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The Eurozone Crisis:Unnecessary and Self-Inflicted
April 2013
Mark WeisbrotCenter for Economic and Policy Research
www.cepr.net
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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
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• 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:
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Spain: Current Account BalancePercent of GDP
Source: Eurostat.1995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
2012-15
-10
-5
0
5
10
-11.8
0.8
6.2
Spain
Germany
Perc
ent o
f GDP
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• 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.
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Spain: Main Fiscal VariablesPercent of GDP
Source: IMF WEO.
200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2
Fiscal Balance -0.2 -0.3 1.0 2.0 1.9 -4.2-
11.2 -9.4 -8.9 -7.0Primary Balance 1.9 1.5 2.5 3.3 3.0 -3.1 -9.9 -7.9 -7.0 -4.5Net Interest Payments 2.1 1.8 1.6 1.3 1.1 1.1 1.3 1.4 1.9 2.5Net Debt 41.4 38.6 34.9 30.7 26.7 30.8 42.5 49.8 57.5 78.6Gross Debt 48.8 46.3 43.2 39.7 36.3 40.2 53.9 61.3 69.1 90.7
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Ireland: Main Fiscal VariablesPercent of GDP
Source: IMF WEO.
200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2
Fiscal Balance 0.3 1.3 1.7 2.9 0.1 -7.3-
13.9-
30.9-
12.8 -8.3
Primary Balance 1.6 2.4 2.7 3.9 1.0 -6.2-
12.1-
27.9 -9.6 -4.4Net Interest Payments 1.2 1.1 1.0 1.0 0.9 1.1 1.8 3.1 3.1 3.9
Net Debt 22.6 19.8 15.8 12.1 11.1 24.6 42.0 74.7 94.9103.
0
Gross Debt 30.8 29.2 27.1 24.8 25.0 44.5 64.9 92.2106.
5117.
7
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Greece: Main Fiscal VariablesPercent of GDP
Source: IMF WEO.
200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2
Fiscal Balance -5.7 -7.4 -5.6 -6.0 -6.8 -9.9-
15.6-
10.5 -9.1 -7.5
Primary Balance -0.7 -2.6 -1.0 -1.3 -2.0 -4.8-
10.4 -4.7 -2.2 -1.7Net Interest Payments 5.0 4.9 4.7 4.7 4.8 5.1 5.1 5.8 6.9 5.9
Net Debt 97.3 98.8101.
2107.
3107.
4112.
6129.
0144.
6165.
4170.
7
Gross Debt 97.4 98.9101.
2107.
3107.
4112.
6129.
0144.
6165.
4170.
7
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Italy: Main Fiscal VariablesPercent of GDP
Source: IMF WEO.
200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2Fiscal Balance -3.6 -3.6 -4.5 -3.4 -1.6 -2.7 -5.4 -4.5 -3.8 -2.7Primary Balance 1.3 1.1 0.1 1.0 3.1 2.2 -1.0 -0.3 0.8 2.6Net Interest Payments 4.9 4.6 4.6 4.4 4.7 4.9 4.4 4.2 4.6 5.4
Net Debt 88.4 88.0 88.9 89.3 86.9 88.8 97.2 99.1 99.6103.
1
Gross Debt103.
9103.
4105.
4106.
1103.
1105.
7116.
0118.
6120.
1126.
3
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Portugal: Main Fiscal VariablesPercent of GDP
Source: IMF WEO. 2012 Article IV Consultation.
200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2
Fiscal Balance -3.7 -4.0 -6.5 -3.8 -3.2 -3.7-
10.2 -9.8 -4.4 -5.0Primary Balance -1.3 -1.7 -4.2 -1.3 -0.6 -1.0 -7.3 -7.0 -0.4 -0.8Net Interest Payments 2.4 2.4 2.3 2.5 2.6 2.7 2.8 2.9 4.0 4.2
Net Debt 51.1 53.1 57.8 58.6 63.7 67.4 79.0 88.9 97.3113.
2
Gross Debt 55.7 57.5 62.5 63.7 68.3 71.6 83.1 93.3108.
1120.
0
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Eurozone Fiscal Deficits (avg. 2005-2007)Percent of GDP (Deficit Shown as Positive)
Source: IMF WEO.
-6
-4
-2
0
2
4
6
8
Gree
ce
Portu
gal
Italy
Fran
ce
Malta
Slov
ak R
epub
lic
Germ
any
Aust
ria
Belg
ium
Slov
enia
Cypr
us
Neth
erla
nds
Irela
nd
Spai
n
Luxe
mbo
urg
Esto
nia
Finla
nd
Perc
ent o
f GDP
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Eurozone Net Debt (avg. 2005-2007)Percent of GDP
Source: IMF WEO.
-80
-60
-40
-20
0
20
40
60
80
100
120
Gree
ce
Italy
Belg
ium
Portu
gal
Fran
ce
Germ
any
Aust
ria
Spai
n
Neth
erla
nds
Irela
nd
Esto
nia
Finla
nd
Perc
ent o
f GDP
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Eurozone back in recession
• Last 5 quarters of real growth were negative.
• Why?• Pro-cyclical policy:
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Growth and Austerity in the Eurozone2008-2012
Source: IMF WEO and Martin Wolf.
-4 -2 0 2 4 6 8 10-20
-15
-10
-5
0
5
10
f(x) = − 1.09687513068836 x − 1.56398351582925R² = 0.413404931620476
2008-2012 Change in Structural Fiscal Balance (% Potential GDP)
Fore
cast
% C
hang
e in
GDP
(200
8-20
12)
AUT
DEU
FRA
SVK
BEL
FIN NLDCYP
MLT
GRC
IRL
SVN
ESPPRT
ITA
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Unemployment in Eurozone2005-current
Source: Eurostat.
2005 2006 2007 2008 2009 2010 2011 2012 20135.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
7.3
12.0
Perc
ent o
f Tot
al W
orkf
orce
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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
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The Case of Greece
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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.
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Greece:Real GDP Projection
Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
140
150
160
170
180
190
200
210
220
163.96488056
198.869510912828
209.5
1st Review2nd Review3rd Review4th Review5th ReviewLatest ReviewActual
billi
ons o
f 200
5 co
nsta
nt e
uros
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Greece:Unemployment Rate Projections
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200
5
10
15
20
25
30
2013; 26.6
2020; 11.3
2012; 24.4
1st Review
2nd Review
3rd Review
4th Review
5th Review
Latest Review
Actual
perc
ent o
f tot
al w
orkf
orce
Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.
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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).
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Social costs:
“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.”
Kentikelenis et al. 2011. The Lancet:
• 52 percent increase in HIV 2010-2011.
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GreeceEmployment as a Percent of Working Age Population
Source: Eurostat1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
39
41
43
45
47
49
EPOP Yearly
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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
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Greece:Real Effective Exchange Rate
Source: Eurostat
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 22004 2005 2006 2007 2008 2009 2010 2011 2012
90
92
94
96
98
100
102
104
106
108
110 REER Deflated by CPI REER Deflated by ULC
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Greece:Debt as a Percent of GDP
Source: IMF (various) and Weisbrot and Montecino (2012)
10
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
171%
1.575
1.785
1.24
Hai
rcut
on
Priv
ate
Deb
t
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EU Net Interest Burden in 2011(Percent of GDP)
Source: IMF and Eurostat
Gree
ceIta
lyPo
rtuga
lIre
land
Hung
ary
Belg
ium
Malta
Unite
d Ki
ngdo
mPo
land
Fran
ceCy
prus
Aust
riaGe
rman
yLit
huan
iaRo
man
iaNe
ther
land
sLa
tvia
Spai
nSl
oven
iaCz
ech
Repu
blic
Slov
akia
Denm
ark
Bulg
aria
Esto
nia
Euro
are
a
-4
-2
0
2
4
6
8
perc
ent
of G
DP
Luxe
mbo
urg
Finla
ndSw
eden
Norw
ay
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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.
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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.
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The Troika and the World
• ECB executive board member Jörg 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
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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.]
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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.
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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.
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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.
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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 )
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Alternatives
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Alternatives
• ECB, European authorities could reverse course and allow for expansionary fiscal policy in Greece and Eurozone – but won’t.
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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.
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Argentina vs. GreeceComparative GDP Recovery Paths: Argentina (1996-2007) vs. Greece (2005-2016)
Source: Weisbrot and Montecino (2012)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
70
80
90
100
110
120
130In
dex:
pea
k G
DP
= 1
00
Argen
tina
Greece
Greece Historical Trend
Argentina Historical Trend
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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.
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Greek advantages over Argentina
• Export sector twice as big.• More potential sources of
borrowing, if needed.• More developed economy, banking
system.
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Argentina vs. GreeceExports as a Percent of GDP, Pre and Post-Devaluation
Source: Eurostat and INDEC.
2001 2003 2011Argentina Greece
0
5
10
15
20
25
30
11.6
25.924
Perc
ent o
f GDP
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Spain
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Spain
• Debt burden is manageable at reasonable interest rates.
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Spain: Quarterly Real GDP GrowthSeasonally Adjusted Annualized Rates
Source: Eurostat
2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.1
0.2
-0.1
0.1
0.3
0.2
0.0
-0.5
-0.4 -0.4
-0.3
-0.8
Perc
ent C
hang
e
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Spain: UnemploymentSeasonally Adjusted Annualized Rates
Source: Eurostat
2005 2006 2007 2008 2009 2010 2011 2012 20130.0
5.0
10.0
15.0
20.0
25.0
30.0
26.3
Perc
ent o
f Tot
al W
orkf
orce
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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.
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Spain: Projected Interest PaymentsPercent of GDP
Source: IMF WEO.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2.11.8
1.61.3
1.1 1.11.3
1.4
1.9
2.5
3.5
3.84.0
4.24.5
Projections
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Conclusion
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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
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Conclusion
• Lack of democracy is key• Without credible threat to leave
euro, weaker countries are subject to Troika’s decisions
• High unemployment, needless suffering will continue for many years or until Troika is forced to retreat