The Eurozone integration, des-integration and possible future developments 18 th Monetary Policy Workshop at the Berlin School of Economcs and Law, 12 13 October 2017
Overview Position 1: The euro itself is the problem, right and left populists stress different aspects Position 2: The finance-capitalistic game as a whole is the problem, the euro is the right within the wrong Comparing the two positions against the background of euro s history Pre-history of the euro crisis: Building-up imbalances in the first half of the euro era (1999-2008) Asymmetric policy in and in Southern Europe: > Reciprocal benefits plus rising creditor-debtor-positions Crisis 2008f and Greek confession > no financial support > New game: Betting on state bankruptcy > > Ireland > Portugal > Spain > Italy Draghi s Whatever it takes -remark plus QE plus ignoring the fiscal compact enable Portugal, Spain and Italy to recover. 2
Financial balances by sectors GERMANY EURO AREA without 7.0 5.0 6.0 5.0 4.0 3.0 4.0 3.0 2.0 2.0 1.0 1.0 0.0 In % des BIP 0.0-1.0-2.0-3.0 In % of GDP -1.0-2.0-3.0-4.0-5.0-6.0-7.0-8.0-9.0 Households Business sector Government ROW 1999 2001 2003 2005 2007 2009 2011 2013 2015-4.0-5.0-6.0-7.0-8.0 Households Business sector Government ROW 1999 2001 2003 2005 2007 2009 2011 2013 2015 3
Gross wage per employee 120 120 100 100 2008 = 100 80 2008 = 100 80 60 Portugal Spain Italy 60 France United Kingdom USA 40 1995 2000 2005 2010 2015 40 1995 2000 2005 2010 2015 4
Expenditure of general government 120 120 110 110 100 100 90 90 80 80 2008 = 100 70 60 50 40 Portugal Spain Italy 2008 = 100 70 60 50 40 Southern Europe Euro area 30 1995 2000 2005 2010 2015 30 1995 2000 2005 2010 2015 5
Overall production and investment GDP Gross investment 105 110 100 100 95 90 90 80 85 2008 = 100 80 75 2008 = 100 70 60 70 65 Southern Europe Euro area 50 40 Southern Europe Euro area 60 1990 1995 2000 2005 2010 2015 30 1990 1995 2000 2005 2010 2015 6
Long-term interest rates 26 24 22 20 18 16 Spain Portugal 14 In % 12 10 8 6 4 2 0-2 1Q1990 3Q1996 1Q2003 3Q2009 1Q2016 7
Unemployment and unemployment benefits Number of unemployed Annual benefit per unemployed 350 300 250 Southern Europe Euro area 10,000 8,000 Southern Europe Euro area 6,000 2008 =100 200 In Euro 4,000 150 100 2,000 50 1995 2000 2005 2010 2015 0 1995 2001 2007 2013 8
Total exports and imports of by partner countries Exports Imports 350 350 300 Portugal Spain Italy 300 Portugal Spain Italy 250 250 1995 = 100 200 150 1995 = 100 200 150 100 100 50 1990 1993 1996 1999 2002 2005 2008 2011 2014 50 1990 1993 1996 1999 2002 2005 2008 2011 2014 9
German current account By partner countries 25 200 180 Southern Europe 20 15 Portugal Spain Italy 160 140 120 France Euro18 World Billions of 10 5 Billions of 100 80 60 40 0 20 0-5 1990 1993 1996 1999 2002 2005 2008 2011 2014-20 1990 1993 1996 1999 2002 2005 2008 2011 2014 10
Current Account 7 7 0 0 In % of GDP -7 In % of GDP -7-14 Portugal Spain Italy -14 Southern Europe Euro area -21 1991 1996 2001 2006 2011 2016-21 1991 1996 2001 2006 2011 2016 11
Unit labour costs and export prices Unit labour costs Export prices 200 180 160 160 150 140 Southern Europe Euro area 140 130 1995 = 100 120 100 1995 = 100 120 110 80 60 Southern Europe Euro area 100 90 40 1990 1995 2000 2005 2010 2015 12 80 1990 1995 2000 2005 2010 2015
Total exports and imports Constant prices Exports Imports 130 130 110 110 90 90 2008 = 100 70 2008 = 100 70 50 Southern Europe Euro area 50 Southern Europe Euro area 30 1990 1995 2000 2005 2010 2015 30 1990 1995 2000 2005 2010 2015 13
Total exports and imports Current prices Exports Imports 400 350 300 Southern Europe Euro Area 400 350 300 250 250 1995 = 100 200 1995 = 100 200 150 100 150 100 Southern Europe Euro Area 50 1990 1995 2000 2005 2010 2015 50 1990 1995 2000 2005 2010 2015 14
Three bear markets and the great crisis 15
Overall Balance Total and structural balance of government Structural Balance 2 0-2 6 4 2 P D G f o % In -4-6 -8-10 -12-14 South Europe Euro area 0-2 P D G -4 f o %-6 In -8-10 -12-14 South Europe Euro area -16 1995 1998 2001 2004 2007 2010 2013 2016-16 1995 1998 2001 2004 2007 2010 2013 2016 16
CDS premia and interest rates on longterm government bonds GREECE PORTUGAL 9,000 CDS premia (left scale) Bond rates (right scale) 48 1,400 CDS premia (left scale) Bond rates (right scale) 17 16 44 1,200 15 Basic points 7,500 6,000 4,500 40 1,000 36 32 Basic points In % 28 24 800 600 14 13 12 11 10 9 In % 3,000 1,500 20 16 12 400 200 8 7 6 5 8 4 0 7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 4 0 7/2009 11/2009 3/2010 7/2010 11/2010 3/2011 7/2011 11/2011 3/2012 3 17
CDS premia and interest rates on longterm government bonds ITALY SPAIN 550 CDS premia (left scale) Bond rates (right scale) 7.5 550 500 CDS premia (left scale) Bond rates (right scale) 7.0 6.5 450 6.5 450 400 6.0 Basic points 350 250 5.5 In % Basic points 350 300 250 5.5 5.0 In % 150 4.5 200 150 4.5 100 4.0 50 7/2009 11/2009 3/2010 7/2010 11/2010 3/2011 7/2011 11/2011 3/2012 3.5 50 7/2009 11/2009 3/2010 7/2010 11/2010 3/2011 7/2011 11/2011 3/2012 3.5 18
Long-term interest rates 19
Government debt in % of GDP 190 190 United Kingdom 170 France Italy 170 Spain Portugal USA 150 150 130 130 110 110 90 90 70 70 50 50 30 2000 2002 2004 2006 2008 2010 2012 2014 2016 30 1999 2001 2003 2005 2007 2009 2011 2013 2015 20
Labor, real and finance capital Labor Real Capital Finance Capital Economic interests Full employment Real wage increases High Profitability of real investments: - Low interest rates - Low exchange rates - Stable financial markets High prifitability of financial investments: - High interest rates - High exchange rates - Unstable financial markets Conflicts of interests Rising wages Rising interest rates Potential coalition partners Real capital Labor or finance capital Real capital Economic interest in state/ government Full employment policy Social security Education Public services Anticyclical policy Growth policy: Infrastructure Ecucation, etc. Strong central bank Restriktive monetary policy Privatisation of social security Political interests Strong welfare state Strong trade unions Weak welfare state Weak trade unions No welfare state No trade unions 21
Real and finance capitalism Real capitalism Finance capitalism Implicit coalition Labor & Real capital Real capital & Finance capital Business/unions Corporatisms Conflict State/market Complementary Antagonistic Targets of economic policy Many: From full employment, high growth to social security and fair distribution Price stability, sound public finances, regulation of policy, de-regulation of markets Power center of economic policy Government Central bank Economic paradigm Keynesianism Monetarism/Neoliberalism Diagnosis/Therapy Systemic Symptom-oriented Financial conditions Interest rate < growth rate, calm stock markets, stable exchange rates and commodities prices Interest rate > growth rate, boom und bust on stock markets, unstable exchange rates and commodities prices Striving for profits focuses on Real economy (Positive-sum game) Finance economy (Zero-sum game) Economic model Social and regulated market economy Pure market economy 22
Long-term economic development in Western Europe 12 Unemployment rate (left scale) Wage share (right scale) 75 10 8 70 In % 6 In % 4 65 2 0 1951 1961 1971 1981 1991 2001 2011 60 85 Gross public debt in % of GDP 75 65 55 45 35 1951 1961 1971 1981 1991 2001 2011 Real long-term interest rate1) 8 Real growth rate1) 6 4 2 In % 0-2 -4-6 1951 1961 1971 1981 1991 2001 2011 23
Exchange rates and global economic growth 130 8 120 6 4 110 2 100 0 1986 = 100 90 80-2 -4 In % -6 70 Effective exchange rate 4 Reserve currencies/dollar -8 World GDP (right scale) 60-10 1951 1961 1971 1981 1991 2001 2011 24
Real and finance capitalism in Europe and US Institutional frame conditions Macroeconomic framework conditions Real capitalism Finance capitalism Mixed (Bastard-Keynesian monetary and fiscal policy, speculation focused on stock market) European Social Model Europe until ~ 1973/80 Europe since ~ 1973/80 US- Model US until ~ 1973/80 US since ~ 1973/80 US since ~ 1990 25
Guidelines of a New Deal for Europe Better balance between Competition/cooperation Economy/politics Market/State Technical/social innovations Striving for profits > real economy Globalization of politics Extension of the European Social Model by environmental components Budget consolidation through stable and green growth 26
The European Monetary Fund Agency and bank for financing euro governments Sells Eurobonds and offers Euro-Accounts At stable interest rates below the medium-term growth rate Unlimited guarantee by all euro states Full backing by the ECB Fully liquid, yet not tradable (like former German Schatzbriefe ) Strict conditionality, not exclusively restrictive 27
Components of a New Deal I Interest rates below rates of economic growth Target zones for key exchange rates Stabilization of price paths of key commodities like crude oil General financial transactions tax (FTT) Re-education of FAB banks > serving the real economy Global strategies for the environment Transnational infrastructure in EU Social minimum standards in EU 28
Components of a New Deal II Innovative working time models: Adjustment to business cycle (e. g., German Kurzarbeitsmodell ) Long-term reduction of life time working hours Investment in environment (from building insolation to new forms of mobility) Recovery of the welfare state (redistribution, education, public health and pension system, etc.) Support the young generation (jobs and flats) 29
Pricing of exhaustible and environmentally harmful resources Basic conditions, in particular for fossil combustibles: Exhaustible plus social costs (climate change etc.) Equilibrium price path: Oil price must rise continuously faster than general price level (Derivatives) markets fail completely > CO2 taxes and emission trading also fail Producers and consumers change energy use mainly through strong and reliable price signals Long amortization periods of energy saving investments 30
Pricing of fossil combustibles in the EU Target: Limit climate change to plus 2 C No-regret-option ( low carbon roadmap ): Price increase by 370 per ton CO2 or 0.74 (0.93 $ at 1 = 1.25 $) per liter crude oil > Final oil price in $: 0.63 (at present at 100$/barrel) plus 0.93 = 1.56*159 = 248 $ > If target to be reached by 2020: Annual price increase by 12% Basic conditions, in particular for fossil combustibles: Exhaustible plus social costs (climate change etc.) 31
Financing the New Deal Guidelines: Shift in incentive structure from Finance towards real world activities Saving towards consumption and investment Wealth concentration towards a more equal distribution Ressource-intensive towards greener activities General financial transactions tax Higher taxes on financial returns Increase of high/top income tax rates Higher wealth taxes (including inheritance tax) Environmental taxes (instead of emissions trading) 32