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Herman Schwartz UNC-CH 20130927
- 1. From (US) financial crisis to eurocrisis: Why are American houses connected to Europe's internal imbalances? Herman Schwartz University of Virginia 27 September 2013 UNC Chapel Hill / TAM
- 2. Everything you need to know…
- 3. Euroland: an Op7mal Currency Area? • Euro only works if Europe is an OCA • OCA needs: – Essen7ally open financial markets (Yes) – Essen7ally open goods markets (Mostly, but…) – High internal labor mobility (No) – High fiscal transfers (No) – And – same ideas about proper policy • Result: regional instabili7es that are magnified by na7onal poli7cal structures
- 4. US Produc7vity growth vs wage growth % change 1948-‐2011 100 150 200 250 300 350 400 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 Wages* ProducWvity
- 5. Produc7vity vs average wage and average income of top 1%, in US, 1979+
- 6. Rising US household debt compared to incomes 1:1 ra7o
- 7. The 1991-‐2007 US growth cycle Asia Recycles US Dollars as new Treasury / MBS Debt Disinfla7on Housing Finance System More Consump7on US trade deficits à Global Growth Faster US Economic Growth ↑ Tax revenue Fed ↓ interest rates
- 8. Low interest rates No welfare state China’s growth cycle, 2000s Central bank Sterilizes $$ Issuing RMB State Banks & party elites More investment for exports Central Bank buys $$ Trade Surplus ↓ domes7c consump7on
- 9. The 1995-‐2000s German growth trap Slower job crea7on Wage restraint Low Domes7c Demand Less Domes7c Consump7on Less domes7c investment Slower rela7ve economic growth ↓ Tax revenue Tight money policy
- 10. Net Exports Contribu7on to each countries’ GDP Growth 1995-‐2009 -‐10 -‐5 0 5 10 15 20 25 30
- 11. The 1995-‐2000s German growth trap Slower job crea7on Wage restraint Low Domes7c Demand Less Domes7c Consump7on Less domes7c investment Slower rela7ve economic growth ↓ Tax revenue Tight money policy Export surplus German banks buy PIGS debt German banks buy US Mortgage bonds
- 12. Germany’s trade surpluses (€ bil) 0 20 40 60 80 100 120 140 Germany to EU27 Germanyto ROW
- 13. RelaWve Unit Labor Costs (wage in euros * produc7vity) 2000=100 80 90 100 110 120 130 140 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Germany France Italy Spain Netherlands
- 14. Germany produces but does not consume – final consump7on expenditure growth as % of German growth (Germany = 100) 80% 100% 120% 140% 160% 180% 200% 220% 240% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Ireland Greece Spain Italy Portugal
- 15. Cumula7ve growth in GDP pc, PPP 1999-‐2009
- 16. EU member interest rates 1995 -‐ 2011 EURO introduced Lehman crash
- 17. EU internal trade balances, € mils More imports = rising “foreign” debt -‐200,000 -‐150,000 -‐100,000 -‐50,000 0 50,000 100,000 150,000 200,000 250,000 300,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 Netherlands Germany France Greece United Kingdom Italy Spain
- 18. External trade balance, € mils -‐300,000 -‐250,000 -‐200,000 -‐150,000 -‐100,000 -‐50,000 0 50,000 100,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Germany France Italy Greece United Kingdom Netherlands Spain
- 19. US trade deficit (goods only, disaggregated, $bil.) -‐700 -‐600 -‐500 -‐400 -‐300 -‐200 -‐100 0 100 200 EU x Germany Lat. America Canada Rest of world Germany Japan Middle East China
- 20. EU member interest rates 1995 -‐ 2011 EURO introduced Lehman crash
- 21. Fiscal (welfare state) excess? (budget balance as % of GDP) -‐6.0 -‐4.0 -‐2.0 0.0 2.0 4.0 6.0 Denmark Germany Sweden
- 22. Fiscal (welfare state) excess? (budget balance % of GDP) -‐30.0 -‐25.0 -‐20.0 -‐15.0 -‐10.0 -‐5.0 0.0 5.0 Germany Greece Ireland Italy Portugal Spain
- 23. It’s financial debt, not sovereign nce all the maturing Peripheral sovereign and bank debt that nd bank debt: almost 7 trillion Euros. 0 1 2 3 4 5 6 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: J.P. Morgan SecuritiesLLC. Peripheral sovereign and financial debt Trillions,Euros Sovereign Financial
- 24. What if Greece (Spain, Italy) defaulted?
- 25. Who owed and to whose banks, 2009, € billions 0 200 400 600 800 1000 1200 1400 1600 Spain Greece Portgual 0 50 100 150 200 250 300 350
- 26. Private capital ounlows, public inflows… as % of GDP of Spain, Greece, Italy, Portugal, Ireland
- 27. The ECB reacts Banking sector Public sector 0 500 1,000 1,500 2,000 2,500 ECB borrowing Borrowing from private banks EFSF/EFSM SMP ECB borrowing Borrowing from private banks Figure 1.7. Euro Area Exposures to Greece, Ireland, Italy, Portugal, and Spain (In billions of euros) Dec-09 Current …and private borrowing is being replaced by public sector flows…
- 28. Wolfgang Schauble (FRG Fin Minister) “Nobody in Europe sees this contradic7on between fiscal policy consolida7on and growth. We have a growth-‐friendly process of consolida7on, and we have sustainable growth, however you want to word it.” Washington Post 10 April 2013 Eurozone 2012 GDP growth: -‐ 0.6% 2013: -‐ 0.4% Eurozone Q2 unemployment rate: 12.1% Eurozone total employment = level of Q2 2005
- 29. The eurozone is a straw house
- 30.