1

THE GLOBAL ECONOMIC CRISIS AND THE EUROPEAN MANUFACTURING INDUSTRY

Marco FortisVice-President Fondazione Edison

Professor of Industrial Economy and International Trade, Catholic University of Milan

Europump, Stresa, May 25, 2012

2

ORIGIN OF THE GLOBAL CRISIS

• The global crisis was originated by the biggest housing-financial bubble of the last decades, which was fed by a true private debt explosion.

• According to McKinsey Global Institute, between 2000 and 2008 the overall public and private debt in the major advanced economies rose by over 40,000 billion dollars. About 75% of the increase was not produced by the states through public debt but by the private sector, through the debts of households, banks and businesses.

• Among advanced countries, the 3 Eurozone “core countries” (i.e. Italy, France and Germany), have the lowest private debt levels.

3

4

AT THE BEGINNING OF THE CRISIS IT WAS CLEAR THAT THE REAL PROBLEM WAS THE PRIVATE DEBT.

“THE ECONOMIST”: A SPECIAL REPORT ON DEBT

June 24, 2010

• “Debt increased at every level, from consumers to companies to banks to whole countries. The effect varied from country to country, but a survey by the McKinsey Global Institute found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008”.

5

“Americans and Britons may have been living in a fool’s paradise for a decade, saving less than they should because they thought share and house prices would stay high for ever. Now they have learnt the awful truth, they may decide to save a lot more, making the recession even worse than expected”.

“The Economist”, 6-12 December, 2008, p. 78

RETHINKING AN UNSUSTAINABLEMODEL OF GROWTH

6

Domestic Demand and Households Debt: 2002-2007

0%

5%

10%

15%

20%

25%

30%

35%

-20% -10% 0% 10% 20% 30% 40% 50%

change of households debt/GDP ratio

% change of domestic demand

IRELAND

SPAIN

UNITED STATES

ITALY

UK

FRANCE

JAPAN

GERMANY

"BUBBLE" ECONOMIES

PRIVATE-SECTOR LESS INDEBTED

ECONOMIES

RETHINKING AN UNSUSTAINABLEMODEL OF GROWTH

7

BEFORE GREECE, THE EYES OF THE WORLD WERE CONCENTRATED ON U.S. AND U.K. DEBTS

“I suspect that the reason the ratings agencies have not downgraded the UK may be that if they did so, they would, in logic, have to downgrade the US, too. Yet we also cannot escape from an“inconvenient truth”. Neither the UK nor the US is quite as wealthy as it once believed. There are losses to be shared, much of which will fall on public spending, taxation, or both. Once it becomesevident that neither of these countries can rise to the challenge, fiscal crises are inevitable. It would only be a question of when”.

Martin Wolf, “Financial Times”, November 24, 2009

8

TODAY THE PRIVATE DEBT, EXPECIALLY HOUSEHOLDS’ DEBT, REMAINS STILL VERY HIGH, EXCEPT IN THE 3 EUROZONE “CORE COUNTRIES”

Private debt in selected countries: 3rd Q 2011 (% of GDP)

Source: compiled by Fondazione Edison on data from Bank of Italy,

"Financial Stability Report", No. 3, April 2012

45 60 5688 67

98 82 93120

82 70106

77 100

105 136154

169

0

50

100

150

200

250

300

350

ITALY

GER

MANY

FRANCE

UNIT

ED S

TATE

S

JAPAN

UNIT

ED K

ING

DO

M

SPAIN

PORTU

GAL

IREL

AND

Households Non-financial enterprises

9

IMPACT OF THE CRISIS ON PUBLIC FINANCESAND ON THE REAL ECONOMY

• In 2008-2009 the world crisis could have had catastrophic developments, which were avoided thanks to bank bailouts and “stimulus” plans. But these actions, combined with a drop in fiscal revenues, had huge costs in many countries in terms of public finance deterioration.

• In addition, the Governments’ efforts could not prevent the financial crisis from transferring very quickly its negative effects to the real economy, in terms of higher structural levels of unemployment, lower private consumption and industrial over capacity.

• A clear indicator of the impact of the financial crisis on the real economy is the “Proust Index” elaborated by “The Economist”.

10

The “Proust Index”

• “Our clock uses seven indicators of economic health, which fall into three broad categories. Household wealth and its main components, financial-asset prices and property prices, are in the first group. Measures of annual output and private consumption are in the second category. Real wages and unemploymentmake up the third.

• A simple average of how much time has been lost in each of these categories produces our overall measure”.

The Economist, February 25th 2012

11

Advanced economies have gone backwards by a decade or more as a result of the crisis

Source: The Economist

The 3 Eurozone“core countries”have gone backwards less than “bubble”economies.

12

THE EVOLUTION OF THE DEBT CRISIS: FROM LEHMAN BROTHERS TO “ACROPOLIS NOW!”

Source: “The Economist”, May 10th 2010

13

FROM PRIVATE TO SOVEREIGN DEBT

• Only the Greek crisis was mainly originated by public debt. On the contrary, in the rest of advanced world the financial crisis and its economic consequences produced a big shift from private to sovereign debt.

• In the U.S., for example, the public federal debt (excluding the debt of individual States, some of which, like California, are in big trouble) rose from 9.2 trillion dollars at the end of 2007 to 15.2 trillion at the end of 2011 (+65%). For comparison purposes, Italy’s public debt rose from 1,602 to 1,897 billion euros (+18.2% only) over the same period and Germany’s public debt rose from 1,582 billion euros to 2,088 billion euros (+32%, i.e. the half of U.S. debt growth).

• The “Third World War” is a war of debts. It is also a war of communication towards the markets, which the Eurozone is losing face to the U.S., U.K. and Japan because of a lack of strategy. The Eurozone sovereign crisis is convenient to U.S. and U.K. and, almost in the short time, to Germany too, which benefits of low interest rates originated from the “flying to quality”.

14

BUT GREECE AND THE EUROZONEARE REALLY THE BIG PROBLEM?

NIALL FERGUSON: PIGS ‘R’ US

Niall Ferguson, Fiscal Crisis and Imperial Collapses: Historical Perspective on Current Predicaments, Ninth Annual Niarchos Lecture, Peterson Institute for International Economics, Washington, DC, May 13, 2010

1515

ADVANCED ECONOMIES: DEBT ABOVE 80% OF GDPSource: Carlo Cottarelli, IMF

AUS

AUT

BEL

CAN

CZE

DEN

DEU

ESP

FIN

FRA

GBR

GRC

ICE

IRE

ISR

ITA

JPN

NED

NZL

PRT

SLK

SLV

USA

0

50

100

150

200

2502007

19%

1616

Advanced Economies: Debt Above 80 percent of GDP

AUS

AUT

BEL

CAN

CZE

DEN

DEU

ESP

FIN

FRA

GBR

GRC

ICE

IRE

ISR

ITA

JPN

NED

NZL

PRT

SLK

SLV

USA

0

50

100

150

200

250

19%81%

2011

ADVANCED ECONOMIES: DEBT ABOVE 80% OF GDPSource: Carlo Cottarelli, IMF

17

CUMULATED PRIMARY BALANCE 2011-2013 G-7 Countries and most important other EU Economies

(Percent of GDP)

Source: IMF, Fiscal Monitor, April 2012

-25.5

-17.8

-15.1

-13.2

-10.8

-10.2

-9.7

-6.6

0.7

3

7.8

-4.5

-2.8

-2.2

-1.5

-30 -25 -20 -15 -10 -5 0 5 10

JAPAN

UNITED STATES

UNITED KINGDOM

SPAIN

DENMARK

NETHERLANDS

CANADA

FRANCE

FINLAND

POLAND

SWEDEN

AUSTRIA

BELGIUM

GERMANY

ITALY

ONLY FEW ADVANCED COUNTRIES ARE ACTUALLY MANAGING WITH SUCCESS THEIR FISCAL BALANCES,

AMONG WHICH ITALY AND GERMANY

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ITALY IS REALLY DIFFERENT, FOR THE BETTER!

Dynamic of cumulated primary balances, 2006-2013 (% of GDP)

Source: compiled by Fondazione Edison on data from European Commission and IMF

15.2

9.5

-16.3

-32.1

-43.0

-50

-40

-30

-20

-10

0

10

20

2006 2007 2008 2009 2010 2011 2012 2013

ITALY GERMANY FRANCE UK USA

19

ITALY IS REALLY DIFFERENT, FOR THE BETTER!

Dynamic of cumulated primary balances, 2006-2013 (% of GDP)

Source: compiled by Fondazione Edison on data from European Commission and IMF

15.2

-24.7

-28.4

-57.0

-15.3

-70

-60

-50

-40

-30

-20

-10

0

10

20

2006 2007 2008 2009 2010 2011 2012 2013

ITALY SPAIN GREECE IRELAND PORTUGAL

20

GENERAL GOVERNMENT BALANCE, 2012 (Percent of GDP)

Source: IMF, Fiscal Monitor, April 2012

-8.5

-8

-7.2

-6

-5.9

-4.6

-4.6

-4.5

-4.5

-4.2

-3.5

-3.2

-3.1

-3

-2.4

-1.4

-0.8

-0.1

-2.9

-9 -8 -7 -6 -5 -4 -3 -2 -1 0

IRELAND

UNITED KINGDOM

GREECE

SPAIN

DENMARK

FRANCE

SLOVENIA

PORTUGAL

NETHERLANDS

SLOVAK REPUBLIC

CZECH REPUBLIC

POLAND

AUSTRIA

HUNGARY

BELGIUM

ITALY

FINLAND

GERMANY

SWEDEN

3% Maastricht Target

ONLY FEW EUROPEAN COUNTRIES ARE ACTUALLY RESPECTING THE MAASTRICHT TRESHOLD

21

GENERAL GOVERNMENT BALANCE, 2013 (Percent of GDP)

Source: IMF, "F iscal Monitor", April 2012

-7.4

-6.6

-5.7

-4.9

-4.6

-4.2

-3.9

-3.7

-3.4

-3.4

-3

-2.8

-2.5

-2.4

-2.2

-1.5

0.5

-0.6

-0.8

-8 -7 -6 -5 -4 -3 -2 -1 0 1

IRELAND

UNITED K INGDOM

SPAIN

NETHERLANDS

GREECE

SLOVENIA

FRANCE

SLOVAK REPUBLIC

CZECH REPUBLIC

HUNGARY

PORTUGAL

POLAND

DENMARK

AUSTRIA

BELG IUM

ITALY

FINLAND

GERMANY

SWEDEN

3% Maastricht Target

ONLY FEW EUROPEAN COUNTRIES ARE ACTUALLY RESPECTING THE MAASTRICHT TRESHOLD

22

GENERAL GOVERNMENT CYCLICALLY ADJUSTED BALANCE, 2012 (Percent of GDP)

Source: IMF, Fiscal Monitor, April 2012

-6.2

-4.6

-4.2

-3.9

-3.7

-3.3

-3.2

-3.1

-2.9

-2.5

-2.2

-2.1

-2

0.7

-0.6

-0.3

-0.2

-7 -6 -5 -4 -3 -2 -1 0 1 2

IRELAND

GREECE

DENMARK

SPAIN

SLOVAK REPUBLIC

FRANCE

POLAND

NETHERLANDS

SLOVENIA

AUSTRIA

BELGIUM

HUNGARY

PORTUGAL

GERMANY

ITALY

SWEDEN

FINLAND

(1)

(1) Fiscal Compact Upper

Target

(2) Fiscal Compact Lower

Target

(2)

ONLY FEW EUROPEAN COUNTRIES ARE APPROACHING SUCCESSFULLY THE NEW FISCAL COMPACT TARGETS

23

GENERAL GOVERNMENT CYCLICALLY ADJUSTED BALANCE, 2013 (Percent of GDP)

Source: IMF, Fiscal Monitor, April 2012

-5.4

-3.6

-3.3

-3.2

-2.8

-2.8

-2.7

-2.6

-2.6

-1.9

-1.3

-1.1

-0.9

0.5

0.6

0.8

-0.5

-6 -5 -4 -3 -2 -1 0 1 2

IRELAND

SPAIN

NETHERLANDS

SLOVAK REPUBLIC

GREECE

HUNGARY

FRANCE

SLOVENIA

POLAND

AUSTRIA

BELGIUM

DENMARK

PORTUGAL

GERMANY

SWEDEN

ITALY

FINLAND

(2) (1)

(1) Fiscal Compact Upper

Target

(2) Fiscal Compact Lower

Target

ONLY FEW EUROPEAN COUNTRIES ARE APPROACHING SUCCESSFULLY THE NEW FISCAL COMPACT TARGETS

24

THE 3 EUROZONE “CORE COUNTRIES” DON’T HAVE A HUGE PUBLIC DEBT PROBLEM, IF DEBT IS MEASURED CORRECTLY,

NOT AS A RATIO OF GDP BUT AS A “DEBT/EQUITY”

Ratio of Public debt to GDP and to private financial wealth (%): Year 2010

Sources: compiled by Fondazione Edison based on data from Eurostat

82,3 83,2

118,4

48,361

92,5

144,9

58,0 66,1 67,7 74,0 78,7

123,2

260,6

0

50

100

150

200

250

300

FRANCE GERMANY ITALY FINLAND SPAIN IRELAND GREECE

Public debt/GDP Public debt/Households net financial assets

25

AND IF PUBLIC DEBT IS COMPARED TO TOTAL PRIVATE WEALTH (FINANCIAL AND NON-FINANCIAL), THE UNITED

STATES ARE THE MOST VULNERABLE, TOGETHER WITH THE EUROZONE “PHERIPHERAL COUNTRIES”

Gross public debt in selected countries: year 2011

(% of households non-financial and net financial wealth)Source: compiled by Fondazione Edison on IMF data and Credit Suisse Global Wealth Databook 2011

5

17

52.1

39.3

35.2

31.6

27.427.126.622.622.6

20.720.117.9

16.214.9

9.68.6

23

0

10

20

30

40

50

60

AUS

CHN

SW

EDNK

UK

FRA

FIN

BEL ITA

GER

SPA

CAN

AUTNET ICE

INDUSA

POR

BRA

IREG

RE

20% threshold 21.6 21.6

26

Nonfinancial-sector Debt, Year 2011 (Percent of GDP)

Source: Banca d'Italia, Financial Stability Report, April 2011, table 1.1, p. 10

81120

86103

6986

165

108 108

60

45

56

88

82

98

61

93120

70

82106

77136

105

66154

169

0

50

100

150

200

250

300

350

400

450

GERMANY ITALY FRANCE U.S. SPAIN U.K. GREECE PORTUGAL IRELAND

Public debt Household debt Corporate debt

27

HOW TO REDUCE THE NONFINANCIAL-SECTOR TOTAL DEBT?

One-time wealth tax to reduce nonfinancial-sector debt

to 180 percent of GDP: Year 2011 Sources: compiled by the author on data from Boston Consulting Group, Eurostat, Banca d'Italia and Credit Suisse

211

248 248

289 287 293

268

355

397

29 35

5872

86

108 113

175

200

0

50

100

150

200

250

300

350

400

450

GERMANY ITALY FRANCE U.K. SPAIN GREECE U.S. PORTUGAL IRELAND

Nonfinancial-sector debt (household, corporate and government), percent of GDP

One-time wealth tax that would be charged on each adult with a financial and nonfinancial wealth exceeding 100,000 U.S. dollars to reducenonfinancial-sector debt to 180 percent of GDP (Euro per adult)

28

IN PERCENT OF GDP, THE U.S. FEDERAL DEBT IS GOING TO APPROACH THE ITALY’S LEVELS

General Government Gross Debt: Italy and United States (Percent of GDP)

Source: compiled by Fondazione Edison on data from IMF "Fiscal Monitor", April 2012

6065707580859095

100105110115120125130

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ITALY UNITED STATES (without State and Local Governments)

35.9%

of GDP

5.9% of

GDP

29

IN PERCENT OF PRIVATE WEALTH, THE U.S. FEDERAL DEBT IS ALREADY ABOVE

THE ITALY’S LEVELS

Gross Public Debt in United States and Italy:

percent of households' total wealth (financial and non-financial) Source: compiled by Marco Fortis on data from Banca d'Italia and FED; © Fondazione Edison

10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

30%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

ITALY UNITED STATES

30

BUT WHICH IS THE REAL LEVEL OF THE PUBLIC DEBT OF THE UNITED STATES?

31

THE WAR OF DEBT WILL BE WORSENED BY A WALL OF INCOMING CORPORATE DEBT

MATURITIES: A “PERFECT STORM”

• A formidable wall of corporate debt maturities and new money requirements over the next five years or so (which Standard & Poor's estimate at $43 trillion to $46 trillion), along with a volatile geopolitical climate that is causing skittishness in financial markets, poses downside risk of a perfect storm for global credit markets.

• Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances. A perfect storm scenario would likely cause financing disruptions even for borrowers that are not highly leveraged.

32

Bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate

borrowings between 2012 and 2016

33

IN THIS NEGATIVE DEBT SCENARIO THE EUROZONE ECONOMIES ARE EXPERIENCING A NEW SLOWDOWN

• April 2012 - Deeper downturns in output were signalled in both the manufacturing and service sectors, as the rates of contraction accelerated in both cases. Both sectors were hit by marked declines in new business. Manufacturers were also hurt by lower levels of new export orders, with trade between Eurozonenations especially weak.

34

ONLY THE EMERGING ECONOMIES CONTINUE TO GROW SUCCESSFULLY. FOR EUROPEAN ECONOMIES TO INCREASE

EXPORTS TOWARD THEM IS A STRATEGIC CHOICE

35

36

How works the TRADE PERFORMANCE INDEX UNCTAD/WTO

It is a composite indicator that ranks the competitiveness of 184 countries in 14 world trade macro-sectors, based on 5 sub-indexes:

1) Value of net exports;

2) Per capita exports;

3) World export shares;

4) Markets diversification degree;

5) Products diversification degree.

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UNCTAD/WTO Trade Performance Index 2009. All productsCurrent index (*). Ranking of international competitiveness.

Number of top 10 placings in the world rankings for foreign trade competitiveness in 14 sectors (§)

Number of

best

positions

Number of

second

positions

Number of

third

positions

Number of

fourth

positions

Number of

fifth

positions

Number of

sixth

positions

Number of

seventh

positions

Number of

eighth

positions

Number of

ninth

positions

Number of

tenth

positions

1 Germany 8 1

2 ITALY 3 4 1

3 China 3 1 1 1 1 1

4 France 2 1 1 1 1

5 Australia 1 1

6 Japan 3 1 1 1

6 Turkey 1 1 1

8 United States 1 1

9 Russia 1

10 Indonesia 1 1 2

11 Canada 1 1

11 India 1 1 1

13 Brazil 1 1

13 Argentina 1 1

15 South Korea 1 2

16 United Kingdom 1

16 Saudi Arabia 1

18 Mexico

18 South Africa

(*) Net exports, per capita exports, share in world market, product diversification, market diversification.

(§) Fresh food, Processed food, Wood products, Textiles, Chemicals, Leather products, Basic manufactures, Non-electronic machinery,

IT & Consumer electronics, Electronic components, Transport equipment, Clothing, Miscellaneous manufacturing, Minerals.

Source: compiled by Fondazione Edison on data from International Trade Centre UNCTAD/WTO

38

GERMANY’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009

World competitiveness in 14 sectors

Source: International Trade Centre, UNCTAD/WTO

39

ITALY’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009

World competitiveness ranking in 14 sectors

Source: International Trade Centre, UNCTAD/WTO

40

CHINA’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009

World competitiveness in 14 sectors

Source: International Trade Centre, UNCTAD/WTO

41

FRANCE’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009

World competitiveness ranking in 14 sectors

Source: International Trade Centre, UNCTAD/WTO

42

Trade balance in non-electronic machinery (billion of euros)

Source: compiled by Fondazione Edison on data from Eurostat

-0,2

2,3

7,1

48,3

93,2

-20

0

20

40

60

80

100

2007 2008 2009 2010 2011

SPAIN FRANCE UNITED KINGDOM ITALY GERMANY