Better in than out? Economic performance inside and outside the European monetary union Rapporto Europa 2015 Roma, 9.7.2015 1
Table of Content I. The political threat Why European monetary union? II. Europe s big recession Economic growth inside and outside the Euro Area Exchange rate flexibility The impact of austerity Output gaps Components of aggregate demand III. Monetary Policy and Quantitative Easing IV. Fiscal Policy: austerity without end? Debt dynamics V. Wage developments Competitiveness Decomposing the competitiveness effect Conclusion Annex 2
I. The political threat 3
60% 50% 40% 30% 20% 52% 50% 49% 48% 46% 45% 45% 48% 43% 42% 32% 34% 31% 34% 35% 36% 38% 36% 37% 35% 15% 17% 15% 14% 15% 17% 17% 19% 16% 15% 40% 38% 40% 41% 38% 39% 39% 39% 39% 38% 39% 37% 35% 31% 31% 30% 30% 31% 26% 28% 29% 29% 28% 25% 22% 20% 20% 10% 0% 2% 3% 2% 3% 2% 2% 2% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Sp.2006 A ut.2006 Sp.2007 A ut.2007 Sp.2008 A ut.2008 Jan.-Feb.2009 Sp.2009 A ut.2009 Sp.2010 A ut.2010 Sp.2011 A ut.2011 Sp.2012 A ut.2012 Sp.2013 A ut.2013 Sp.2014 A ut.2014 EB65 EB66 EB67 EB68 EB69 EB70 EB71.1 EB71 EB72 EB73 EB74 EB75 EB76 EB77 EB78 EB79 EB80 EB81 EB82 Total "positive" Neutral Total "negative" Don't know 4
Why European monetary union? Padoa Schioppa s inconsistent quartett Robert Mundell s optimum currency area 5
Figure 3. ERM Exchange rates in crisis 6
II. Europe s big recession 7
Major Economies CrisisCountries NorthernEuropeinsideEuroArea 1.16 1.05 1.08 1.12 1.08 1.04 0.95 0.90 1.04 0.96 0.92 0.85 0.80 0.75 0.96 0.92 0.88 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euro area (18 countries) Non-Euro 18 European Union (28 countries) United States Japan 1.12 1.08 1.04 0.96 0.92 Opt out Countries 0.70 1.15 1.10 1.05 0.95 0.90 0.85 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euro area (18 countries) taly Spain Greece Cyprus Portugal Ireland New Member States within the Euro Area 0.88 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euro Area (18 countries) Austria Belgium Finland France Germany Netherlands New Member States outside the Euro Area 1.24 1.20 1.16 1.12 1.08 1.04 0.96 0.92 0.88 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euro area (18 countries) United Kingdom Sweden Denmark 0.80 2007 2008 2009 2010 2011 2012 2013 2014 2015 Euro area (18 countries) Slovakia Slovenia Estonia Latvia Lithuania 0.88 2007 2008 2009 2010 2011 2012 2013 2014 2015 8 Euro area (18) Czech Republic Hungary Bulgaria Romania Poland
Figure 6. Exchange rates relative to euro Exchange Rate Index for Opt-out Countries Exchange Rate Index for New Member States 1.2 1.1 1.0 0.9 1.6 1.5 1.4 1.3 1.2 1.1 0.8 1.0 0.9 0.7 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 0.8 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 UK pound sterling Swedish krona Danish krone Polish zloty Czech koruna Hungarian forint Bulgarian lev Romania lei Croatian kuna 9
Figure 6. Exchange rates relative to euro Figure 7. Output gaps and potential output Euro Area 18 European Union 28 Non-Euro Area 4 4 4 2 2 2 0 0 0 10,000 9,600 9,200 8,800 8,400 8,000 7,600 7,200-2 -4 14,000 13,000 12,000 11,000 10,000 9,000-2 -4 4,000 3,600 3,200 2,800 2,400 2,000 - - Gap GDP real Potential GDP 10
Figure 8. Cumulative effect of growth components since 2008 6 Euro Area 18 2,5 Non-Euro Area 4 2,0 2 1,5 0 1,0-2 0,5-4 0,0-6 -0,5-8 2008 2009 2010 2011 2012 2013 2014 2015-1,0 2008 2009 2010 2011 2012 2013 2014 2015 15 United States 6 Japan 10 5 4 2 0 0-2 -5-4 -6-10 2008 2009 2010 2011 2012 2013 2014 2015-8 2008 2009 2010 2011 2012 2013 2014 2015 Public consumption Private consumption Gross investment Net export GDP growth Public consumption Private consumption Gross investment Net export GDP growth 11
III. Monetary Policy and Quantitative Easing 12
Figure 9. Total Assets of Central Banks (index December 2007=100) 520 470 420 370 320 270 220 170 120 70 2007 2008 2009 2010 2011 2012 2013 2014 2015 Federal Reserve Bank of England Bank of Japan ECB Source: Datastream. 13
IV. Fiscal Policy: austerity without end? 14
Figure 11. Budget positions Budget Balance General Government Structural Budget Balance 2 2 0-2 0-4 -2-6 -4-8 -10-6 -12-8 -14 00 02 04 06 08 10 12 14 16 18 20-10 00 02 04 06 08 10 12 14 16 18 20 Source: IMF Source: IMF deficit France deficit Italy deficit Japan deficit Germany deficit United Kingdom deficit United States structural France structural Italy structural United States structural Germany structural United Kingdom structural Japan 15
Figure 13. Drivers of public debt 5% 4% 3% 2% 1% 0% -1% -2% Euro Area 18 16 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 Debt growth Negative GDP growth Debt/GDP 15% Non-EA 10% 5% 0% -5% -10% 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 2013Q4 2014Q2 Debt growth Negative GDP growth Debt/GDP
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Table 4. Fiscal Policy Stance and Debt Sustainability 2015 2011-15 2010 15 Primary surplus growth adjusted interest rate level Sum of change (y r) Difference European Union 0.81 European Union (15) 0.90 2.70 0.97 1.72 sustainable Euro area 1.59 3.10 0.95 2.14 sustainable Euro area (12) 1.63 3.09 1.61 1.48 sustainable Belgium 0.50 0.77 0.86-0.09 not sustainable Germany 2.58 2.16-0.22 2.38 sustainable Estonia -0.28-0.73-4.61 3.88 sustainable Ireland -0.02 5.85 0.79 5.06 sustainable Greece 2.80 6.79 6.97-0.18 not sustainable Spain 0.74 5.80 3.77 2.04 sustainable France -0.21 3.24 1.02 2.22 sustainable Italy 3.63 2.63 3.52-0.90 not sustainable Cyprus 3.28 6.32 5.27 1.05 sustainable Latvia -0.70-0.40-2.77 2.37 sustainable Lithuania -0.47 1.07-1.49 2.56 sustainable Luxembourg 0.94 0.19-2.24 2.43 sustainable Malta 0.57 1.64-0.10 1.74 sustainable Netherlands 1.05 3.06 1.46 1.60 sustainable Austria 1.58 1.65 0.57 1.08 sustainable Portugal 3.36 8.04 4.18 3.86 sustainable Slovenia 0.75 3.74 3.63 0.11 sustainable Slovakia -0.24 5.61 0.76 4.85 sustainable Finland -0.53-0.76 0.48-1.25 not sustainable Bulgaria -1.67 0.09 1.70-1.61 not sustainable Czech Republic -0.42 2.35 2.93-0.58 not sustainable Denmark 0.93-0.28 2.03-2.31 not sustainable Croatia (1) -0.49 3.46 6.26-2.79 not sustainable Hungary 1.09 0.25 4.42-4.17 not sustainable Poland -0.72 5.11 1.54 3.57 sustainable Romania 0.31 4.67 0.72 3.95 sustainable Sweden -0.25-2.08-0.66-1.42 not sustainable United Kingdom -1.77 2.83-2.18 5.02 sustainable 18
V. Wage developments 19
Figure 15. Relative return on capital for Non-Euro Area, USA and Japan Wage-led growth? Incresing the wage share? Implications for competitiveness A new measure of the CER- Competitiveness Index Equilibrium wage derived from equality of return on capital Non-Euro Area United States Japan 1.20 1.35 1.04 1.16 1.12 1.08 1.30 1.25 1.20 1.15 1.03 1.02 1.01 0.99 1.04 1.10 0.98 1.05 0.97 0.96 0.96 0.95 20
Figure 15. Relative return on capital for Non-Euro Area, USA and Japan Equilibrium wage depends on: A country s labour productivity (+) Relative capital-output ratio (+) Relative inflation (-) 21
Equilibrium wage against actual wage 42 Germany France Italy 48 38 40 36 38 44 34 36 34 32 30 28 40 36 32 32 30 28 26 24 22 26 28 20 34 Spain Greece United Kingdom 28 50 32 24 45 30 20 40 28 26 16 35 24 22 12 8 30 25 20 4 20 22
CER Competitive index 1.12 1.04 1.6 1.08 1.02 1.5 1.04 0.98 0.96 0.94 0.92 1.4 1.3 1.2 0.96 0.92 0.90 0.88 0.86 1.1 1.0 GERMANY ITALY GREECE 1.06 1.04 1.02 0.98 0.96 0.94 0.92 0.90 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.96 0.92 0.88 0.84 UNITED KINGDOM POLAND UNITED STATES 23
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Conclusion No systemic advantages for being outside the Euro Area and using the exchange rate as a policy tool. The difference between in and out countries is the conduct of stabilization policies. The Euro Area has suffered from excessive restrictions on effective demand. Policy orientations must re-focus on macro-stability and balanced growth. 25
Conclusion The political question: how to change policy orientations Europe stands at a crossroad. Either it will move forward towards more integration with centralized and democratically controlled decision making or it will disappear. Tertium non datur. 26