Studium Generale
The euro area sovereign debt
crisis: causes and consequences
Prof. Dr. Olaf Sleijpen
Maastricht, 3 November 2011
School of Business and Economics
Agenda
1) A short (conceptual) history of
European monetary integration
2) Fiscal discipline in the Treaty
3) Evidence of fiscal discipline in the euro
area
4) Lessons to be drawn: the inconsistent
triangle revisited
5) A new perspective on nominal and real
convergence in the euro area
6) An assessment of the euro area summit
of 23 October
7) Concluding remarks
School of Business and Economics
A short (conceptual) history of
European monetary integration
Maastricht Treaty
“Big Bang”
approach
-Nominal convergence required;
No real convergence
-Strongly embedded monetary
policy structure in place
-Intergovernmental framework
to impose fiscal
discipline; no framework to
impose real convergence
-Convergence will
follow automatically after
Start monetary union
-Discipline imposed by
fixed exchange rates will
trigger nominal and real
economic discipline
Economic and Monetary Union
School of Business and Economics
Convergence
approach
-Inspired by Optimal
Currency Area theory
-Full nominal and real
convergence required
-Appropriate adjustment
mechanisms in place in
case of (asymmetric) shocks
-Monetary union is the “crown”
on convergence process
Why fiscal discipline matters in a
monetary union
•
•
•
•
•
Preventing spillovers from fiscal to
monetary policy
Preventing spillovers from national
fiscal policies to other Member States
Absorption of asymmetric shocks
at the national level
Market discipline flawed
Macro-economic and financial stability
School of Business and Economics
Fiscal discipline in the Maastricht
Treaty
•
•
•
•
Multilateral surveillance procedure
Excessive deficit procedure
Prohibition of priviliged access
No bail-out clause
School of Business and Economics
The Stability and Growth Pact
Revisited
• Adopted in 1997
(Amsterdam European Council)
• Reform in 2004
• Preventive arm
– Strengthening of the surveillance of
budgetary positions and the surveillance
and coordination of economic policies
• Corrective arm
– Speeding up and clarifying the
implementation of the excessive deficit procedure
School of Business and Economics
Insufficient compliance …
% GDP
2
00
0
99
-2
01
02
98
07
03 04
06
08
05
-4
09
-6
-8
97
99
Programme year
01
03
Realisation
05
07
09
Spring Forecast
Source: European Commission, Spring Forecasts 2010 and budgetary plans according to national budgets.
School of Business and Economics
11
…became apparent during the crisis
Budget deficit
% of GDP
5
0
-5
-10
-15
96
98
Germany
Netherlands
00
02
France
Greece
04
Italy
Portugal
School of Business and Economics
Source: European Commission, Spring Forecasts, 2010.
06
08
Spain
Ireland
10
Increase in debt…
Gross public debt euro area
% of GDP
90
80
70
60
94
99
04
School of Business and Economics
Source: European Commission, Spring Forecasts 2010.
09
…and late market reaction
Interest rate spread with German government debt
(10-year maturity) % points
10
8
6
4
2
0
-2
96
98
00
02
04
06
France
Italy
Spain
Greece
Portugal
Ireland
School of Business and Economics
Source: Thomson Financial.
08
10
Netherlands
Consequence: financial stability risk
in EMU
Government debt held by non-residents
(% of total)
DE
FR
IT
ES
NL
GR
PT
IE
1998
33.8
50.9
26.9
24.2
19.5
29.3
37.9
na
2004
42.7
46.0
38.6
47.3
52.9
53.4
56.4
58.7
2008
49.6
55.6
42.3
45.9
65.5
na
77.1
72.7
School of Business and Economics
Source: Eurostat and CBS (for The Netherlands).
The (new) inconsistent triangle
• The inconsistent triangle (Padoa-Schioppa, 1985)
– Incompatibility between fixed but adjustable
exchange rates, full capital mobility and
independent monetary policies
– This inconsistent triangle prooved to be true
in the EMS Crisis (1992-1993)
• The new inconsistent triangle
– Incompatibility between single monetary policy,
full capital mobility and independent fiscal policies
– Reflected by the current crisis in the euro area
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What doe this inconsistent triangle
imply?
• Fiscal consolidation is necessary, but will take time
– And will not reassure financial markets
in the short term
• If the (new) inconsistent triangle is true,
a major overhaul of the institutional set-up
of the euro area is necessary
• A major reform of the institutional set-up may
not sooth financial markets
– Enlarged and flexible EFSF as temporary solution
School of Business and Economics
Strengthening economic governance
– the view of the EU
•
•
•
•
•
Towards greater fiscal discipline
Broadening economic surveillance: a new
surveillance mechanism
Deeper and broader coordination:
the “European Semester”
Robust framework for crisis management
Stronger institutions for more effective economic
governance
School of Business and Economics
The importance of enhancing national fiscal rules
and frameworks
1.50
FI
Error Surplus Adjustment
1.00
SE
DK
0.50
ES
IE
AT
0.00
0.00
0.20
-0.50
NL
BE
0.40
IT
0.60
FR
0.80
1.00
1.20
DE
UK
PT
EL
-1.00
FISRUL
Relationship between plausibility of projections stability programmes and national fiscal
rules, after taking into account other explanatory variables.
School of Business and Economics
Source: Beetsma, Giuliodori and Wierts (2009, Economic Policy)
More focus on debt financing
800
Short-term government debt outstanding (central
government)
14
700
12
600
10
500
8
400
6
300
4
200
2
99
Bn euro
01
03
% GDP (right scale)
05
07
% Share in total debt (right scale)
School of Business and Economics
Source: Hoogduin, Öztürk and Wierts (2010).
09
An assessment of the economic
(fiscal) governance
• Excessive deficit and follow-up
should be called by Community
institution
– Framework should become less
intergovernmental
• Sanctions should be efficient and
effective
– Value-added of fines, etc. is limited
• Financial support limited to strong
conditionality
School of Business and Economics
Economic convergence revisited
•
Nominal convergence
(interest rate, inflation, public finance)
•
Real convergence
 (labour) market flexibility
 (assymetric) shock absorption by national
budgets (automatic stabilisers)
School of Business and Economics
Inflation euro area: low and stable…
Inflation euro area
% changes (y-o-y)
5
4
3
2
1
0
-1
91
96
01
School of Business and Economics
Source: Thomson Financial.
06
…but inflation differentials persistent
Inflation (HICP)
% changes (y-o-y)
6
3
0
-3
99
01
Germany
03
France
Netherlands
Greece
05
Italy
Portugal
School of Business and Economics
Source: Thomson Financial.
07
09
Spain
Ireland
Imbalances have increased
Current account balance
% euro area or world GDP
6
3
4
2
2
1
0
0
-2
-1
-4
-2
91
93
95
97
99
01
03
05
Deficit countries euro area
Surplus countries euro area
Deficit countries - global (right-hand axis)
Surplus countries - global (right-hand axis)
School of Business and Economics
Source: IMF.
07
09
Causes imbalances
% GDP and % changes
20
10
0
-10
-20
LUX
NL
D
FI
BE
AT
EMU
IT
FR
IRL
PT
Current account balance
Average increase house prices 2000 -2007
Change real effective exchange rate 1997-2007 (GDP deflator)
School of Business and Economics
Source: European Commission.
SP
GR
Budget periphery more affected
Average deterioration of the budgetary position
A. Other EMU countries
Before crisis
After crisis
4 (Autumn 2007) (Spring 2010)
4
0
0
-4
-4
-8
-8
-12
-12
2007
2009
Actual deficit
2007
B. Portugal, Ireland, Italy,
Greece and Spain
Before crisis
After crisis
(Autumn 2007) (Spring 2010)
2009
Structural deficit
2007
Actual deficit
School of Business and Economics
Source: European Commission, Economic forecasts.
2009
2007
2009
Structural deficit
Crisis reveals relationship imbalances and
budgetary position
Structural budget deficit 2007
5
0
-5
-10
R2 = 0,1647
-15
-20 -15 -10 -5
0
5
10 15
After crisis (Spring 2010)
Structurak budget deficit 2009
Before crisis (Autumn 2007)
5
0
-5
-10
R2 = 0,6034
-15
-20 -15 -10 -5
Current account balance 2007
School of Business and Economics
Source: European Commission, Economic forecasts.
0
5 10 15
Current account balance 2007
What has been agreed on 23
October?
European Council
• Banking package
Euro Summit
• Sustainable public finances and structural reform
• Refining the Greek programme
– Monitoring
– PSI and credit enhancement
• EFSF
– Leverage resources of the EFSF
• Economic governance
School of Business and Economics
Assessment of the 23 October
package
Pro’s
• Increase in “fire
power” of the
EFSF
• Package necessary
to sooth markets
• Further
enhancement of
economic
governance
Con’s
• PSI not clear
• Leverage: will it
work?
• Enhanced
economic
convergence: not
enough?
• Implementation
lag
School of Business and Economics
Concluding remarks
• Financial crisis has revealed weak
compliance with and enforcement
of fiscal and economic policy rules in EMU
• Insufficient fiscal discipline; insufficient real
convergence
• “Every cloud has a silver lining”: broadening
and deepening of policy framework necessary
– But more ambition necessary
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