WILL THE €uro SURVIVE?
Iain Begg
European Institute, London School of Economics
1
YES
But please don’t leave yet…
2
KEY FEATURES OF EURO AREA
ECONOMIC GOVERNANCE
Primary imperative for ECB: price stability
Fiscal policy remains with the Member State
–As does supply-side policy
Caught in trap of 16/27 membership
–Hence confusion in responsibilities of different actors
Necessitates extensive resort to coordination
>> The EU is NOT a United States of Europe,
but more a united Europe of states
3
THE INSTITUTIONAL MIX
ECB
ECOFIN &
EUROGROUP
4
THE INSTITUTIONAL MIX
COMMITTEES:
Economic policy
Employment
Social protection
ECONOMIC
AND
FINANCIAL
COMMITTEE
MACROECONOMIC
DIALOGUE
MEMBER
STATES
ECB
ECOFIN &
EUROGROUP
COMMISSION
ECOSOC &
OTHERS
NATIONAL
CBs
5
PRINCIPAL SHORTCOMINGS
ECB as sole, EU level economic actor
Aggregation of national policies: policy mix
Certainly fiscal, but also supply-side
Wrong focus of surveillance
Especially, neglect of imbalances and their causes
No explicit crisis resolution mechanism
– Tricky wording of ‘no bail-out’ clause in Treaty
Political economy of implementation
– The ‘why comply?’ Catch-22s – legitimacy
6
LONG-TERM INTEREST RATES SINCE
START OF FINANCIAL ‘CRISIS’
Interest rate, %
12
10
8
6
4
2
Au
g07
O
ct
-0
7
De
c07
Fe
b08
Ap
r-0
8
Ju
n08
Au
g08
O
ct
-0
8
De
c08
Fe
b09
Ap
r-0
9
Ju
n09
Au
g09
O
ct
-0
9
De
c09
Fe
b10
Ap
r-1
0
Ju
n10
Au
g10
0
Germany
Ireland
Greece
Spain
France
Italy
Portugal
7
GROWING DIVERGENCE IN
CURRENT ACCOUNT OF BoP
% of GDP
10
5
0
-5
-10
-15
2000
2001
Germany
2002
2003
Netherlands
2004
Greece
2005
2006
Spain
2007
France
2008
Italy
2009
Portugal
2010
2011
Ireland
8
TRENDS IN CONSUMER PRICES OF
EURO AREA COUNTRIES, 1999-2010
Change in price level
over period, %
70.0
60.0
50.0
40.0
30.0
20.0
10.0
1999-2003
2003-2007
Sp
ai
n
G
re
ec
e
Sl
ov
en
ia
Sl
ov
ak
ia
C
yp
ru
Lu
s
xe
m
bo
ur
g
an
d
Ire
l
Po
rtu
ga
l
M
al
ta
It a
ly
G
er
m
an
y
Fi
nl
an
d
Fr
an
ce
Au
st
ria
Be
lg
iu
N
m
et
he
rla
nd
s
Eu
ro
ar
ea
16
0.0
2007-2010
9
EXTENT OF ULC SHIFTS
….pre-crisis!
Member State
Change 2000-08, %
Spain
29.3
Italy
26.1
Greece
25.0
Portugal
21.8
Belgium
17.2
France
17.1
Germany
-0.2
Euro area
14.8
UK
22.8
Poland
6.8
10
“THINGS THAT CAN’T GO ON
FOREVER… DON’T”
Herb Stein [Nixon’s economic adviser]
11
…..THEN CAME MAY 2010
Greece
Ireland
AND NOVEMBER 2010…AND?
12
DISTINCT ‘PATHOLOGIES’
PUBLIC SECTOR
•Weak & profligate
•Too costly
Greece
Portugal?
BANKING CRISIS
•Systemic risk
•Bail-out
SOVEREIGN
DEBT
CRISIS
Ireland
Spain next?
COMPETITIVENESS
•Unit labour costs
Greece
Portugal
Spain
13
STRUCTURE OF DEBT,
EXCLUDING FINANCIAL SECTOR
% of GDP, 2009
400
350
300
250
200
Compani es
150
Househol d
Publ i c
100
50
0
Source: Laurence Boone, Barclays Capital
14
EXPLAINING RECENT PROBLEMS
Germany’s changed role in Europe
– Traditionally the ‘good European’
– But new generation of leaders and new times
– Awkward domestic constraints
The constitutional court – most trusted institution
Public opinion, articulated by Bild Zeitung
Unintended consequences of Deauville
– Correct for long-term
– But threw petrol on the flames
Burning Ireland and igniting Portugal
15
EMERGING SOLUTIONS: OUTCOME
OF van ROMPUY TASK FORCE
Better macroeconomic surveillance
– Macroeconomic, with focus on risky imbalances
Internal, but with ramifications for external
– Structural indicators
Fiscal frameworks and/or rules at national level
Changes in the Stability and Growth Pact
– Debt indicator to complement 3% deficit limit
A new sanctions regime
Preferably, to be achieved within existing Treaty
16
THE MEANS
Dark arts of rules & persuasion
Better prevention along with coordination
– The two semester approach
New excessive imbalances procedure ‘EIP’
–
–
–
A scorecard with ‘alert’ indicators
But leavened by judgement
In-depth reviews: is action needed?
If the latter, recommendations will be issued
Sanctions for euro area members
Only euro area members vote
National rules consistent with SGP
17
UNFINISHED…OR TOO HARD
Crisis resolution mechanism
– Unease about involvement of IMF
– Need for mini-Treaty change
Avoiding case before German Constitutional Court
– Concerns about moral hazard
Nature and scope of possible EMF
Euro-bonds as a means of pooling risk
Moral hazard concerns again; adverse incentives
The spectre of ‘fiscal’ union
– If only we knew what it meant
18
CONCLUDING REMARKS
Many political economy issues
Subsidiarity: who controls?
Winners and losers: who is really being rescued?
Germany is pivotal
– Usually does the right thing … eventually
Progress towards financial stability
Yet there is, effectively, no ‘European tax-payer’
New realism about costs of non-compliance
Doubts nevertheless persist about delivery
>> Political will, that elusive ingredient
19
SO, IS THE EURO IN
PERIL?
My answer:
It remains part of the solution,
but is at a tricky crossroads
20