AGORA Economic Conference 4th Athens Biennale 2013 12/10/13

1. The systemic crisis of the Euro
– true causes and effective therapies
Athens, October 2013
Professor Dr. Heiner Flassbeck
flassbeck-economics.de

2. The crucial relationship
ULC1) growth rates and inflation for EMU2)
16%
14%
12%
10%
8%
6%
4%
2%
0%
ULC growth
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
-2%
Inflation
Notes: 1) ULC defined as gross income per capita in ECU/Euro of dependent employees divided by real GDP per total employed persons
2) 12 countries: Belgium, Germany, Finland, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal, Spain
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
2

3. France and Germany: No real Problem
Nominal wages1) and nominal productivity2)
55
55
Germany
France
50
50
45
45
40
Euro per hour
Euro per hour
Δ €17,1
Δ €14,9
35
30
40
35
30
Δ €11,6
Δ €10,6
20
55
45
35
25
15
25
1999
Euro per hour
25
20
15
Nominal wages
3
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
15
3
Nominal productivity
Notes: 1) Defined as total nominal compensation of dependent employees divided by working hours of dependent employees times number
of dependent employees. 2) Defined as nominal GDP divided by working hours of total employed persons times number of employed
persons. 3) 2012 values for working hours of total employees and dependent employees projected based on data from Destatis and AMECO
Source: AMECO database (as per Nov-12); Eurostat; own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
3

4. France got it right
Real wages per hour1) and productivity2) (1999 = 100)
120
120
Germany
France
115
115
120
115
110
105
100
95
90
105
2006
110
1999
110
105
Real wages per hour
Fictitious real wages
3
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
95
2001
95
2000
100
1999
100
Productivity
Notes: 1) Total real compensation of dependent employees divided by working hours of dependent employees times number of dependent
employees. 2) Real GDP divided by working hours of total employed persons times number of employed persons. 3) Total nominal
compensation of dependent employees is price adjusted by a constant inflation rate of 1.9%, apart from that same calculation as for 1)
Source: AMECO database (as per Nov-12); OECD database (as per Apr-13); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
4

5. Under- and overshooting: who is to blame?
ULC in Germany, France and Southern Europe1) (1999 = 100)
135
130
125
120
115
110
105
100
95
ULC Germany
ULC France
ULC Southern Europe
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
90
Inflation target of 1.9%
Notes: 1) Spain, Italy, Greece and Portugal
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
5

6. Historically unique trade imbalances
Growing trade imbalances mark the beginning of EMU – Current
account balances in percent of GDP
10%
Introduction of the Euro
8%
6%
4%
2%
0%
-2%
-4%
-6%
Germany
France
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-8%
Southern Europe (Greece, Portugal, Spain and Italy)
Note: Negative values represent a current account deficit
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
6

7. Adjustment by some
ULC from 1999 to 2012 for selected EMU countries (1999 = 100)
140
135
130
125
120
115
110
105
100
95
Germany
Greece
Spain
France
Italy
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
90
Inflation target of 1.9%
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
7

8. Recession without adjustment
ULC and real GDP – France (1999 = 100)
140
135
130
125
120
115
110
105
ULC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
8

9. Deep recession without adjustment
ULC and real GDP - Italy (1999 = 100)
140
135
130
125
120
115
110
105
ULC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
9

10. More adjustment and more recession
ULC and real GDP - Portugal (1999 = 100)
140
135
130
125
120
115
110
105
ULC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
10

11. Depression and adjustment
ULC and real GDP - Spain (1999 = 100)
140
135
130
125
120
115
110
105
ULC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
11

12. The „best“ performer and a great disaster
ULC and real GDP - Greece (1999 = 100)
140
135
130
125
120
115
110
105
ULC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
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13. The only way out
A scenario for convergence of ULC (1999 = 100)
150
+1.3% (=nominal wages of
about +2.3%)
140
130
+1% (= nominal wages
between 1% and 2%)
120
+3% (= nominal wages of about
+4.7%)
110
Fictitious development
100
Germany
France
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
90
Southern Europe (Greece, Portugal, Spain and Italy)
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
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14. The German contradiction
Net financial flows1) in Germany2)
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
Private households
Corporations
Government
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1971
1970
1969
1968
1967
1966
1965
-10
1…
1964
20
0
-20
1963
1962
1961
-10
Foreign countries
Notes: 1) Net debt position of a business sector in relation to gross national product; moving 3-year averages. 2) Western Germany until
1991; Germany starting 1991
Source: German Federal Ministry of Finance; AMECO database (as per May-11); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
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15. Titel
Nominal 10YR bond yields
30%
25%
20%
15%
10%
5%
Germany
France
Italy
Belgium
Greece
Spain
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
Portugal
Source: AMECO database (as per Nov-12); own calculation
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
15

16. Titel
Real 10YR bond yields1)
10%
8%
6%
4%
2%
0%
-2%
-4%
Germany
France
Italy
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-6%
Belgium
Notes: 1) Real bond yields equal nominal bond yields minus GDP inflation rate
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
16

17. Titel
ULC and real GDP - Ireland (1999 = 100)
160
150
140
130
120
110
ULC
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
100
Real GDP
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
17

18. Titel
Core country bank lending to periphery – Gross claims
Core1)-periphery2) ($m)
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
2012-Q3
2012-Q2
2012-Q1
2011-Q4
2011-Q3
2011-Q2
2011-Q1
2010-Q4
2010-Q3
2010-Q2
2010-Q1
2009-Q4
2009-Q3
2009-Q2
2009-Q1
2008-Q4
2008-Q3
2008-Q2
2008-Q1
2007-Q4
2007-Q3
2007-Q2
2007-Q1
2006-Q4
0
Notes: 1) Germany, Netherlands and France. 2) Spain, Portugal, Greece and Ireland.
Source: BIS; own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
18

19. Titel
ECB liquidity provision1) by instrument (€m)
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
Main refinancing operations
2013-Q2
2013-Q1
2012-Q4
2012-Q3
2012-Q2
Longer-term refinancing operations
Marginal lending facility
2012-Q1
2011-Q4
2011-Q3
2011-Q2
2011-Q1
2010-Q4
2010-Q3
2010-Q2
2010-Q1
2009-Q4
2009-Q3
2009-Q2
2009-Q1
2008-Q4
2008-Q3
2008-Q2
2008-Q1
2007-Q4
2007-Q3
2007-Q2
2007-Q1
0
Other liquidity providing operations
Notes: 1) Refers only to liquidity provision by the ECB (no absorption)
Source: ECB; own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
19

20. Titel
Reserve Maintenance for EMU banks (€m)
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Required reserves
Excess reserves
2013-Q1
2013-Q1
2012-Q4
2012-Q3
2012-Q3
2012-Q2
2012-Q1
2012-Q1
2011-Q4
2011-Q3
2011-Q3
2011-Q2
2011-Q1
2011-Q1
2010-Q4
2010-Q3
2010-Q3
2010-Q2
2010-Q1
2010-Q1
2009-Q4
2009-Q3
2009-Q3
2009-Q2
2009-Q1
2009-Q1
-50,000
Deficiencies
Source: ECB; own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
20

21. 5.0%
2007-…
2007-…
2007-…
2007-…
2007-…
2007-…
2008-…
2008-…
2008-…
2008-…
2008-…
2008-…
2009-…
2009-…
2009-…
2009-…
2009-…
2009-…
2010-…
2010-…
2010-…
2010-…
2010-…
2010-…
2011-…
2011-…
2011-…
2011-…
2011-…
2011-…
2012-…
2012-…
2012-…
2012-…
2012-…
2012-…
2013-…
Titel
Government securities held by banks to total assets
9.0%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
Source: ECB; own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
21

22. Titel
Holdings of sovereign bonds by domestic banks and non-residents as
percent of total MFI assets – Greece
80%
70%
60%
50%
40%
30%
20%
10%
Resident banks
2012-Q2
2011-Q4
2011-Q2
2010-Q4
2010-Q2
2009-Q4
2009-Q2
2008-Q4
2008-Q2
2007-Q4
2007-Q2
2006-Q4
2006-Q2
2005-Q4
2005-Q2
2004-Q4
2004-Q2
2003-Q4
2003-Q2
2002-Q4
2002-Q2
2001-Q4
2001-Q2
2000-Q4
2000-Q2
1999-Q4
1999-Q2
1998-Q4
1998-Q2
1997-Q4
0%
Non-residents
Source: Brueghel database of sovereign bond holdings developed in Merler and Pisani-Ferry (2012)
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
22

23. Titel
Holdings of sovereign bonds by domestic banks and non-residents as
percent of total MFI assets – Portugal
90%
80%
70%
60%
50%
40%
30%
20%
10%
Resident banks
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0%
Non-residents
Source: Brueghel database of sovereign bond holdings developed in Merler and Pisani-Ferry (2012)
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
23

24. Titel
Holdings of sovereign bonds by domestic banks and non-residents as
percent of total MFI assets – Spain
60%
50%
40%
30%
20%
10%
Resident banks
2012-Q2
2011-Q4
2011-Q2
2010-Q4
2010-Q2
2009-Q4
2009-Q2
2008-Q4
2008-Q2
2007-Q4
2007-Q2
2006-Q4
2006-Q2
2005-Q4
2005-Q2
2004-Q4
2004-Q2
2003-Q4
2003-Q2
2002-Q4
2002-Q2
2001-Q4
2001-Q2
2000-Q4
2000-Q2
1999-Q4
1999-Q2
1998-Q4
1998-Q2
1997-Q4
0%
Non-residents
Source: Brueghel database of sovereign bond holdings developed in Merler and Pisani-Ferry (2012)
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
24

25. Titel
Holdings of sovereign bonds by domestic banks and non-residents as
percent of total MFI assets – Ireland
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Resident banks
2012-Q3
2012-Q1
2011-Q3
2011-Q1
2010-Q3
2010-Q1
2009-Q3
2009-Q1
2008-Q3
2008-Q1
2007-Q3
2007-Q1
2006-Q3
2006-Q1
2005-Q3
2005-Q1
2004-Q3
2004-Q1
2003-Q3
2003-Q1
2002-Q3
2002-Q1
2001-Q3
0%
Non-residents
Source: Brueghel database of sovereign bond holdings developed in Merler and Pisani-Ferry (2012)
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
25

26. Titel
Holdings of sovereign bonds by domestic banks and non-residents as
percent of total MFI assets – Italy
60%
50%
40%
30%
20%
10%
Resident banks
2012-Q2
2011-Q4
2011-Q2
2010-Q4
2010-Q2
2009-Q4
2009-Q2
2008-Q4
2008-Q2
2007-Q4
2007-Q2
2006-Q4
2006-Q2
2005-Q4
2005-Q2
2004-Q4
2004-Q2
2003-Q4
2003-Q2
2002-Q4
2002-Q2
2001-Q4
2001-Q2
2000-Q4
2000-Q2
1999-Q4
1999-Q2
1998-Q4
1998-Q2
1997-Q4
0%
Non-residents
Source: Brueghel database of sovereign bond holdings developed in Merler and Pisani-Ferry (2012)
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
26

27. Titel
Adjustment of ULC growth rates over thirty years
25%
20%
15%
10%
5%
0%
Germany
Italy
France
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-5%
Inflation target of 1.9%
Source: AMECO database (as per Nov-12); own calculations
Luxembourg - Bruxelles, 26./27.06.2013
flassbeck-economics.de
27