Emerging from the euro debt crisis Making the single currency work Dr. Michael Heise, Allianz SE American Institute for Contemporary German Studies Johns Hopkins University Washington D.C., August 20, 2013
1 1 Euro debt crisis: Easing but not yet over 2 The way forward: Making the single currency work 2
EMU: Recession has come to an end, but growth to remain moderate in the course of the year Real GDP growth (%) 1.0 0.9 Q4 '12 Q1 '13 0.8 0.7 Q2 '13 0.6 0.5 Q3 '13 (estimated) 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0-0.6-0.3 0.3 0.3-0.5 0.0-0.2-0.2 EMU DE FR 0.2-0.9-0.6-0.2 0.1-0.8-0.5-0.1 0.0 IT ES Sources: Eurostat, own estimates. 3
EMU: Pace of growth likely to pick up in 2014 Real GDP growth (%) 4.5 3.5 2.5 1.5 0.5-0.5-1.5-2.5-3.5-4.5-5.5-6.5-7.5 1.5 q4/q4 0.7% 1.5 3.0 2.1 1.0 0.7 1.7 1.4 0.2 0.0 ES GR IE PT 2.0 1.4 1.0 1.0 0.91.1 0.5 0.8 1.0 0.4-0.3-0.5-1.6-1.4-1.4-1.6-1.5-2.4-3.2-4.2 2011 2011 EMU DE FR IT 2012 2012 2013 2013-6.5-7.2 2014 2014 Sources: Eurostat, own forecasts. 4
EMU: Economic indicators support recovery hopes Economic Sentiment Indicator (Business and consumer survey)* Industrial production (excl. construction) index 2010 = 100, 3 month moving average *) The EU Commission s Economic Sentiment Indicator (ESI) is a composite indicator made up of business and consumer sentiment indicators. Results are published as the balance of positive and negative answers. Source: EcoWin. 5
Milestones of the euro crisis and sovereign bond spreads 16 14 12 EMU stage 1 (July 1990) EMU stage 2 (January 1994) EMU stage 3 (January 1999) 9/11 (September 2011) Deauville (October 2010) First PSI (June 2011) Draghi Bazooka 1 (LTRO) (December 2011) 10 Draghi Bazooka 2 (OMT) (September 2012) 8 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Spain Ireland Italy Portugal PSI = public sector involvement. LTRO = longer-term refinancing operations. OMT = outright monetary transactions. Source: EcoWin. 6
Euro debt crisis: Easing but not yet over There are clear signs that the eurozone economy is bottoming out of a long recession. But medium term growth will remain moderate due to consolidation and deleveraging needs. Despite the errors made in crisis management, the basic principle to use ECB measures and rescue fund means to buy time in exchange for consolidation and structural reforms has proven to be right and is bearing fruit. Austerity does not lead to a downward spiral, it is a necessity in a situation of overindebtedness and lack of capital market access. If well-designed (embedded in mediumterm concept, focus on spending rather than tax side, combined with pro-growth reforms) consolidation can quickly restore confidence. For the future success of the eurozone, it is now essential to establish a strong and stable architecture in the financial, fiscal, economic and political domains. 7
EMU: Financial markets with signs of normalization Yield spread over 10y German government bonds, percentage points Change in net outstanding cross-border financing in the euro area in EUR bn (q-o-q) 175 150 125 100 75 50 25 0-25 -50-75 -100-125 -150 Q2-1999 Q4-2000 Q2-2002 Q4-2003 Q2-2005 Q4-2006 Q2-2008 Q4-2009 Q2-2011 Q4-2012 EMU: Corporate spreads*, basis points * Calculated as: Corporate bond yields (7-10yr.) minus average of govt. benchmark bond yields with maturity of 7 and 10 years. Net claims of Bundesbank within the Eurosystem (TARGET2), EUR bn 800 700 600 500 400 300 200 100 0-100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: Deutsche Bundesbank, EcoWin. 8
EMU: Macroeconomic adjustment is substantial Nominal unit labor costs Index 2000 = 100, deviation from target path of 1.5% rise per year 28 26 24 Ireland 22 20 18 16 Italy 14 Spain 12 10 8 6 France 4 2 EMU 0-2 Portugal 2000 2002 2004 2006 2008 2010 2012 6 4 2 0-2 -4-6 -8-10 -12 Current account balances as % of GDP France Portugal EMU Italy Ireland Spain -14 2000 2002 2004 2006 2008 2010 2012 Sources: EcoWin, Eurostat, own calculations and forecasts. 9
EMU: Consolidation process continues with some delay Public budget balances, as % of GDP Public budget balances, as % of GDP 5 0-5 -10 5 0-5 -10-15 -15-20 -25 Germany France Italy EMU -20-25 Ireland Greece Spain Portugal -30-30 -35 2000 2002 2004 2006 2008 2010 2012-35 2000 2002 2004 2006 2008 2010 2012 Source: Eurostat, own forecasts. 10
EMU: Powder keg record-high youth unemployment Youth unemployment rate*, in % Youth unemployment rate*, in % *) Harmonized, share of unemployed persons aged less than 25 years in relation to the labor force of the same age group. Source: Eurostat. 11
Structural reform drives where progress has been achieved Greece Ireland Portugal Spain Italy Consolidation Public sector efficiency Pensions Labor market Deregulation (product markets, professions) Privatization Financial system far-reaching action significant action some action, but still major reform needs and/or insufficient implementation empty = no action / no reform needed 12
It does not take too long for reforms to start working Germany: Labor market trends and labor market reforms 41.8 41.4 41.0 40.6 40.2 39.8 39.4 39.0 38.6 Employed people, millions (lhs) 2002: Job-AQTIV-Law 2003-2006: Hartz I IV 2) 1) Unemployed, millions (rhs) 38.2 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 6.2 5.8 5.4 5.0 4.6 4.2 3.8 3.4 3.0 2.6 1) Welfare benefit recipients capable of work redefined as registered unemployed. 2) Hartz I and II (2003): Liberalization of temporary work; tightening of job suitability rules, Me Incs, job centers, new rules for minijobs and midijobs. Hartz III (2004): Restructuring of Federal Labor Office, less employment protection in small companies. Hartz IV (2005-2006): Merging of unemployment and welfare benefit, tightening of entitlement requirements, shorter entitlement period for unemployment benefit. Source: EcoWin. 13
Turning to the European level: Key priorities for restoring growth Infrastructure improvements (also via project bonds) Completion of the single market TTIP exploiting the growth potential of trade Joint qualification and education efforts Curbing youth unemployment through rechanneling of EU funds 14
2 1 Euro debt crisis: Easing but not yet over 2 The way forward: Making the single currency work 15
Success of the euro in stabilizing prices Inflation rates also lower in stable countries Average yearly rate before (1990-1998) and with the euro (1999-2012) 5.0 4.5 4.0 3.5 4.4 1990-1998 4.4 1990-1998 3.0 2.5 2.0 1.5 1.0 2.5 1990-1998 1.5 1999-2012 2.3 1999-2012 2.0 1990-1998 1.7 1999-2012 2.8 1999-2012 0.5 0.0 Germany Italy France Spain Sources: EcoWin, Allianz calculations. 16
Currency composition of global foreign exchange rates: Emergence of a global currency Shares of disclosed reserves 80 70 60 50 USD Amounts in trillion USD 12 10 8 USD Yen other currencies Euro undisclosed 40 30 20 10 0 Euro Yen 1999 2001 2003 2005 2007 2009 2011 6 4 2 0 1999 2001 2003 2005 2007 2009 2011 Source: IMF Statistics Department COFER database and International Financial Statistics. 17
The euro has a fairly high valuation 120 115 EUR/USD spot rate (rhs) 1.6 1.5 110 105 100 95 90 85 Euro area-17 countries nominal effective exchange rate vis-à-vis EER-20 group of trading partners (lhs) 1.4 1.3 1.2 1.1 1.0 0.9 80 0.8 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: EcoWin. 18
An optimum currency area? Openness indicator 350 300 250 200 150 100 50 0 Greece France Italy Spain Percent of GDP Portugal Cyprus Germany Austria Slovenia Netherlands Belgium Slovakia Estonia Ireland Malta Luxembourg Euro area USA Japan 2010 2011 2012 The Openness Indicator is defined as the sum of imports and exports of goods and services in percent of national GDP. The graph is based on national account data (current prices) from Eurostat Database. Data for Greece is provisional. Euro area includes all member states of the respective year. 19
Migration from other EMU countries to Germany (non-nationals) 2012 2011 2010 year 2009 2008 2007 2006 2005 2004 2003 Other EMU countries Portugal Netherlands Austria Slovakia France Spain Greece Italy 2002 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 persons 2012: preliminary data. Source: Statistisches Bundesamt, Wiesbaden 2012. 20
A toothless stability pact: Heatmap on the deficit criterion Country 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Austria -2,3-1,7 0,0-0,7-1,5-4,4-1,7-1,5-0,9-0,9-4,1-4,5-2,5 Belgium -0,6 0,0 0,4-0,1-0,1-0,1-2,5 0,4-0,1-1,0-5,5-3,8-3,7 Cyprus -4,3-2,3-2,2-4,4-6,6-4,1-2,4-1,2 3,5 0,9-6,1-5,3-6,3 Estonia -3,5-0,2-0,1 0,3 1,7 1,6 1,6 2,5 2,4-2,9-2,0 0,2 1,1 Finland 1,7 7,0 5,1 4,2 2,6 2,5 2,9 4,2 5,3 4,4-2,5-2,5-0,6 France -1,8-1,5-1,5-3,1-4,1-3,6-2,9-2,3-2,7-3,3-7,5-7,1-5,2 Germany -1,6 1,1-3,1-3,8-4,2-3,8-3,3-1,6 0,2-0,1-3,1-4,1-0,8 Greece -3,3-3,7-4,5-4,8-5,6-7,5-5,2-5,7-6,5-9,8-15,6-10,7-9,4 Ireland 2,6 4,7 0,9-0,4 0,4 1,4 1,7 2,9 0,1-7,4-13,9-30,9-13,4 Italy -1,9-0,8-3,1-3,1-3,6-3,5-4,4-3,4-1,6-2,7-5,4-4,5-3,9 Luxemburg 3,4 6,0 6,1 2,1 0,5-1,1 0,0 1,4 3,7 3,2-0,8-0,8-0,3 Malta -7,2-5,8-6,4-5,8-9,2-4,7-2,9-2,8-2,3-4,6-3,9-3,6-2,7 Netherlands 0,4 2,0-0,2-2,1-3,1-1,7-0,3 0,5 0,2 0,5-5,6-5,1-4,5 Portugal -3,1-3,3-4,8-3,4-3,7-4,0-6,5-4,6-3,1-3,6-10,2-9,8-4,4 Slovakia -7,4-7,7-6,5-8,2-2,8-2,4-2,8-3,2-1,8-2,1-8,0-7,7-4,9 Slovenia -3,0-3,7-4,0-2,4-2,7-2,3-1,5-1,4 0,0-1,9-6,0-5,7-6,4 Spain -1,2-0,9-0,5-0,2-0,3-0,1 1,3 2,4 1,9-4,5-11,2-9,7-9,4 surplus above 3% surplus between 0% - 3% balanced budget deficit between 0-3% deficit above 3% Source: EcoWin. 21
Seven steps towards Euro 2023 1. Reform of EU governance enhancing EU decision-making and democratic legitimacy of EU institutions. 2. Explicit exit rules for countries that do not live up to their commitments within the Monetary Union. 3. A precise fiscal rulebook empowering an EU finance commissioner to intervene when necessary. 4. An effective mechanism at EU level to detect and correct the development of imbalances that could derail economies. 5. Enhanced competencies for European institutions, particularly with regard to the European banking system. 6. More common policies that lead investments in Europe s physical and intellectual infrastructure boosting growth and competitiveness. 7. A sovereign debt restructuring mechanism guaranteeing an orderly process in the case of default. 22
Appendix 23
Euro area: Economic indicators and forecasts* 2012 2013 2014 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013f 2014f GDP real -0.1-0.2-0.1-0.6-0.3 0.3 0.3 0.3 0.5 0.4 0.4 0.4-0.5-0.3 1.5 Private consumption -0.2-0.5-0.1-0.6 0.0 0.2 0.2 0.2 0.2 0.2 0.3 0.3-1.3-0.3 0.9 Government spending -0.1-0.3-0.1 0.0-0.2 0.0 0.0 0.1 0.0 0.0 0.0 0.0-0.4-0.2 0.0 Investment -1.3-1.8-0.8-1.5-1.9 0.3 0.7 0.5 0.8 0.5 0.6 0.6-4.2-3.2 2.5 Exports 0.8 1.5 0.8-0.9-0.9 1.3 1.4 1.0 1.2 1.2 1.3 1.0 2.9 1.1 4.8 Imports 0.0 0.3 0.2-1.2-1.2 1.0 1.4 0.8 0.7 1.0 1.2 1.0-0.7-0.3 4.0 Industrial production (excl. construction) -0.5-0.6 0.1-2.0 0.2 0.9 0.4 0.5 0.7 0.6 0.6 0.6-2.3-0.5 2.5 Unemployment rate % 10.9 11.3 11.5 11.8 12.0 12.1 12.3 12.3 12.1 12.0 11.9 11.7 11.4 12.2 11.9 Consumer prices y-o-y 2.7 2.5 2.5 2.3 1.9 1.4 1.4 1.3 1.3 1.4 1.5 1.6 2.5 1.5 1.5 Producer prices y-o-y 4.0 2.7 2.6 2.4 1.2 0.0 0.1 0.9 1.2 2.6 2.4 2.0 2.9 0.6 2.0 Current account balance EUR bn, nsa 20.4 27.2 35.3 43.5 57.2 55.0 40.0 40.0 45.0 45.0 40.0 35.0 126.4 192.2 165.0 % of GDP 1.3 2.0 1.7 Budget balance % of GDP -3.7-2.9-2.5 *) quarterly values: percentage change over previous period, seasonally adjusted, except where noted; annual GDP not adjusted; foreign trade incl.intra trade f = forecast. 24