the european union and the eurocrisis · why was the currency union flawed? •no optimal currency...
TRANSCRIPT
THE EUROPEAN UNION AND THE EUROCRISIS
Why did it happen (2002)?
• Why have multiple currencies in a single market?
• Similar beliefs: monetarism, market liberalism
• Geopolitics: to anchor Germany in Europe after
unification
Why was the currency union
flawed?
• No optimal currency area: economy works differently in
different parts of the European Union
• Insufficient labor mobility
• No federal budget to offset depression in one area
Eurocrisis 2008+
Key events
Lehman Brothers is allowed to go bankrupt (US)
German Chancellor Angela Merkel declares no European
guarantee for failing banks – it’s a national responsibility
National governments pay bank bailouts through DEBT
(2009-2010)
Speculation against Spanish and Italian government debt
(summer 2011)
Why no warning?
• Delusions of market rationality and deregulation
• Economic boom: top 1% in heaven.
• Lenders (north) and borrowers (south) benefit
• Governments, banks, rating agencies buy in.
• Wrong diagnosis: real threat was imbalances in the
economy (real estate bubble, financial deregulation)
— not government budgets
• Wrong medicine: focus on government debts
It’s not government debt
It’s the housing bubble (. . . and other bubbles)
Government debt = result of bailing out banks
. . . and speculation !
Why delayed problem solving?
National identity
No federal budget
Difficult to reform the rules
So: technocratic solutions
• Solution one: ad hoc intergovernmental loans (2009+)
• Solution two: the European Central Bank creates
liquidity (from 2012) and regulates big banks (from
2016)
• Solution three: tighter supranational surveillance of government deficits (from 2015)
Should Europe have a Fiscal Union?
Fiscal union is the integration of the fiscal policy of nations or
states. Under fiscal union decisions about the collection and
expenditure of taxes are taken by common institutions, shared by
the participating governments.
EU is no fiscal union, but:
• Sets framework rules on consumption taxes and sets trade tariffs
• Spends an annual budget of appr. €140 billion (=$154 billion) [vs.
$3.8 trillion US federal budget)
• Since 2013 (not for Britain, Czech Republic, Croatia)
• Ceilings on spending & debt + automatic correction (fines if non-
compliance)
• Coordination of economic policy (not binding)
Political problems
• Austerity (government cuts) is unpopular and unfair:
low growth, rising inequality
• North vs. South conflict
• Declining trust in European institutions
• Rise of populism
Austerity and Growth (2009-2013)More austere countries have a lower rate of growth
Gro
wth
ra
te
Austerity = the average annual change in the cyclically adjusted primary surplus
Source:
Paul
Krugman
(2015)
Economic fall-out: rising unemployment
Social fall-out: rising inequalitySocial fall-out: rising inequality
Systemic fall-out: declining trust
Southern Europe: declining trust in democracy
R=0.67
anti-EU pro EU | Total
-------------+----------------------+----------
non-populist | 22 140 | 162
|
-------------+----------------------+----------
populist | 46 13 | 59
|
-------------+----------------------+----------
Total | 68 153 | 221
|
Political fall-out: rise in populism
Anti-Europe populism: vote strength in 2014-15
bedk
ge
gr
esp
fr
irl
it
nl
uk
port
aus
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svbul
cz
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pol
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sle0
10
20
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50
righ
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list an
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nti-E
U
0 10 20 30 40left populist and anti-EU
DIAGNOSIS
• Populist parties thrive on anti-austerity, anti-
immigration, anti-solidarity, anti-trade, anti-EU
• Polarization
• But . . .
• Mainstream pro-EU parties still
control governments
• Strong supranational institutions
• 2009-10: Purchase of sovereign bonds (relax criteria for
collateral)
• Dec 2011: Long Term Refinancing Operation (LTRO) which
provides cheap money to commercial banks
• Sept 2012: unlimited sovereign bond-purchasing provided that
country enters into Commission-monitored austerity pact
• 2014: banking union (single supervisor = ECB)
• 2015: further increase in liquidity
• Jan 2016: banking union in effect: stress tests for largest banks
+ insurance fund (8% bail-in required)
Solution one: the European Central Bank steps
in
• Tighter surveillance (2011+)
beyond budget deficit into competitiveness indicators (unit labor costs, labor productivity, hiring/firing, pension schemes, labor
force participation rates)
• Crisis management: European Stability Mechanism (2013) to
provide bridging loans and debt restructuring
Solution two: monitoring among states