Transcript The debt crisis in the peripheral countries of the Euro

The debt crisis in the peripheral
countries of the Euro area
Alain Henriot
Delegate Director, Coe-Rexecode, Paris
AIECE Medium Term Group
Essen, 6th May 2011
• Different stories … but a same problem: public finances
• Greece: dynamic growth before the crisis, but heavy structural
problems (tax collection) => structural measures directed towards a
market economy
• Ireland: safe public finances before the crisis, but the burst of the
housing bubble translated into heavy losses for banks: a huge cost
for public finances => structural measures reshuffling the banking
system, partly nationalized
• Portugal: low growth before the crisis, the consequence of changes
in international sectoral specialization => structural measures
accelerating changes in the economy
• Spain: when the housing bubble bursts … structural measures
towards new engines of growth; rationalization of the banking system
-2
• Strong tensions on financial markets regarding the debt
of peripheral countries
Long-te rmin te re stra te s
Govern mentbonds-10ye ars
16
%
5.0
%
15
14
4.5
France
Germany
13
12
11
10
Italy
Greece
Spain
Ireland
Portugal
4.0
3.5
9
8
3.0
7
6
2.5
5
4
3
2.0
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J
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2009
2010
2011
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J
2008
2009
2010
2011
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• Consequences: questions about the future of the Euro
area
• How can the Euro area survive with such different
countries?
• What kind of economic policies for countries in difficulty?
• More solidarity or more discipline between member
States?
-4
Contents
1. The convergence process in the Euro area and its
consequences on monetary policy
2. The policy mix in the Euro area since 2000
3. How coping with the debt crisis?
-5
• What are the characteristics of an
optimum currency area?
Robert Mundell (1961), gave the basis for “a theory of optimum
currency areas” :
 A common currency can only be applied in areas or regions
with the same economic structure or being able to converge
quickly. A same monetary policy can be inappropriate in one
country (or a group of countries) in case of differences in terms
of economic structure. In this latter case, a possible remedy is
a great mobility of production factors
Question : What about the Euro area?
-6
• The level of GDP per capita differs among Euro area countries
although there were signs of convergence during the last 15 years
GDP per capita (SPA, Euro area =100)
Euro area (16 countries)
Belgium
Germany
Ireland
Greece
Spain
France
Italy
Cyprus
Malta
Netherlands
Austria
Portugal
Slovenia
Slovaquia
Finland
Standard deviation (without Luxembourg)
Max/min (without Luxembourg)
1995
100,0
113,2
113,2
90,4
73,7
80,7
101,8
106,1
77,2
75,4
107,9
118,4
67,5
64,9
42,1
94,7
21,9
2,8
2000
100,0
112,5
105,4
117,0
75,0
86,6
102,7
104,5
79,5
75,0
119,6
117,0
72,3
71,4
44,6
104,5
22,1
2,7
2005
100,0
109,1
106,4
130,9
82,7
92,7
100,9
95,5
82,7
70,9
119,1
112,7
71,8
79,1
54,5
103,6
20,6
2,4
2009
100,0
107,4
107,4
118,5
86,1
96,3
100,0
94,4
90,7
72,2
120,4
113,0
73,1
80,6
65,7
102,8
17,1
1,8
-7
GDP per capita growth rate, % 19952009
• The poorest countries in 1995 registered the highest economic
growth during the last 15 years
GDP per capita (1995, Euro area =100)
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• Because of the convergence process, we observed a
higher economic growth in the peripheral countries before
the crisis (except for Portugal) than the Euro area average
…
Real GDP growth (annual average, 1995-2007, %)
Euro area (16 countries)
Germany
France
Greece
Spain
Ireland
Portugal
Real
2,3
1,6
2,2
3,9
3,7
7,2
2,4
Potential (Eur. Com.
Estimates)
2,0
1,5
2,0
3,5
3,3
6,8
2,1
-9
• …, but real convergence also implied higher inflation in
high growth countries
- 10
• A similar business cycle, but with higher
volatility in some countries
Devia tio n to tre nd
5
%
7
%
6
4
5
4
3
3
Italy
France
Germany
Euro area
Spain
2
1
2
1
0
0
-1
-2
-1
-3
-2
-4
Ireland
Portugal
Greece
Euro area
-5
-3
-6
-4
-7
99
00
01
02
03
04
05
06
07
08
09
10
11
99
00
01
02
03
04
05
06
07
08
09
10
11
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• A limited mobility of the labor factor (large
discrepancies in unemployment rates)
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• In the U.S. it also exists a discrepancy in GDP per
capita even if it seems lower than in the Euro area
Dispersion of GDP per capita in the U.S. and in the Euro area
U.S. (2008)
Euro area (2009)
Standard deviation of nominal GDP per
capita
19,1
29,2
(American States and EA-15)*
Standard deviation of nominal GDP per
capita
10,5
22,2
(8 U.S. regions and EA-11)**
* Excluding Columbia district for the U.S. and Luxembourg for the Euro area which are extreme
points
** Euro area exluding Luxembourg, Cyprus, Malta, Slovakia and Slovenia
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• A comparison U.S./Euro area
. More mobility of the labor factor in the U.S? Not so sure
recently as large discrepancies in the unemployment rate
remain
Unemployment rate (Feb. 2011): lowest North Dakota 3,7%,
U.S. average 8,9%, highest Nevada 13,6%.
. Differences in terms of inflation trend seem rather small:
March 2011/ March 2011: Northeast urban 2.5%, Midwest
urban 2.7%, South urban 2.8%, West urban 2.6%, USA: 2.7%
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•To sum up: The Euro area has not all the characteristics
of an optimum currency area, although signs of
improvement have been noticed before the crisis
. Differences in economic structure, although convergence
has improved. Strong integration is visible in the high
correlation between national business cycles.
. Real convergence implies higher real GDP growth, with
consequences in terms of higher inflation (this is the major
difference with the U.S.).
=> Real convergence creates a dilemma for monetary
policy in a single currency area, especially because not so
much mobility in the labor market.
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2 – if the Euro area is not an optimal
currency area, what kind of problems can
emerge?
In an economy which is moving towards the technological
frontier we can observe the following developments:
Productivity
=>
Wages
=>
GDP per capita
=>
Inflation: tensions in the economy (low unemployment rate or
decreasing unemployment rate), “Balassa effect” (increase in non
internationally tradable goods prices, e.g. services as real convergence
implies also nominal convergence of price levels)
 Appreciation of the exchange rate and increase in interest
rates
BUT this was not possible in the Euro area for converging
countries
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• Has monetary policy been appropriate to
the economic situation since 2000?
An application of the Taylor rule :
ECB Repo = average annual growth of potential output (952007) – 1 (difference between long term and short term
interest rates) + inflation
+ 0.5 * output gap (real GDP/potential GDP) + 0.5 (inflation
rate -2 the ECB target)
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• Between 2000 and 2008, monetary policy was
restrictive for Germany and expansionist for
countries which were converging
I n t er est r at es f ollo win g t he T aylo r r ule
16
%
12
8
4
0
France
Germany
Ireland
Greece
Spain
Euro area
ECB Repo
-4
-8
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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• Consequences: monetary policy has
exacerbated internal disequilibrium
H o u se h o ld sd e b t
130
N o n fin a n c ia lc o rp o ra tio n sd e b t
% disposable incom e
260
% value ad ed
240
120
220
110
France
Germany
Spain
200
France
Germany
Spain
100
180
90
160
80
140
70
120
60
100
50
80
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
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• External disequilibrium reflected internal
disequilibrium (except in Ireland)
U n itla b o rc o st(c o mp a re d to E u ro a re a a v e ra g e )
125
T ra d e b a la n c e
1999=100
250
120
Bilions of euros (3 months mov. avg. annualised)
200
115
150
110
Ireland
Germany
Spain
Greece
Portugal
100
105
50
Ireland
Germany
Spain
Greece
Portugal
100
0
95
-50
90
-100
85
80
-150
00
01
02
03
04
05
06
07
08
09
10
11
12
00
01
02
03
04
05
06
07
08
09
10
11
12
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• No compensation (or not enough)
through fiscal policy
Public def ic it
5
As a percentage of GDP
0
-5
-10
Spain
Greece
Portugal
Ireland
-15
-20
-25
-30
-35
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
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• To sum up: monetary policy was appropriate
for the Euro area, but internal divergences were
(almost) inevitable
. Monetary policy was appropriate for the Euro area as a
whole but not for all individual members
. This was not a mistake of the ECB but the consequence
of the real convergence process (a political target,
supported by various instruments, e.g. structural funds)
. To equilibrate the policy mix, fiscal policy should have
been more restrictive in peripheral countries and more
relaxed in Germany (the opposite was done). But was it
politically possible (Spain close to the equilibrium, Ireland
registered a fiscal surplus)?
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3 – What’s next?
Is there any exit strategy from the Euro area? NO
. There is not a symmetry between entering and leaving the EMU:
technically, what would be the value of the private or the public debt
for the country leaving the EMU? If there is a strong depreciation of
the new currency (50% or more), the increase of the external debt will
not be sustainable.
. Which value for the new currency? In the short run, a depreciation
of the currency increases the competitiveness, but if it is followed by
a strong rise in the inflation rate, interest rates would be pushed up:
as a consequence GDP might be hit negatively and competitiveness
would deteriorate.
. Consequences on remaining countries are not clear. It might lead to
an increase in interest rates in EMU Member States and to a lower
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intra-Euro area demand.
•
An exercise regarding the sustainability
of the public debt in the Euro area
countries
2011-2012 : Coe-Rexecode outlook (Spain) and European Commission (Portugal, Italy, Greece)
Dec 2010
2013-2020 : Assumptions :
- Real GDP close to potential growth (revised downward compared to the pre-crisis period;
- Euro area inflation close to 2% (a bit higher inflation for peripheral countries)
- Apparent interest rates in line with growth of nominal GDP, including a risk premium.
- Public receipts increase as nominal GDP
- Public expenditures are adjusted to stabilize the debt/GDP ratio in the medium run (when possible)
Reminder:
If Bp(t)=G(t)-T(t), the primary deficit, with G(t) the public expenditures (excluding payments) and T the
public receipts
Total fiscal deficit is B(t) = Bp(t) + r(t)D(t-1), where interest payments is the product between the
apparent interest rate and the debt level
It comes, D(t) = D(t-1) + B(t)= Bp(t)+(1+r(t))D(t-1)
And in % of GDP, the debt dynamics can be written: d(t) = bp(t) + (1+r)/(1+g) d(t-1),
with r the apparent interest rate and g the nominal GDP growth rate.
• Underlying assumptions of a scenario on
the public debt sustainability
Main assumptions (%, annual average 20132020)
Spain
Portugal
Greece
Ireland
Real GDP growth
rate
2.5
2.0
2.0
2.5
GDP deflator
growth rate
2.5
2.5
2.5
2.5
Fiscal receipts
growth rate
5,0
4.5
5,0
5,0
Fiscal expenditures
growth rate
4.2
3.5
4.0
3.5
Apparent interest
rate (average level)
4.5
4.8
5.0
5.0
• The stabilization of the debt/GDP ratio is possible,
but only in the long run (around 2015)
Outlook of public finances in peripheral
Euro area countries (% GDP)
2010
2015
2020
Primary balance
-7.3
-1.6
-0.1
Fiscal balance
-9.2
-4.7
-3.3
Public debt
60.1
73.3
74.1
140
Primary balance
-6.1
-1.3
0.7
10
Fiscal balance
-9.1
-4.9
-4.0
Public debt
93.0
95.4
96.5
Public debt
Spain
170
%
Portugal
80
Greece
Primary balance
-4.9
-0.1
0.9
Fiscal balance
-10.5
-7.9
-7.0
Public debt
142.8
163.9
165.3
Ireland
I reland
Port ugal
Gre ce
Spain
50
20
Primary balance
-29.2
-2.5
0
Fiscal balance
-32.4
-8.2
-6.0
Public debt
96.2
121.1
126.0
20 0
20 5
2010
2015
2020
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• What can be learnt from this numerical
exercise?
•
Debt dynamics (the snowball effect) is clearly heavily
dependant on the level of interest rates: what is sustainable
with a 5% interest rate is not anymore sustainable with
interest rates at 10% (nominal GDP growth has to increase
by the same proportion!).
•
In the long run, peripheral countries can stabilize the
debt/GDP ratio with a better discipline regarding fiscal
policy. A shock therapy is not needed (it can have a
counterproductive effect, see Greece in 2010).
•
It is necessary to “buy time”. This is exactly the target of
the future European Stability Mechanism. It can be a triple
win process: no cost for other EMU members states (loans,
no gift); no losses for banks (different from the default
case); a sustainable process for peripheral countries.