El próximo viernes 11/03 a las 10 h. se expondrá públicamente dicha presentación en la Facultad de Ciencias Económicas y Empresariales de la Universidad de Cádiz (UCA). Y a las 12 h., tendrá lugar en el nuevo salón de Actos de la Escuela Superior de Ingeniería (Puerto Real). La conferencia se realizará en inglés y correrá a cargo del Prof. Dr. Steffen Minter del Instituto de Teoría Económica y Finanzas de la Universidad Albert-Ludwig Freiburg – Deutschland (Friburgo - Alemania). La ponencia versará sobre la Crisis en la Eurozona y las Políticas fallidas (Eurozone crisis and policy failure). Resumen: Analizar la crisis sufrida en Europa y poner de manifiesto la falta de políticas acertadas para ayudar a salir de la crisis de una manera más eficaz y menos traumática.

1. Eurozone crisis and policy
failure
Dr. Steffen Minter
Albert-Ludwigs-Universität Freiburg im Breisgau
March 2016

2. Schedule for today
1. Stylized facts on Eurozone crisis
2. Eurozone as optimum currency area
(Policy failure Nr. 1 ?)
3. Fiscal policy at the lower (interest rate) bound
(Policy failure Nr. 2 ?)
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3. 23.02.2016 Eurozone crisis and policy failure 3
Part I:
Stylized facts on Eurozone crisis

4. The Eurocrisis and…rebounding growth?
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
2007 2008 2009 2010 2011 2012 2013 2014
GDP growth rates
Euro area (18 countries) Germany Spain Italy

5. Different view: absolute levels
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20.000
22.000
24.000
26.000
28.000
30.000
32.000
34.000
36.000
38.000
2007 2008 2009 2010 2011 2012 2013 2014
GDP per capita
Euro area (18 countries) Germany (until 1990 former territory of the FRG) Spain Italy

6. Large deviations from expected growth
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7. Recovery in perspective I
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8. Recovery in perspective II
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Unemployment: Great depression vs. Eurocrisis

9. Summary part I
 Since 2013: EU economies are gaining
momentum
 However, different picture when considering:
o levels instead of rates of change,
o deviation from projected growth path before
crisis,
o comparison to great depression from 1930s.
 Large asymmetries between southern and
northern EU member countries
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Part II:
Eurozone as optimum currency area ?

11. Eurozone an optimum currency area?
 Benefits from having common currency: reduced
transactions costs (no exchange fees, no currency
risk, etc.)
 Costs of common currency: no flexibility in adjusting
nominal exchange rates
Reminder: International competitveness of a country is
highly affected by its real exchange rate
(= nominal exchange rate x relative price level)
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12. Asymmetric shock and single currency in a
stylized model
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Real
exchange
rate in A
Output gap
AS
AD
Real
exchange
rate in B
Output gap
AS
AD
Country B (Germany)Country A (Spain)
Before 2007
0 0

13. Asymmetric shock and single currency in a
stylized model
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Real
exchange
rate in A
Output gap
AS
AD
AD´
Real
exchange
rate in B
Output gap
AS
AD
Country B (Germany)Country A (Spain)
After 2007
A
B
C
Contraction with flexible
nominal rates
Contraction without flexible
nominal rates

14. Asymmetric shock and the Euro
 Absence of national currency prevents possibility to
depreciate nominal exchange rate and gain
international competitiveness
 Instead: domestic price level decreases
But: this happens slowly and painfully (wage
reductions, shortening of social benefits, etc.)
 Several factors that alleviate negative
consequences: labor mobility, fiscal transfers, trade
integration
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15. Summary part II
 Euro reduces ability of countries to react to
asymmetric shocks
 Negative consequences of economic crises are
prolonged
 Alleviating factors are (still) underdeveloped in the
EU (contrary to the US)
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From an economic point of view: Euro seems to
be a terrible idea so far
Of course: Political motives have probably dominated
the decision to introduce the Euro

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Part III:
Fiscal policy at the lower (interest rate) bound

17. Hitting rock bottom…
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18. A quick refresher on macroeconomics
 IS-LM Model: close relationship between interest
rate and production level:
o the lower the interest rate, the higher the
production (capital becomes cheaper, which
leads to more investments, which leads to more
consumption)
 Interest rates are affected by monetary policy (first
policy option)
 Once the lower bound has been hit, (conventional)
monetary policy becomes ineffective
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19. IS-LM Model with lower bound
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Production Y
Interestratei

20. Austerity and the Troika
 Second policy option: fiscal policy
 Large fiscal deficits: Troika has called for austerity
policy in southern EU countries: cuts in government
spending + tax hikes
 According to classic IS-LM: Austerity is contractionary
(IS curve goes to the left)
 Motive of Troika: Austerity leads to an increase in
(investor) confidence (IS curve to the right)
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Austerity and Confidence
Production Y
Interestratei

22. Fiscal tightening and GDP 2007-2015
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23. Summary part III
 Monetary policy has lost effectiveness due to the
zero lower bound
 Fiscal tightening has been prescribed by the Troika
o prediction of classic IS-LM: further contractionary
effects
o But: eventually stimulating effects through
increased confidence
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Result has to be determined empirically: At the
moment little indication of confidence boosting
effects

24. Conclusion
 Eurozone crisis: severe effects and very slow recovery
in southern EU member states
 Euro has been bad idea according to OCA-Theory (but:
political objectives might dominate)
 Effectiveness of monetary policy restricted due to lower
bound
 Prescription of tight fiscal policy (Austerity) rests on
confidence arguments, which are highly controversial
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