” fall in debt-to-GDP
ratios
• “Adjustment fatigue” leads to protests
• “Financial repression” within the single market is
increasingly difficult – residents cannot be forced
to buy government bonds
• Persistent, significant risk praemia raise the cost
of servicing existing debt in the Eurozone’s
periphery
European Financial Stability Facility
• Established in 2010 to avoid another “Greece
I” bailout (Euro 110bn hard to cobble
together)
• Hopes that it would merely deter bank runs by
its existence
• Yet needed for Ireland and Portugal within
months
• Euro 440bn not enough
The Banking Union Proposal
• A true banking union removes all national
differences in the policy and regulatory
environments in which banks operate
• Crisis Prevention
– Regulation
– Supervision
• Crisis management: LLR
• Crisis resolution: bailing in/out
THE “MUTUALIZED” DEBT CAKE
Transfers I (aid)? Not really
we frown upon the transmission of familyacquired wealth to offsprings if two different
individuals belong to the same nation [but] we
take it as normal that there is a transmission of
collectively acquired wealth over generations
within the same nation, and if two individuals
belong to two different nations, we do not even
think, much less question, such acquired
differences in wealth, income and global social
position. (Milanovic 2012)
Transfers II: FDI – Perhaps, but...
Migration – really?
“either poor countries will become richer, or
poor people will move to rich countries.
Actually, these two developments can be seen
equivalent. Development is about people: either
poor people have ways to become richer where
they are now, or they can become rich by
moving somewhere else. “ (Milanovic 2012)
CAN THE EU FACE THE TRUTH?
European policy-makers have been reluctant to accept that the eurozone's
decentralised nature makes it an inherently unstable currency union that
forces its constituent states and 'their' banks into a pernicious and deadly
embrace.
On the face of it, all that changed at the June 29 summit, when memberstates agreed to consider establishing a banking union. Among the
features of such a union would be: a shared supervisory authority; a
collective deposit protection scheme for the currency union; and a
common resolution framework for dealing with weak banks.
... The idea of a banking union is sometimes spoken of as an easier route
to 'mutualisation' (or federalisation) than issuing common debt – partly,
the reasoning goes, because citizens do not understand what a banking
union entails.
Philip Whyte, July 2012
EUROPEAN REDEMPTION (GSP MK II)
in November 2011, the GCEE suggested a bridge between short-term
stabilisation and long-term governance: The European Redemption Pact,
one element of which is the European Redemption Fund. In fact, the
European Redemption Pact (henceforth “the Pact”) rests on three pillars,
(i) a European Redemption Fund (henceforth “the Fund”), relying on
mutualizing part of Eurozone debt; (ii) the Fiscal Compact, in particular a
commitment to national debt brakes preferably at the constitutional level;
and (iii) the installation of a crisis resolution mechanism, with provisions
for the possible involvement of the private sector in future crises.
Bofinger, July 2012