Transcript The state of the global economy Daniel Gros, CEPS
Analysis of the US approach: What the EU can learn from US policies and politics Daniel Gros Vienna, October 21, 2010 CEPS, 1 Place du Congrès, 1000 Brussels, +32 2 229 3911, http://www.ceps.eu
Outline:
• Transatlantic structural differences and similarities – Housing – Credit – Market vs. bank-centric system • Europe internal heterogeneity • Post-crisis differences
Structural factors: Crisis and Recovery • Key driving factors of crisis similar both sides of Atlantic • Obstacles also?
• Recurrent theme: house price boom leads to consumption boom and expansion of financial sector ….
• Intra: Euro area divergences: But not necessarily to construction boom!
What kind of crises? From real estate bust to financial bust: • • Sub-prime only tip of iceberg.
Real problem is combination of two factors: 1. Global real estate boom 2. Explosion of financial activity, a credit boom with most of the risk superficially outside banking system (via securitization, credit default insurance, etc.).
An ‘Anglo-Saxon’ crises? • • • Real estate boom not only US, but global (with two exceptions, DE and J).
Securitization on industrial scale: mainly an Anglo-Saxon phenomenon plus Spain But …… expansion of financial sector comparable in Europe.
=> Crisis not made in USA!
Source: OECD 120 110 100 90 80 70 60 50 40 Not just a US Housing Boom House: Price-to-rent ratio
US EA
Transatlantic Difference (I) • In US most mortgages are ‘no recourse’: the borrower can just send the keys to the bank.
• In Europe borrower remains liable for remainder should value of house be lower than mortgage: no ‘jingle mail’.
• => in US cost of house price bust is borne by financial system, not households.
Not just a US Credit boom: No problem with Corporate Leverage?
Debt-to-GDP ratios 1999 2007 2008 Change 1999-2007
Economy-wide EA
3.51
4.54
4.73
US
2.66
3.47
3.46
Non-financial corporate sector EA
0.67
0.92
0.97
US
0.46
0.49
0.49
1.03
0.81
0.25
0.03
Not just a US Credit boom: Transatlantic Difference (?) Debt-to-GDP ratio
Financial sector Households & small business
1999 2007 2008 Change 1999-2007
EA
1.61
2.32
2.42
0.71
US
0.79
1.17
1.17
0.38
EA
0.48
0.61
0.61
0.13
US
0.88
1.28
1.24
0.4
Transatlantic difference (II) Deleveraging problem in Europe as least as severe as in US. But … • more quickly apparent in US due to securitization (market based system).
• In EU banks allowed to hide problems and no area wide institution to deal with consequences.
Transatlantic differences (III): Financing need higher in EA than US Financing gap of corporate sector: EA versus US 6,0 3,0 0,0 -3,0 -6,0 -9,0 -12,0 Source: ECB and Federal Reserve Board Note: financing gap=internal cash flow minus cap expenditure as % of value added
US EA
Divergences within EA more salient than transatlantic similarities?
Large and sustained differences in prices and activity (construction): – Prices up like in the US almost everywhere, except in Germany.
– Why not in DE? Unification boom (and bust after 1995): key asymmetry in starting condition!
– Housing cycles can (have) lasted over a decade.
3,5 3 2,5 2 1,5 1 0,5 0 Divergences within EA (I)
House Prices: Price to Rent Ratio
Source: OECD . House price to rent ratio Note: Index divided by the average 1990-1999
Germany Italy Spain Ireland
16 18 20 Divergences within the EA (II): Construction booms (and busts)
Investments in constructions
Germany Spain France Italy 14 12 10 8 6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Consequences of National Housing Boom(s): Lasting Divergence National housing booms lead to strong domestic demand and hence long cycles of divergence. • National housing cycles can (have) lasted over a decade (Germany, Japan). • Busts also?
Post-crisis Transatlantic difference (I): growth Cumulated growth since outbreak of crisis 4 EA US UK 3 2 1 -3 -4 0 2007q03 2007q04 2008q01 2008q02 2008q03 2008q04 2009q01 2009q02 2009q03 2009q04 2010q01 2010q02 -1 -2
Post-crisis transatlantic difference (II): unemployment
Cumulated % changes in the unemployment rate since outbreak of crisis
100,0 80,0 60,0 40,0
EA US UK
20,0 0,0 2007q03 2007q04 2008q01 2008q02 2008q03 2008q04 2009q01 2009q02 2009q03 2009q04 2010q01 2010q02 -20,0
Post-crisis transatlantic difference (II): unemployment (II)
Cumulated changes in the level of unemployment since outbreak of crisis 2007q2
6,0 5,0 4,0 3,0
EA16 US UK
2,0 1,0 0,0 2007q03 2007q04 2008q01 2008q02 2008q03 2008q04 2009q01 2009q02 2009q03 2009q04 2010q01 2010q02 -1,0
Concluding Remarks I • Within a monetary union national real estate markets can (they do not have to!) go on different trajectories.
• Divergences difficult to explain except for DEU • What to do?
– Intervene when prices/construction activity get out of hand.
– Limit loan-to-value ratios for mortgages.
– Auction off building permits.
– Dynamic provisioning for banks (Spain!).
Concluding remarks II: Outlook • Without financial crisis: smooth adjustment with trends of first ten years in reverse (construction sector contracts in Spain, inflation higher in DE with slow reversal in current account (im)balances).
• Financial crisis accelerates this process.
• Can politics accept the inevitable?
Concluding remarks III: Outlook • Immediate impact of crisis similar everywhere. But this masks fundamental long term differences: – Germany affected by external demand, domestic demand largely stable.
– Spain/Ireland, EU periphery opposite – France: in between
Conclusions: Europe will suffer more • EA Financial sector highly leveraged • EA Corporate sector more dependent on external financing than in US • US large losses on credit but partially born by European investors • EA banks delay loss recognition with agony of credit supply
Thank you