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Can the EU survive the Eurozone Crisis?

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Can the EU survive the Eurozone Crisis?

  1. 1. Undergraduate Economics Association Event – Can the EU survive the EUROzone Crisis? (10/24/13)
  2. 2. Announcements Econ Talk  Sunday, Nov. 27th, 12:00pm in GSU Starbucks Writing Committee + STATA Workshop  Sunday, Nov. 27th, 1:00-2:00 pm in CAS 322 Undergraduate Economics Association 2
  3. 3. Announcements Special Lecture by Nobuhiro Kiyotaki, Professor of Economics at Princeton University: Monetary Policy and Macroeconomic Performance in Recent Japan We will discuss the causes and consequences of the Japan’s recession from 1991 to present. In particular, we ask: Why did Japan stop growing? What are the roles of monetary and fiscal policies for the recession and potential recovery?  Wednesday, October 30th 5pm to 7pm  Located at 1 Silber Way, SMG Building, Kenmore Room, 9th floor, (use entrance on 1 Silber Way).  A reception will follow  Cocktails & light refreshments will be served following the lecture. Undergraduate Economics Association 3
  4. 4. Opportunities Veritas Financial Group Conference  Conference on Saturday, Nov. 9th  Learn from keynote speakers in the industry  Workshops in securities, capital markets, real estate and other relevant topics.  Network!  Register on the mail we will send + PDF resume to veritasfinancial@gmail.com  Representatives include Goldman Sachs, J.P. Morgan, Blackstone, Morgan Stanley, Deutsche Bank and many more.  Deadline Oct. 31st at 11:59 p.m. Undergraduate Economics Association 4
  5. 5. Student Articles  Unemployment in Spain after the Financial Crisis J. Sinitsky  Let’s Play Monopoly Y. Tampi Undergraduate Economics Association 5
  6. 6. Can the EU survive the EUROzone Crisis? Vivien A. Schmidt Boston University
  7. 7. Euro Crisis: A Failure of Economics or Politics? • Is it the Economics? ▫ Structures and/or Policies? • Is it the Politics? ▫ Institutions ? Leadership? Democracy? • What are the dangers? ▫ Political Volatility, rise of the extremes? ▫ End of Euro? of EU? EUtopia vs. DystopiEU • Clash of ideas/discourse on how to explain/resolve crisis
  8. 8. Clash of Ideas on economic problems/solutions • Austerity (+ neo/ordo-liberalism) (Germany/ECB/Commission) ▫ Problem: public sector profligacy, lack of discipline, excessive deficits, macro imbalances, lack of competitiveness ▫ Solution: Rapid deficit/debt reduction, fiscal consolidation, financial stability, stability ‘pacts’; S Eur: wage/price deflation, structural reform • Pragmatism (+ NeoKeynesianism)(US Obama/UK Brown, Fed, BoE, IMF?) ▫ Problem: 2008 global financial crisis, private sector debt, the markets, Greek crisis, + lack of liquidity ▫ Solution: Slow deficit reduction, some stimulus + consolidation? • Who wins in EU? Austerity Hawks. In US? Pragmatists so far.
  9. 9. IS the Problem Public Sector Profligacy or Private Debt? (Public sector finances 2000-20012) Public Sector Debt to GDP ratio Source: Eurostat 2013
  10. 10. Output Loss: Potential vs Actual GDP Euro Area United States 8,800 15,000 8,400 14,000 8,000 13,000 7,600 12,000 7,200 11,000 6,800 10,000 6,400 9,000 1996 1998 2000 2002 2004 2006 GDP_EA 2008 2010 2012 2014 1996 1998 2000 PGDP_EA 2002 2004 2006 GDP_US Germany 2008 2010 2012 2014 2010 2012 2014 2010 2012 2014 PGDP_US Italy 2,600 1,500 2,500 1,450 2,400 1,400 2,300 2,200 1,350 2,100 1,300 2,000 1,900 1,250 1996 1998 2000 2002 2004 2006 GDP_DE 2008 2010 2012 2014 1996 1998 2000 2002 PGDP_DE 2004 2006 GDP_IT Greece 2008 PGDP_IT Spain 220 1,000 210 960 200 920 190 880 180 840 170 800 160 760 150 720 140 680 130 640 1996 1998 2000 2002 2004 GDP_GR Source: Collignon 2013 2006 2008 PGDP_GR 2010 2012 2014 1996 1998 2000 2002 2004 GDP_ES Red Line is Potential GDP, Blue is Actual GDP 2006 2008 PGDP_ES
  11. 11. Is the Problem Competitiveness? Real Compensation per Employee (2000=100) Deflator Private Consumption Source: Ameco Database; Scharpf 2013
  12. 12. What about the Current Account Imbalance? 200.0 150.0 100.0 Germany Ireland 50.0 Greece Spain France Italy 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Netherlands Portugal -50.0 -100.0 -150.0 Current Account Balance with the Rest of the World 2001-2011( Euro= 1 000 million) Source: Eurostat 2013
  13. 13. Or is the problem lack of investment? (Source: Collignon 2013) E uro A rea 8 Euro 6 4 2 0 -2 -4 60 65 70 75 Change in inv entories Public c ons umption 80 85 90 95 00 Gros s fix ed c apital formation Trade balanc e 05 10 Priv ate c ons umption U nited S tates 10 Reagan/Bus h Clinton G W Bus h Obama Lehman 8 6 4 2 0 -2 -4 Cons umer boom -6 60 65 70 75 Change in inv entories Public c ons umption 80 85 90 Inv es tment boom 95 Gros s fix ed c apital formation Trade balanc e 00 05 10 Priv ate c ons umption
  14. 14. Is the Problem the Structure of EMU? It is not an optimum currency area! Source: JPMorgan May 2, 2012
  15. 15. Are Banks the Problem? Too big to bail? $466.7bn UK Germany Eur exposure $215.8bn $1.3tn Eur exposure $199.6bn $1.9tn $212.2bn $243.9bn France $81.4bn $122.5bn Eur exposure $729.5bn $434.3bn $125.9bn $107.9bn Spain Eur exposure $448.3bn $257.7bn $334bn Italy Eur exposure $622.3bn Major European national banking systems’ holdings of public and private sector debt of ‘too big to bail’ European countries (only amounts above $60bn) (Source: Data from BIS, FT March 2013.)
  16. 16. 16 Is the Problem the Markets? Spreads over German Bund (Sp, It) Credit default swap spreads (bank risk) Source: Financial Times, Sept. 12, 2012
  17. 17. Or do Markets respond to the politics? 7.00 4B: Greek-German Interest Rate Differential 6.00 5.00 Percent 4.00 December European Council 3.00 March European Council February European Council First Greek Restatement 2.00 Van Rompuy Calls for Special Council 1.00 Second Greek Restatement 0.00 01/07/2009 01/08/2009 01/09/2009 01/10/2009 01/11/2009 01/12/2009 Date Source: Erik Jones, EUSA paper 2010 01/01/2010 01/02/2010 01/03/2010 01/04/2010 Global Insight
  18. 18. A Problem of Structures and Policies!! • Structures Matter:  No ‘E’ in EMU; banks too big to bail; deficit vs. surplus countries • Policies Matter: ▫ Gov’t rescues--turn Private into Public Debt--sovereign debt crisis ▫ Austerity--output losses, current account imbalances, recession; debt crisis becomes competitiveness crisis for South + social crisis! ▫ MISSING: Debt mutualization (Eurobonds), quantitative easing (ECB as LOLR), Bank Resolution Facility (Banking Union), EMF, EIB for investment, fiscal federalism…..social solidarity? • And Politics Matter: • Austerity--Politically unsustainable? • Doesn’t work: Greece? Italy = ‘save Italy’, ‘grow Italy’ in wrong order
  19. 19. A Problem of Political Leadership? • A lack of EU vision?  Small-state mentality (small state in glob econ vs EU as global giant)  Ideological (and country) blinders? (Austerity, Ordo-liberalism)  Focus on national interests vs EU? (esp electoral?) • Poor decision-making? Create market panic? ▫ Greek Crisis—1st Bailout 2010: discourse (bar metaphor); no BRICS ▫ ▫ ▫ ▫ German delay; Merkel fuels negative public w 2nd—Finns’ collateral; Slovakian veto threat; no Greek ref; 2010 Irish Crisis: Bail-Out, follows talk of ESM creation, haircuts 2011 Portuguese Crisis: True Finns again; Slovakia veto threat; 2011-12 Spain/Italy in Crisis—Italy: Technical govt, then no govt; 2013 Cyprus: initial tax on small depositors
  20. 20. A Problem of Institutional Actors in ‘one-size’ governing by rules, ruling by numbers? • ECB- Does what can with ‘one size fits none’ (inflationtargeting) rules ▫ reinterprets rules -- buys debt 5/2010; ‘whatever it takes’ 7/2012 • Council: excessive intergovernmentalism for ‘one size fits one’ rules (i.e. Germany) ▫ Governing thru agreements/treaties; little joint decision-making; ▫ Pacts, packs, compacts; ever more stringent/punitive rules • Commission: secretariat for ‘one size fits all’ ruling by the numbers ▫ European semester, vetting of nat’l budgets ▫ Failure to deal w diff models of growth, varieties of capitalism • European Parliament ‘no size at all’
  21. 21. A Problem of Politics? • EU’s ‘policy without politics  Politically charged l/r policies removed to EU, depoliticized esp. w > intergovernmental + technocracy of Eurozone crisis • Leading to nat’l ‘politics without policy’  blame-shifting--‘EU made me do it’; Populism, rise of extremes • Solution: More ‘policy with politics’ ? For l/r debates ▫ Elect EU Council President? (but who is the candidate?) ▫ Elect Commission President?  EP election campaigns x EU w party candidates & majority leader named Pres of Commission by European Council.  Greater political legitimacy for EP & Commission for more flexible application of rules following political orientation of EP? • But be careful what you wish for!!! Viz rise of Euroskeptics
  22. 22. Different euro-sceptics: % saying membership of EU is a ‘bad thing’. Eurobarometer, 75 (3) May 2012.
  23. 23. To Survive the Eurozone Crisis the EU needs: • • • • • • • Better Leadership and Policies New Ideas with Persuasive Discourse New Institutional Reforms Reinvigorate Democracy, EU & National Economic Policy beyond Neo-Liberalism? A ‘moralizing’ of capitalism? And more………………
  24. 24. Article Competition UEA Article Competition  Fantastic quality of articles  A very close competition  Only one winner Julia Sinitsky Undergraduate Economics Association 25

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