Understanding the Eurozone Crisis: A Critical Analysis
The Eurozone crisis of April 2013 was deemed unnecessary and self-inflicted by Mark Weisbrot. Contrary to conventional wisdom, the crisis was not solely a debt crisis but also a result of the world financial crisis and recession. Countries like Spain and Ireland, which were reducing their Debt/GDP ratios before the crisis, saw a reversal in fortunes due to the recession. Fiscal data from Spain, Ireland, and Greece reveals the impact of the crisis on their economies.
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The Eurozone Crisis: Unnecessary and Self-Inflicted April 2013 Mark Weisbrot Center for Economic and Policy Research www.cepr.net
Debt crisis or policy crisis? Conventional wisdom: Eurozone governments have borrowed too much, must reduce debt (and therefore annual deficits) in order to get back to a sustainable debt level and restore growth. Confidence fairies (Krugman) idea that reducing budget deficit will inspire so much confidence that growth improves
Alternative: debt and deficits are the result of the world financial crisis and recession. Bubble growth overborrowing was in the private sector. This shows up in the Eurozone countries current account balances:
Spain: Current Account Balance Percent of GDP 10 6.2 5 0.8 Percent of GDP 0 -5 Spain -10 Germany -11.8 -15 2012 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Eurostat.
Recession cuts revenues and increases spending. Before the crisis Spain and Ireland were reducing their Debt/GDP ratio and Italy s was stable. Spain and Ireland were running fiscal surpluses and had lower debt than Germany and France.
Spain: Main Fiscal Variables Percent of GDP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -0.2 -0.3 1.0 2.0 1.9 1.9 1.5 2.5 3.3 3.0 2.1 1.8 1.6 1.3 1.1 41.4 38.6 34.9 30.7 26.7 48.8 46.3 43.2 39.7 36.3 Fiscal Balance Primary Balance Net Interest Payments Net Debt Gross Debt -4.2 -11.2 -3.1 1.1 30.8 40.2 -9.4 -7.9 1.4 49.8 61.3 -8.9 -7.0 1.9 57.5 69.1 -7.0 -4.5 2.5 78.6 90.7 -9.9 1.3 42.5 53.9 Source: IMF WEO.
Ireland: Main Fiscal Variables Percent of GDP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0.3 1.3 1.7 2.9 0.1 1.6 2.4 2.7 3.9 1.0 1.2 1.1 1.0 1.0 0.9 22.6 19.8 15.8 12.1 11.1 30.8 29.2 27.1 24.8 25.0 Fiscal Balance Primary Balance Net Interest Payments Net Debt Gross Debt -7.3 -13.9 -30.9 -12.8 -6.2 -12.1 -27.9 1.1 1.8 24.6 42.0 44.5 64.9 -8.3 -4.4 3.9 -9.6 3.1 94.9 103.0 3.1 74.7 92.2 106.5 117.7 Source: IMF WEO.
Greece: Main Fiscal Variables Percent of GDP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -5.7 -7.4 -5.6 -6.0 -6.8 -0.7 -2.6 -1.0 -1.3 -2.0 5.0 4.9 4.7 4.7 4.8 97.3 98.8 101.2 107.3 107.4 112.6 129.0 144.6 165.4 170.7 97.4 98.9 101.2 107.3 107.4 112.6 129.0 144.6 165.4 170.7 Fiscal Balance Primary Balance Net Interest Payments Net Debt Gross Debt -9.9 -15.6 -10.5 -4.8 -10.4 5.1 5.1 -9.1 -2.2 6.9 -7.5 -1.7 5.9 -4.7 5.8 Source: IMF WEO.
Italy: Main Fiscal Variables Percent of GDP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -3.6 -3.6 -4.5 -3.4 -1.6 1.3 1.1 0.1 1.0 3.1 4.9 4.6 4.6 4.4 4.7 88.4 88.0 88.9 89.3 86.9 103.9 103.4 105.4 106.1 103.1 105.7 116.0 118.6 120.1 126.3 Fiscal Balance Primary Balance Net Interest Payments Net Debt Gross Debt -2.7 2.2 4.9 88.8 -5.4 -1.0 4.4 97.2 -4.5 -0.3 4.2 99.1 -3.8 0.8 4.6 99.6 103.1 -2.7 2.6 5.4 Source: IMF WEO.
Portugal: Main Fiscal Variables Percent of GDP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -3.7 -4.0 -6.5 -3.8 -3.2 -1.3 -1.7 -4.2 -1.3 -0.6 2.4 2.4 2.3 2.5 2.6 51.1 53.1 57.8 58.6 63.7 55.7 57.5 62.5 63.7 68.3 Fiscal Balance Primary Balance Net Interest Payments Net Debt Gross Debt -3.7 -10.2 -1.0 2.7 67.4 71.6 -9.8 -7.0 2.9 88.9 93.3 108.1 120.0 -4.4 -0.4 4.0 97.3 113.2 -5.0 -0.8 4.2 -7.3 2.8 79.0 83.1 Source: IMF WEO. 2012 Article IV Consultation.
Eurozone Fiscal Deficits (avg. 2005-2007) Percent of GDP (Deficit Shown as Positive) 8 Greece Portugal Slovak Republic 6 France Italy 4 Malta Germany Austria Belgium Slovenia Percent of GDP 2 Cyprus 0 Netherlands -2 Ireland Spain Luxembourg Estonia -4 Finland -6 Source: IMF WEO.
Eurozone Net Debt (avg. 2005-2007) Percent of GDP Greece 120 Belgium Italy 100 Portugal Germany France 80 Austria Netherlands 60 Spain Percent of GDP 40 Ireland 20 0 Estonia -20 -40 -60 Finland -80 Source: IMF WEO.
Eurozone back in recession Last 5 quarters of real growth were negative. Why? Pro-cyclical policy:
Growth and Austerity in the Eurozone 2008-2012 10 Forecast % Change in GDP (2008-2012) SVK 5 MLT DEU BEL AUT 0 FRA NLD FIN IRL CYP -5 ITA ESP PRT SVN -10 y = -1.0969x - 1.564 R = 0.4134 -15 GRC -20 -4 -2 0 2 4 6 8 10 2008-2012 Change in Structural Fiscal Balance (% Potential GDP) Source: IMF WEO and Martin Wolf.
Unemployment in Eurozone 2005-current 13.0 12.0 12.0 11.0 Percent of Total Workforce 10.0 9.0 8.0 7.0 7.3 6.0 5.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Eurostat.
Compare to Europe and ECB Note the political irony: Europe has bigger left, socialist parties, but much more right-wing fiscal and monetary policy. (More on this topic later.) Result: U.S. still down about 10 million jobs; but economy is growing. 2.1% annual average GDP growth since June 2009 not enough to get close to full employment, but a much better story than eurozone
Most important Problem: Fiscal policy is pro-cyclical 2009-2013: Greece attempts to reduce debt, cutting its structural balance by 18.7 percent. (For comparison: $2.9 trillion in the U.S.) As the economy shrinks, it becomes harder to make the revenue targets IMF has been way off in its projections and getting worse.
Greece: Real GDP Projection 220 209.5 210 198.9 200 billions of 2005 constant euros 190 180 170 1st Review 164.0 2nd Review 160 3rd Review 4th Review 5th Review 150 Latest Review Actual 140 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.
Greece: Unemployment Rate Projections 30 2013, 26.6 1st Review 2nd Review 25 2012, 24.4 3rd Review 4th Review percent of total workforce 5th Review 20 Latest Review Actual 15 2020, 11.3 10 5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.
Economic costs so far: Loss of 20.1 percent of GDP (among worst of past century s financial crises), 2008 to 2012 27 percent unemployment for 2013; still more than 16 percent by 2018 (April 2013 WEO) Minimum wage cut 32 percent for youth (under the age of 25) and 22 percent for older workers Mass layoffs (150,000 public workers by 2015) Cuts to health and education Mass privatization totaling $30.77 billion projected ($2.09 billion realized to date).
Social costs: Kentikelenis et al. 2011. The Lancet: Suicides rose by 17% in 2009 from 2007 and unofficial 2010 data quoted in parliament mention a 25% rise compared with 2009. The Minister of Health reported a 40% rise in the first half of 2011 compared with the same period in 2010 [ ] Violence has also risen, and homicide and theft rates nearly doubled between 2007 and 2009. 52 percent increase in HIV 2010-2011.
Greece Employment as a Percent of Working Age Population EPOP Yearly 49 47 45 43 41 39 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Eurostat
Strategy Internal Devaluation : how it is supposed to work Not Working Real effective exchange rate hasn t fallen enough to pull the economy out of recession
Greece: Real Effective Exchange Rate 110 REER Deflated by CPI REER Deflated by ULC 108 106 104 102 100 98 96 94 92 90 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Eurostat
Greece: Debt as a Percent of GDP 2 2013, 179% 1.8 2011, 171% 1.6 2012, 158% 1.4 1.2 2020, 124% 1 0.8 Haircut on Private Debt 0.6 0.4 0.2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IMF (various) and Weisbrot and Montecino (2012)
EU Net Interest Burden in 2011 (Percent of GDP) 8 6 4 percent of GDP Luxembourg 2 Sweden Norway Finland 0 Poland Spain Italy France Cyprus Hungary Greece Portugal Malta Germany Ireland Slovakia Slovenia Denmark Estonia Lithuania Latvia Euro area Romania Czech Republic Bulgaria Belgium Austria Netherlands United Kingdom -2 -4 Source: IMF and Eurostat
The Troika and the World Troika is slowing the world economy for second time since last year. 2010 growth 5.2 percent 2011 growth 4.0 percent 2012 growth 3.2 percent IMF projections for world GDP growth in 2013 have been revised downward: April 2012 projection 4.1 percent October 2012 projection 3.6 percent April 2013 projection 3.3 percent The ILO estimates a record 202 million people could be unemployed in 2013.
The Troika and the World How to explain the Troika s behavior? They see the crisis as an opportunity to remake European social democracy. Neoliberal reforms. When crisis ends, they lose their leverage over weaker Eurozone economies. A delicate balance: they don t want to end crisis without achieving their political goals; but don t want a meltdown either.
The Troika and the World ECB executive board member J rg Asmussen, the most senior German at the bank said it was crucial to ensure that ECB decisions did not reduce pressure on governments to reform. That is one reason why the central bank is unlikely to reveal all details of the plan on Thursday. -- Reuters, Sep 4, 2012
The Troika and the World The policy advice given by the IMF to European Union countries in 67 Article IV agreements for the four years 2008-2011 shows a consistent pattern of policy recommendations: (1) a macroeconomic policy that focuses on reducing spending and shrinking the size of government, in many cases regardless of whether this is appropriate or necessary, or may even exacerbate an economic downturn; [cont.]
The Troika and the World (2) a focus on other policy issues that would tend to reduce social protections for broad sectors of the population (including public pensions, health care, and employment protections), reduce labor s share of national income, and possibly increase poverty, social exclusion, and economic and social inequality as a result.
Recent History First crisis around Greek debt because ECB refused to buy sovereign bonds (May 2010) Continuing crises, partly because Troika insisted no haircut for creditors. But each time they compromised to avoid worse crisis. 8 aid packages, increasing in size, between May 2010 and December 2011. A small problem in early 2010 was made very big.
Recent History Mario Draghi takes office as ECB President last November Draghi is different from Trichet. Long Term Refinancing Operation (LTRO): 1 trillion for banks since December 2011. Despite compromises, Troika still pushed Europe into recession: this is a huge policy failure. Troika willing to take great risks to further their neoliberal political agenda.
The Troika and the World Financial markets are a problem too, but the ECB can overpower them ECB is therefore the main problem, as well as the potential solution. In 2011, it became clear that governments were tightening budgets pro-cyclical policy to satisfy the ECB, not to satisfy financial markets, which were increasingly ambivalent about fiscal tightening (e.g S &P s latest downgrade of Spanish debt )
Alternatives ECB, European authorities could reverse course and allow for expansionary fiscal policy in Greece and Eurozone but won t.
Default and Exit: Argentina Banking system collapsed, but only one quarter of continued recession. Then growth: 63 percent in six years. Recovers pre-crisis GDP within 3 years. Allow 2/3 reduction in poverty and extreme poverty. Large increases in social spending, reduced inequality. Huge Success.
Argentina vs. Greece Comparative GDP Recovery Paths: Argentina (1996-2007) vs. Greece (2005-2016) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 130 Argentina Historical Trend 120 Greece Historical Trend 110 Index: peak GDP = 100 100 90 80 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Weisbrot and Montecino (2012)
Argentine Recovery Misunderstood Not a commodities boom. Not even export led. Led by domestic consumption and investment. Change in macroeconomic policy was key: change from pro-cyclical to pro-growth.
Greek advantages over Argentina Export sector twice as big. More potential sources of borrowing, if needed. More developed economy, banking system.
Argentina vs. Greece Exports as a Percent of GDP, Pre and Post-Devaluation 30 25.9 24 25 20 Percent of GDP 15 11.6 10 5 0 2001 2003 2011 Greece Argentina Source: Eurostat and INDEC.
Spain Debt burden is manageable at reasonable interest rates.
Spain: Quarterly Real GDP Growth Seasonally Adjusted Annualized Rates 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.0 0.0 -0.1 Percent Change -0.2 -0.3 -0.4 -0.4 -0.4 -0.5 -0.6 -0.8 -0.8 -1.0 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 Source: Eurostat
Spain: Unemployment Seasonally Adjusted Annualized Rates 30.0 26.3 25.0 Percent of Total Workforce 20.0 15.0 10.0 5.0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Eurostat
Spain The IMF's latest (July 2012) Article IV consultation has Spain with 20.5 percent unemployment in 2017, despite the fact that it is, by the IMF estimation, operating at just about potential GDP.
Spain: Projected Interest Payments Percent of GDP 5.0 4.5 4.5 4.2 4.0 4.0 3.8 3.5 3.5 3.0 2.5 2.5 2.1 1.9 1.8 2.0 1.6 1.4 1.3 1.5 1.3 1.1 1.1 1.0 0.5 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Projections Source: IMF WEO.
Conclusion Last fall: Draghi makes statement interpreted as commitment to stabilize Italian and Spanish bonds This put an end to the acute crisis a significant step But recession continues because of fiscal tightening Note difference from U.S. : Because eurozone citizens have lost any democratic input into economic policy-making
