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The Threat of European
Disintegration
Prof. Dr. h.c. Michael Burda, PhD
Humboldt-Universität zu Berlin
Public Lecture, Ees...
Overview
• 2016 has been a difficult year for economic policy – but not
necessarily a bad year for the European economy
• ...
The Problem
• My bachelor-level course „European Integration“ at Humboldt University
stresses economic forces behind Europ...
The Problem
Economic Growth:
• Growth has not been so low for a long time: D 2015: 1.5%
• Not just central Europe – around...
Quelle: World Bank
10000
15000
20000
25000
30000
35000
40000
45000
50000
55000
60000
1980 1981 1982 1983 1984 1985 1986 19...
20000
25000
30000
35000
40000
45000
50000
55000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004...
Quelle: Weltbank
The Threat of European Disintegration 7
European Divergence: Real
GDP per capita (2005 USD)
The Problem
Capital mobility:
• In the course of the sovereign debt crisis at the Euro-periphery
and half-hearted reforms ...
European Divergence:
Target-2 Balances
The Threat of European Disintegration 9
The Problem
Labor mobility:
• The Schengen agreement was supposed to facilitate a slower
process of wage convergence, and ...
The Problem
Trade:
• Intra-European trade has suffered from the crisis
• The voices of protectionism have grown louder – a...
The Problem
Convergence of institutions and policies
• Background: The financial and sovereign debt crises have
focused ou...
The Problem
Convergence of institutions and policies
• Background: The financial and sovereign debt crises have
focused ou...
Recall the dynamics of sovereign debt
• The dynamics of debt are simple:
 Debt = - Consolidated government balance
= Spen...
• Market interest rates reflect aggregated trust of creditors - and
the reputation of the borrowers
• Income normally grow...
The Dynamic of Government Debt
• Primary versus total „headline“ Deficit – latter includes
interest payment
• At the momen...
Sovereign debt, Euro-Länder (ESA95 Basis)
% of GDP, 1990-2015
The Threat of European Disintegration 17
18
Yields on Eurozone government debt,
10 year bonds, % p.a., 1990-2016
19
Monetary policy appears helpless
0
500
1000
1500
2000
2500
3000
3500
1999
1999
1999
2000
2000
2001
2001
2001
2002
2002
...
The Problem
Regional divergence is poison for a monetary union:
• Mundell (1961)
• Nominal wage growth 1999-2015:
0
20
40
...
Solutions
Growth – and productivity growth – is the key
• But the key is lost! How to find it? Look under the right lamppo...
Austerity as priority?
• Solution: Does „Schulden“ mean „guilt“?
• Many have expressed strong views on this point, also in...
The growth solution
• What can policy do about the situation?
• Growth, growth, growth! Europe must „grow up“ - to the
lea...
Ray of hope, I: Labor market reforms
The Threat of European Disintegration 24
25
The price of labor market success: Wage inequality
Quelle: Dustmann, Fitzenberger, Schönberg, and Spitz-Oener (2014)
Re...
26
…in particular for part-time and marginal jobs
Real wages, part-time, western Germany
Source: Burda and Seele (2015)
In...
27
1.2
1.7
2.2
2.7
3.2
3.7
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
90-10...
Personal inequality has not increased more in
Germany than in other OECD countries
The Threat of European Disintegration 28
Ray of hope, II: Demand boom in Germany
The massive influx of refugees in the past year – of more than
one million people ...
Ray of hope, III: Growth is possible
• It has become fashionable among scholars of
macroeconomics to talk of „secular stag...
Real per capita GDP growth, 1980-2015
The Threat of European Disintegration 31
US growth took a hit after the crisis
Quelle: Fernald (2015) The Threat of European Disintegration 32
…but US labor productivity continues to grow…
Value added per hour, cumlative relative to value in 1973 (%)
Source: Fernal...
34
Source: Fernald (2015)
…while the rest of the world is falling behind
Value added per hour, relative to US value (%)
35
World Bank Ease of Doing Business Indicator, 2013
Source: www.doingbusiness.org
The Threat of European Disintegration
36Source: www.doingbusiness.org The Threat of European Disintegration
72
(2011: 87)
(2011: 100)
World Bank Ease of Doing B...
Infrastructure investment
• What can policy do about the situation?
• For Europe to „grow up“ - to the leading countries a...
Conclusions
• 2016 will be a year of tectonic (not only teutonic) challenges –
„meta challenges – for the EU“: Migration, ...
The Threat of European
Disintegration
Prof. Dr. h.c. Michael Burda, PhD
Humboldt-Universität zu Berlin
Public Lecture, Ees...
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Michael Burda. The Threat of European Disintegration

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Prof. Dr. h.c. Michael Burda, PhD
Humboldt-Universität zu Berlin
Public Lecture, Eesti Pank
18 August 2016

Published in: Economy & Finance
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Michael Burda. The Threat of European Disintegration

  1. 1. The Threat of European Disintegration Prof. Dr. h.c. Michael Burda, PhD Humboldt-Universität zu Berlin Public Lecture, Eesti Pank 18 August 2016 1
  2. 2. Overview • 2016 has been a difficult year for economic policy – but not necessarily a bad year for the European economy • The danger of deterioration or even disintegration of the EU: A bird´s eye view • The shadow of secular stagnation and the north-south divide • Points of light – and possible solutions The Threat of European Disintegration 2
  3. 3. The Problem • My bachelor-level course „European Integration“ at Humboldt University stresses economic forces behind European integration… Autonomous capital accumulation and convergence to a common European norm Capital mobility Labor mobility Trade in goods and services Convergence of institutions, rule of law, harmonization of both macroeconomic disturbances and fiscal policy Political convergence in general and the free flow of ideas • …all have been thrown into reverse gear over the past year! The Threat of European Disintegration 3
  4. 4. The Problem Economic Growth: • Growth has not been so low for a long time: D 2015: 1.5% • Not just central Europe – around the world, at the same time • Moveover, divergence in Europe is emerging (2015) • Italy 0.8% • France 1.1% • Greece -0.2% • Germany 1.5% • Spain 3.2% • Ireland 7.8% • Life-threatening in a monetary union – a persistent problem The Threat of European Disintegration 4
  5. 5. Quelle: World Bank 10000 15000 20000 25000 30000 35000 40000 45000 50000 55000 60000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Pro-Kopf BIP (Niveau), USD von 2005 France Germany Greece Italy United Kingdom Spain Ireland European Divergence: Real GDP per capita (2005 USD) The Threat of European Disintegration 5
  6. 6. 20000 25000 30000 35000 40000 45000 50000 55000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Pro-Kopf BIP (Niveau), Int.USD von 2011 France Germany Greece Italy United Kingdom Spain Ireland Quelle: Weltbank European Divergence: GDP per capita (USD int.2011) The Threat of European Disintegration 6
  7. 7. Quelle: Weltbank The Threat of European Disintegration 7 European Divergence: Real GDP per capita (2005 USD)
  8. 8. The Problem Capital mobility: • In the course of the sovereign debt crisis at the Euro-periphery and half-hearted reforms in these countries, investment has ground to a halt – investment, that could stimulate demand and supply • Capital flight from the crisis countries continues • Mixed with nationalist/nativist tendencies, opposition to foreign capital is growing The Threat of European Disintegration 8
  9. 9. European Divergence: Target-2 Balances The Threat of European Disintegration 9
  10. 10. The Problem Labor mobility: • The Schengen agreement was supposed to facilitate a slower process of wage convergence, and suppress migration for all but the poorest countries • After in-migration of more than 1,2 million people to Germany, the free mobility of labor is threatened by the reimposition of border controls • The deployment of migrants in Germany is occurring, but only slowly The Threat of European Disintegration 10
  11. 11. The Problem Trade: • Intra-European trade has suffered from the crisis • The voices of protectionism have grown louder – as the discussion of TTIP and Brexit have shown • The EU-referendum outcome in June shows potential dangers of populist sentiment – and may follow if the UK has a soft „Brexit“ The Threat of European Disintegration 11
  12. 12. The Problem Convergence of institutions and policies • Background: The financial and sovereign debt crises have focused our attention once again on sovereign solvency • Focus on government debt relative to GDP – not debt levels • Facts: Public budget balances, consolidated, 2012 (% des BIP) Country Fiscal Balance Interest service Primary balance Debt / GDP D 0,1 2,4 2.5 81,0 F -4,8 2,6 -2,3 90,2 PL -3,9 2,8 -1,1 55,6 GR -9,0 5,0 -4,0 156,9 IRL -8,0 3,2 -4,8 120,2 Source: IW Köln The Threat of European Disintegration 12
  13. 13. The Problem Convergence of institutions and policies • Background: The financial and sovereign debt crises have focused our attention once again on sovereign solvency • Focus on government debt relative to GDP – not debt levels • Facts: Public budget balances, consolidated, 2014 (% des BIP) Source: IW Köln Country Fiscal Balance Interest service Primary balance Debt / GDP D 0,3 1,4 1,7 74,0 F -3,9 2,0 -1,9 95,6 PL -3,3 1,9 -1,4 51,6 GR -3,9 3,9 0,0 178,4 IRL -3,9 3,5 -0.4 107,5 The Threat of European Disintegration 13
  14. 14. Recall the dynamics of sovereign debt • The dynamics of debt are simple:  Debt = - Consolidated government balance = Spending – Income = Government consumption + transfer payments + government investment + interest payments - revenues - debt repayment The Threat of European Disintegration 14
  15. 15. • Market interest rates reflect aggregated trust of creditors - and the reputation of the borrowers • Income normally grows, tax revenues should grow at the same time – assuming there is growth • The relevant number is therefore the debt-GDP ratio! • The central formula for a stabilized and sustainable fiscal stance: Primary surplus/GDP = (r–g)(Total government debt/GDP) where r=interest rate on government debt and g=growth rate The Threat of European Disintegration 15 Recall the dynamics of sovereign debt
  16. 16. The Dynamic of Government Debt • Primary versus total „headline“ Deficit – latter includes interest payment • At the moment interest rates are at lowest levels in a century, lower than 7 decades ago • … but growth has also slowed considerably • Causal for the debt crisis: Chronic primary deficits in a time when g was greater than r, then collapse of growth (g) The Threat of European Disintegration 16
  17. 17. Sovereign debt, Euro-Länder (ESA95 Basis) % of GDP, 1990-2015 The Threat of European Disintegration 17
  18. 18. 18 Yields on Eurozone government debt, 10 year bonds, % p.a., 1990-2016
  19. 19. 19 Monetary policy appears helpless 0 500 1000 1500 2000 2500 3000 3500 1999 1999 1999 2000 2000 2001 2001 2001 2002 2002 2003 2003 2004 2004 2004 2005 2005 2006 2006 2006 2007 2007 2008 2008 2009 2009 2009 2010 2010 2011 2011 2011 2012 2012 2013 2013 2014 2014 2014 2015 2015 2016 2016 EURbillions Total ECB assets and unconventional policy measures Size of the ECB's balance sheet Securities held for monetary purposes LTRO
  20. 20. The Problem Regional divergence is poison for a monetary union: • Mundell (1961) • Nominal wage growth 1999-2015: 0 20 40 60 80 100 120 140 160 180 200 2008 0 20 40 60 80 100 120 140 160 180 200 2016 Quelle: Eurostat/AMECO The Threat of European Disintegration 20
  21. 21. Solutions Growth – and productivity growth – is the key • But the key is lost! How to find it? Look under the right lamppost • Is Germany part of the problem? Or a key to the solution? • More austerity? More spending? Tax cuts? • Infrastructure? • Human capital program for migrants? The Threat of European Disintegration 21
  22. 22. Austerity as priority? • Solution: Does „Schulden“ mean „guilt“? • Many have expressed strong views on this point, also in Germany • Negative demand effects in the short run – Greece, Italy, Portugal, Spain, Ireland • But the long run is a string of short runs • Ireland v. Greece • Is hope in sight in Ireland? Spain? Greece? The Threat of European Disintegration 22
  23. 23. The growth solution • What can policy do about the situation? • Growth, growth, growth! Europe must „grow up“ - to the leading countries at the technological frontier • More reforms are necessary:  Labor reforms: Learn from the German success story  Product market reforms: Learn from Scandinavia and the UK  Infrastructure program: The „Summers No-brainer“ The Threat of European Disintegration 23
  24. 24. Ray of hope, I: Labor market reforms The Threat of European Disintegration 24
  25. 25. 25 The price of labor market success: Wage inequality Quelle: Dustmann, Fitzenberger, Schönberg, and Spitz-Oener (2014) Reallöhne, Vollzeit, Westdeutschland The Threat of European Disintegration
  26. 26. 26 …in particular for part-time and marginal jobs Real wages, part-time, western Germany Source: Burda and Seele (2015) Indexedwagegrowth The Threat of European Disintegration
  27. 27. 27 1.2 1.7 2.2 2.7 3.2 3.7 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 90-10 Percentile ratios, full-time workers Germany Sweden FranceSource: OECD Evident in international comparisons The Threat of European Disintegration
  28. 28. Personal inequality has not increased more in Germany than in other OECD countries The Threat of European Disintegration 28
  29. 29. Ray of hope, II: Demand boom in Germany The massive influx of refugees in the past year – of more than one million people – will trigger new economic impulses, that might help mend the situation: It will induce 1) A Keynesian demand stimulus, possibly €20-30b. per annum 2) A reversal of the still-rising current account surpluses of Germany with southern Europe, similar to the fashion they were reduced after German unification 1990-1995 3) Nominal wages are finally rising in Germany, especially at thelow end, which will help take the edge off German „über- competitiveness“ The Threat of European Disintegration 29
  30. 30. Ray of hope, III: Growth is possible • It has become fashionable among scholars of macroeconomics to talk of „secular stagnation“ again (Alvin Hansen 1939) • Protagonists: Lawrence Summers, Paul Krugman, as well as Robert Gordon und Martin Wolf • Growth in the past two decades has indeed been remarkably modest, even in the USA since the Great Recession • Despite this, there are points of strong growth today: Ireland, Poland, Nordic countries – and Estonia • Extensive economic growth as an alternative: Why not? The Threat of European Disintegration 30
  31. 31. Real per capita GDP growth, 1980-2015 The Threat of European Disintegration 31
  32. 32. US growth took a hit after the crisis Quelle: Fernald (2015) The Threat of European Disintegration 32
  33. 33. …but US labor productivity continues to grow… Value added per hour, cumlative relative to value in 1973 (%) Source: Fernald (2015) The Threat of European Disintegration 33
  34. 34. 34 Source: Fernald (2015) …while the rest of the world is falling behind Value added per hour, relative to US value (%)
  35. 35. 35 World Bank Ease of Doing Business Indicator, 2013 Source: www.doingbusiness.org The Threat of European Disintegration
  36. 36. 36Source: www.doingbusiness.org The Threat of European Disintegration 72 (2011: 87) (2011: 100) World Bank Ease of Doing Business Indicator, 2013
  37. 37. Infrastructure investment • What can policy do about the situation? • For Europe to „grow up“ - to the leading countries at the technological frontier – it needs to modernize its infrastructure • Facts (% of GDP): 1991 2002 2013 D: 2,6 1,8 1,6 F: 3,6 2,9 3,2 PL: - 3,4 3,9 • Infrastructure investment has been week for more than a decade • Summers‘ logic – the rate of return is certainly high enough The Threat of European Disintegration 37
  38. 38. Conclusions • 2016 will be a year of tectonic (not only teutonic) challenges – „meta challenges – for the EU“: Migration, Euro, reforms, Brexit • The outcome may depend more on the politics than economics • Brexit is only the beginning • The survival of the Euro, low interest rates of ECB and non- reforms in F, I, P, S and GR mean further divergence • I don´t dare make a forecast – but am happy to speculate! The Threat of European Disintegration 38
  39. 39. The Threat of European Disintegration Prof. Dr. h.c. Michael Burda, PhD Humboldt-Universität zu Berlin Public Lecture, Eesti Pank 18 August 2016 The Threat of European Disintegration 39

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