European Stagnation: Private sector structural balance + fiscal policy Jesper Jespersen, Jesperj@ruc. dk Roskilde University & Aalborg University 21 st April 2017
Secular(?) stagnation in EU 1. Persistently high unemployment 2. Slow growth in old Europe 3. Why? Private sector structural imbalances
Unemployment in the euro zone Arbejdsløshed, Euro-zonen (15 lande) 18000000 16000000 14000000 12000000 10000000 8000000 6000000 4000000 So, here we are! 2000000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 2000 2002 2004 2006 2010 2012 Kilde: OECD, Economic Outlook, dec. 2011 Antal personer
Unemployment: Eurozone & non-eurocountries 13,00 12,00 Eurozone 11,00 Percent of labour force 10,00 9,00 8,00 7,00 6,00 Non-Euro countries 5,00 4,00 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 Source:OECD, economic Outlook, June 2016
Increasing stagnation in old Europe, 1960-2015
Angela Merkel: It s only resting! But, she is wrong: Which a tiny drop: ECB monetary easing cannot help October 2014
3. why? 1. Lack of effective demand! Caused by: Private sector (structural) excess financial savings Structural: full employment (hypothetical calculation what model is used? ) Excess: financial savings > real investment (NB! S I) Excess private sector financial savings public deficit + balance of payments surplus
Two Sector balance! (1) Y C + I + G (2) Y Tax C + I + [G Tax] (3) Private actual excess savings: Spx Y C I Tax [G Tax] (4) Private actual excess savings public sector deficit
2012 Euro(15): Real Investment/GDP, 1970-2013 27 25 23 21 19 17 Percent of GDP y = -0,1427x + 25,054 R 2 = 0,7774 No wonder Europe has a problem! 15 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 2000 2002 2004 2006 2010 Source: OECD, Economic Outlook, no.90 & 92
14 EU15, Real investment ratio & rate of Unemployment, 1970-2013 Unemployment, percent 12 10 8 6 4 2 y = -1,2792x + 35,384 R 2 = 0,9155 0 16 18 20 22 24 26 28 Real investment ratio, percent
2011 2012 2013 2014 24 23 22 21 20 19 18 17 16 15 Real Investment ratio, 1991-2014 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 Source: OECD, Econom ic Outlook, 2014 Germany Italy Euro area (15 countries) Italy Germany 1994 1993 1992 1991 Percent of GDP
Real Fixed Capital, 2007-2013 110 100 Germany France 90 2007 = 100 80 Italy UK 70 60 Spain France Germany Italy Spain United Kingdom 50 2007 2009 2010 2011 2012 2013 Source: OECD, Economic Outlook, June 2013
Private sector excess savings, Eurozone & Instability! 9,00 8,00 7,00 6,00 5,00 4,00 3,00 Percent of GDP 2,00 1,00 0,00 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015-1,00 Source: OECD, Economic Outlook, 2016 Lack of internal private sector demand of 6 pct. of GDP
No wonder Euro zone has a growth problem! Lower real investments mean: 1. Short run: lack of effective demand, causing rising unemployment 2. Long run: lower productivity growth, causing growth to slow further down But, even worse it is: 1. Re enforced by austerity policy due to misunderstood macroeconomics. Because:
Two Sector balance! (1) Y C + I + G (2) Y Tax C + I + [G Tax] (3) Private actual excess savings: Spx Y C I Tax [G Tax] (4) Private actual excess savings public sector deficit
EU(15): Getting causality right! Private Sector surplus <==> Public Sector Deficit? Excess Private saving public deficit (and foreign surplus) 10 8 6 4 Percent of GDP 2 0-2 -4 1973 1975 1977 Public sector 1979 1981 1983 1985 1987 Privat sector 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013-6 -8-10 Source:OECD, Economic Outlook, no. 90 & 93 R2=0,82, trivial 1. Collapse of private real investment 2. Unemployment 3. Public sector budget deficit
4,00 Current Budget and Structural Budget, 2015 3,00 2,00 Percent of GDP 1,00 0,00 1,00 2,00 3,00 4,00 5,00 The Euro: why it failed. Germany Italy The misunderstood macroeconomics countries) United Kingdom Poland France Spain Euro area (15 Jesper Jespersen Roskilde University, Denmark jesperj@ruc.dk PSBR structural budget 6,00 Source: OECD, Economic Outlook, 2016 Blue column: actual budget
Limits to the public sector structural and actual budget is destabilizing! The private sector is not self adjusting to full employment and for sure not within the euro zone (semi closed area) So, the conventional calculation of the structural public sector budget is only a measure of fiscal policy. (½ pct.) If it is smaller than the current deficit fiscal policy is too restrictive to create full employment. The current deficit is just a mirror picture of the lack of effective demand The relevant calculation is: how much extra effective demand is needed to create full employment!
7 What we see is an EU imposed Austerity Bias adding to the stagnation Fiscal policy: underlying primary public budget, 2014 6 5 4 procent af BNP 3 2 1 0 Series1-1 -2-3 -4 Kilde: OECD, Economic Outlook
A case study: Spain SPAIN: Unemployment, Public Sector and Fiscal Policy 30,00 Percent of GDP and Percent of Labour Force 25,00 20,00 15,00 10,00 5,00 0,00-5,00-10,00 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 Public Sector Budget Unemployment Fiscal Policy -15,00 Source:OECD, Economic Outlook, 2016
Country study Why has Spain come out so much weaker than Germany during the crisis? Balance of payments makes a difference!
Three sector balances! (1) Y C + I + G + [E M] (3) Private excess savings: Spx Y C I Tax [G Tax] + [E M] (4) Public sector budget deficit: [G Tax] Spx [E M] So, Public sector deficit Private excess savings + balance of payments deficit
Balance of payments imbalances 10% Betalingsbalancen i pct. af BNP, - 5% 0% -5% Belgien Finland Irland Grækenland Portugal Holland Østrig Spanien Italien Frankrig Tyskland Danmark Sverige Storbritannien Euro-zone USA -10% -15% -20% light blue Spain Germany Kilde: OEDC, Economic Outlook dark blue German surplus, 200 bill. Eurozone
Forthcoming, November 2016
Accumulated wealth, 2014 Bill. Euro France Germany Italy Spain Priv. finans Wealth Foreign Wealth Public Debt 1673 25 1648 3260 1940 1320 2030-147 2177 244-647 891
Figure 5.A.1 Spain: private Savings=>Unemployment, 30 1991 2015 25 20 Unemployment 15 10 5 y = 0.7919x + 15.649 R² = 0.887 0 15 10 5 0 5 10 15 Source: OECD Economic Outlook No. 99 Private excess Savings
Spain: Excess savings and B o P Appendix 5.A.2. Spain: Private Excess Savings & Balance of Payment 1991-2015 Balance of Payments -15-10 -5 0 5 10 15 Private Excess Savings Trendline: y = 0,4748x - 4,1671 R 2 = 0,6742 Source: OECD Economic Outlook No. 99
Figure 5.A.3. Spain: Unemployment & Public Sector Budget, 1991-2012 4 2 Public Sector Budget 0-2 -4-6 -8-10 5 7 9 11 13 15 17 19 21 23 25-12 -14 Source: OECD Economic Outlook No. 99 Note: time period shortened due to changed fiscal policy Unemployment Trendline: y = -0,8176x + 7,9497 R 2 = 0,8192
Diverging Economies
Old Euro stagnation 1. Falling rate of real investment 2. Private excess savings 3. Not counterbalanced by fiscal policy due to misunderstood macroeconomics 4. Balance of payments imbalances due to fixed exchange rates
Thank you for your attention
Uneven development Unemployment: Eurozone & non-eurocountries 13,00 12,00 Eurozone 11,00 Percent of labour force 10,00 9,00 8,00 7,00 6,00 Non-Euro countries 5,00 4,00 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 Source:OECD, economic Outlook, June 2016
Unemployment: high and unfairly distributed, 2015 All euro-countries (or fixed rate)
Inspiration from Keynes: How to analyse uncertainty Keynes reading Mathematics and Philosophy in Cambridge 1902 05 His fellowship dissertation (1909) submitted to King s college was later (1921) published: Treatise on Probability It demonstrates that Keynes was a highly sophisticated mathematician, but it also underscored his views about uncertainty, knowledge and risk. Keynes understood that some risks could not be calculated or compared because they relied on assumptions about the future which had no basis in probability [or reality], which made these calculations simply wrong. Source: http://www.howtothinkaboutthefuture.com/?p=99 Jobs do not come by themselves!