Transcript Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment? Mark Weisbrot, Co-Director Center for Economic and Policy Research September 24, 2011

Macroeconomic Policy in the
Eurozone: Are There Alternatives
to Slow Growth and High
Unemployment?
Mark Weisbrot, Co-Director
Center for Economic and Policy Research
September 24, 2011
• Europe’s crisis, stagnation, and
unemployment are not the result of
unsustainable borrowing
• It is the result of bad macroeconomic
policies from the European authorities:
• The “Troika” – European Central Bank,
European Commission, IMF
• Three most important macroeconomic
policies: Fiscal, monetary, and
exchange rate
• Not helping, or actively causing damage,
in troubled eurozone economies
(Greece, Ireland, Portugal, Spain, Italy)
• Troika, especially ECB has played game
of brinksmanship with troubled
economies since early 2010
• Repeatedly pushing Europe, and now
much of the world economy, to the edge
of serious crisis
• Why?
What policy failure looks like
Italy
Real GDP (Index: 2007=100)
120
Trend
WEO (spring)
115
WEO (fall)
110
105
100
100
99
94
95
95
95
96
96
97
98
99
90
85
2007
2008
2009
2010
2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)
20
15
11
11
12
14
15
16
16
17
10
5
0
0
3
Trend vs. Actual and Projected GDP (percent)
Ireland
Real GDP (Index: 2007=100)
185
Trend
WEO (spring)
175
WEO (fall)
165
155
145
135
125
115
105
100
96
95
90
89
2009
2010
90
91
93
96
99
102
85
2007
2008
60
40
20
0
26
0
34
2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)
42
48
54
59
64
68
10
Trend vs. Actual and Projected GDP (percent)
Greece
Real GDP (Index: 2008=100)
135
Trend
WEO (spring)
130
WEO (fall)
125
120
115
110
105
100
99
100
98
96
93
95
93
89
90
87
88
90
85
2007
2008
2009
2010
2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)
40
26
30
0
34
35
35
35
16
20
10
32
0
2
8
Trend vs. Actual and Projected GDP (percent)
Portugal
Real GDP (Index: 2008=100)
135
Trend
WEO (spring)
130
WEO (fall)
125
120
115
110
105
100
100
100
97
101
99
97
103
98
95
96
95
90
85
2007
2008
2009
2010
2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)
30
22
24
25
26
16
20
9
10
0
24
0
10
3
Trend vs. Actual and Projected GDP (percent)
Spain
Real GDP (Index: 2008=100)
145
Trend
WEO (spring)
WEO (fall)
135
125
115
105
99
100
96
96
2009
2010
97
98
100
102
104
105
95
85
2007
2008
2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)
30
20
10
10
0
0
14
17
19
21
23
25
26
2
Trend vs. Actual and Projected GDP (percent)
Argentina
Real GDP (Index: 1998=100)
130
125
Trend
125
Actual GDP
120
115
115
110
106
105
100
100
97
97
96
95
92
89
90
85
82
80
1998
1999
2000
2001
32
40
20
0
2002
0
5
8
15
2003
23
2004
15
2005
8
2006
2007
1
-5
-20
Trend vs. Actual GDP (percent)
Lessons from Argentina:
• Despite chaotic default, financial
collapse, and no outside help, Argentine
economy begins to recover just one
quarter after default
• Argentina reaches pre-recession GDP
within 3 years, despite much deeper
recession – compare to more than a
decade in Greece.
• Passes trend GDP in 2006 (compare to
eurozone – when?)
• Real GDP growth more than 90 percent
2002-2011
• There are ALWAYS alternatives to the
years of recession, stagnation, and high
unemployment that the Troika is
offering to the troubled eurozone
economies
The human cost of economic
mismanagement
Ireland
Unemployment Rate
(Seasonally Adjusted)
16
14
(percent)
12
10
8
6
4
2008
Source: Eurostat
2009
2010
2011
Greece
Unemployment Rate
(Seasonally Adjusted)
16
14
(percent)
12
10
8
6
4
2008
Source: Eurostat
2009
2010
2011
Italy
Unemployment Rate
(Seasonally Adjusted)
16
14
(percent)
12
10
8
6
4
2008
Source: Eurostat
2009
2010
2011
Portugal
Unemployment Rate
(Seasonally Adjusted)
16
14
(percent)
12
10
8
6
4
2008
Source: Eurostat
2009
2010
2011
Spain
Unemployment Rate
(Seasonally Adjusted)
22
20
18
(percent)
16
14
12
10
8
6
4
2008
Source: Eurostat
2009
2010
2011
• Low inflation implies there is plenty of
room for expansionary monetary and
fiscal policies – but eurozone countries
that need it can’t implement these
policies
Ireland
Inflation
(Seasonally-Adjusted, year over year)
6.0
5.0
4.0
(percent)
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
J
F
M
A
M
J
J
2010
Source: Eurostat
A
S
O
N
D
J
F
M
A
M
2011
J
J
A
Greece
Inflation
(Seasonally-Adjusted, year over year)
6.0
5.0
4.0
(percent)
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
J
F
M
A
M
J
J
2010
Source: Eurostat
A
S
O
N
D
J
F
M
A
M
2011
J
J
A
Spain
Inflation
(Seasonally-Adjusted, year over year)
6.0
5.0
4.0
(percent)
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
J
F
M
A
M
J
J
2010
Source: Eurostat
A
S
O
N
D
J
F
M
A
M
2011
J
J
A
Italy
Inflation
(Seasonally-Adjusted, year over year)
6.0
5.0
4.0
(percent)
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
J
F
M
A
M
J
J
2010
Source: Eurostat
A
S
O
N
D
J
F
M
A
M
2011
J
J
A
Portugal
Inflation
(Seasonally-Adjusted, year over year)
6.0
5.0
4.0
(percent)
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
J
F
M
A
M
J
J
2010
Source: Eurostat
A
S
O
N
D
J
F
M
A
M
2011
J
J
A
“Internal Devaluation” doesn’t work
Real Effective Exchange Rate
(Based on Unit Labor Costs of 27 Trading Partners)
(Index: 2008QI=100)
105
100
95
Spain
Ireland
Portugal
Greece
Italy
90
I
II
III
2008
Source: Eurostat
IV
I
II
III
2009
IV
I
II
III
2010
IV
More fiscal consolidation
Total Projected Fiscal Consolidation 2010-2016
(percentage points of GDP)
9
8
Greece
Ireland*
7.6
7.7
Italy
Portugal
Spain
7.4
7
6
5.2
5
4
3.3
3
2
1
0
*Note: 2010 overall balance in Ireland excludes 21% of GDP in financial sector assistance.
Source: IMF
Greece
Projected Net Interest Payments
(% of GDP)
9
8.4
8.5
7.9
7.7
8
7.2
6.7
(% of GDP)
7
6
5.2
5.5
5
4
3
2
1
0
2009
2010
Source: IMF
2011(f)
2012(f)
2013(f)
2014(f)
2015(f)
2016(f)
Conclusion
• Euro zone crisis primarily a result of
wrong macroeconomic policies
• European authorities will probably
resolve current crisis with bigger EFSF
or other rescue mechanisms,
interventions in bond markets, bank
bailouts, even Greek debt restructuring
Conclusion
• But continued wrong macroeconomic
policies will cause unnecessary
unemployment and suffering; cuts to
health care, pensions, education;
trillions of dollars in lost output, and
possibly more crises