Is the eurozone crisis over and what about Greece? … · 3. Crisis-hit countries • The ECB has...
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Is the eurozone crisis over – and what about Greece? Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Eliamep Lecture 16 th December 2015 Athens, Greece
Transcript of Is the eurozone crisis over and what about Greece? … · 3. Crisis-hit countries • The ECB has...
Is the eurozone crisis over – and
what about Greece? Martin Wolf, Associate Editor & Chief
Economics Commentator, Financial Times
Eliamep Lecture
16th December 2015
Athens, Greece
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Eurozone crisis
• Illusory “recovery”
• Germany’s eurozone
• Crisis-hit countries
• Challenges of a bad marriage
1. Illusory recovery
• The eurozone crisis has stopped getting worse
• But output and employment are very weak
• The European Central Bank was the main actor
• But adjustment and reform have also taken place
3
1. Illusory recovery
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DIVERGENCE BETWEEN THE US AND EUROZONE
90
95
100
105
110
115
REAL GDP AND REAL DEMAND
Eurozone GDP Eurozone Demand US GDP US Demand
1. Illusory recovery
5
85,0
90,0
95,0
100,0
105,0
110,0
2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP PER HEAD (2007 = 100; at purchasing power parity; 2015 is a forecast) (Source: The Conference Board)
France Germany Italy United Kingdom United States Spain
DIVERGENCE IN LIVING STANDARDS
1. Illusory recovery
6
SLOW TURNAROUND IN UNEMPLOYMENT
0
2
4
6
8
10
12
14
UNEMPLOYMENT (per cent of the labour force) Source: OECD
US Germany France UK Eurozone
1. Illusory recovery
7
CAUGHT IN A “LOW-FLATION” TRAP
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15
CORE CONSUMER PRICE INFLATION RATE (per cent)
US Eurozone
1. Illusory recovery
8
THE ECB GETS THERE FAR TOO LATE
0
1
2
3
4
5
6
7
8
Ιαν-94 Ιαν-96 Ιαν-98 Ιαν-00 Ιαν-02 Ιαν-04 Ιαν-06 Ιαν-08 Ιαν-10 Ιαν-12 Ιαν-14
OFFICIAL POLICY RATES (Source: Thomson Reuters Datastream)
US Fed funds Europe (Bundesbank repo/ECB repo)
UK (BoE base rate) Japan (BoJ uncollatoralized call money)
1. Illusory recovery
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THE ECB GETS TO QE TOO LATE
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Q1 2014
Q1 2015
CENTRAL BANK ASSETS OVER GDP per cent) (Source:
Thomson Reuters Datastream and Bank of England)
US (Federal Reserve) Eurozone (ECB) UK (BoE) Japan (BoJ)
1. Illusory recovery
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FORECASTERS ADJUST THEIR VIEWS
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
US UK Japan Eurozone Germany France Italy Spain World
SUCCESSIVE CONSENSUS FORECASTS FOR 2015
Jan-14 Nov-15
1. Illusory recovery
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EUROZONE HAS A RECOVERY OF SORTS
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
US UK Japan Eurozone Germany France Italy Spain World
SUCCESSIVE CONSENSUS FORECASTS FOR 2016
Jan-15 Nov-15
2. Germany’s eurozone
• Aggregate demand has been chronically weak
• The eurozone has also externalised its adjustment
• A weak euro has helped
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2. Germany’s eurozone
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TURNING INTERNAL INTO EXTERNAL IMBALANCE
-3,0%
-2,0%
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
1999 2002 2005 2008 2011 2014 2017 2020
Eurozone Imbalances on Current Account (as per cent of eurozone GDP) (Source: IMF, World Economic Outlook Database)
Germany Other creditors Crisis-hit Countries
France Others Eurozone
2. Germany’s eurozone
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ECB HELPS
60
70
80
90
100
110
120
1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15
REAL EXCHANGE RATES (JP Morgan)
Yen Dollar Euro
2. Germany’s eurozone
15
0
1
2
3
4
5
6
7
8
1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15
YIELDS ON 30-YEAR BONDS
US UK Germany France Italy Spain
GERMANY’S GAIN IN A DISINFLATIONARY WORLD
3. Crisis-hit countries
• The ECB has eliminated panic, except in Greece
• All crisis-hit countries are in deep recession, properly
defined
• But most are at least growing
• Greece is the exception
• But the crisis has left dreadful scars
• This has been, at least, a lost decade
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3. Crisis-hit countries
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SURPRISING TRIUMP OF THE OMT PROGRAMME
-1
0
1
2
3
4
5
6
7
Ιαν-07 Ιαν-08 Ιαν-09 Ιαν-10 Ιαν-11 Ιαν-12 Ιαν-13 Ιαν-14 Ιαν-15
SPREADS ON 10-YEAR BONDS OVER BUNDS (Source: Thomson Reuters Datastream)
Italy Spain
UK Announcement of 3-year LTRO
Announcement of OMT Announcement of QE
3. Crisis-hit countries
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GREECE IS THE EXCEPTION
-10
0
10
20
30
40
50
Ιαν-07 Ιαν-08 Ιαν-09 Ιαν-10 Ιαν-11 Ιαν-12 Ιαν-13 Ιαν-14 Ιαν-15
SPREADS ON 10-YEAR BONDS OVER BUNDS (percentage points) (Source: Thomson Reuters Datastream)
Portugal Ireland Greece
Programme for Greece Programme for Ireland Programme for Portugal
3. Crisis-hit countries
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THE COST OF THE EUROZONE CRISIS
70,0
75,0
80,0
85,0
90,0
95,0
100,0
105,0
2007 2008 2009 2010 2011 2012 2013 2014 2015
GDP PER HEAD IN CRISIS-HIT EUROZONE COUNTRIES (at purchasing power parity) (Source: The Conference Board)
Italy Greece Ireland Portugal Spain
3. Crisis-hit countries
20
0
5
10
15
20
25
30
UNEMPLOYMENT RATES
Germany Italy Eurozone Portugal Ireland Spain Greece
UNEMPLOYMENT IN CRISIS-HIT COUNTRIES
3. Running to stand still
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UNEMPLOYMENT IN CRISIS-HIT COUNTRIES
0
10
20
30
40
50
60
70
YOUTH UNEMPLOYMENT RATES (15-25)
Germany Italy Eurozone Portugal Ireland Spain Greece
3. Crisis-hit countries
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RISK OF DEBT DEFLATION
-5,0
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15
CORE INFLATION IN THE EUROZONE
Germany Italy Eurozone Portugal Ireland Greece Spain
3. Crisis-hit countries
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90,0
100,0
110,0
120,0
130,0
140,0
150,0
Q1-2000 Q1-2003 Q1-2006 Q1-2009 Q1-2012 Q1-2015
WHOLE ECONOMY UNIT LABOUR COSTS RELATIVE TO GERMANY (Germany = 100)
France Greece Ireland Italy Portugal Spain
COMPETITIVE DISINFLATION AND RECESSIONS
3. Crisis-hit countries
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ELIMINATE CURRENT ACCOUNT IMBALANCES
6,0 6,7
-5,4
-1,4
-14,0
-9,6 -9,7
10,2
7,4
3,6 1,9 0,9 0,8 0,6
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
15,0
Netherlands Germany Ireland Italy Greece Spain Portugal
CURRENT ACCOUNT BALANCES IN THE EUROZONE (per cent of GDP)
2007 2014
3. Crisis-hit countries
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THE DISAPPEARANCE OF FOREIGN CAPITAL
-20
-15
-10
-5
0
5
10
15
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SECTORAL FINANCIAL BALANCES IN GREECE (per cent of GDP) (Source: IMF, World Economic Outlook database)
Government Foreign Private
3. Crisis-hit countries
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POST-CRISIS EXPLOSION IN DEBT
-50%
0%
50%
100%
150%
200%
Ireland Greece Portugal Spain Italy
Change in Gross Indebtedness in the Real Economy, 2007-14 (as a per cent of GDP) (Source: McKinsey Global Institute)
Government Non-financial Corporate Household Total
3. Crisis-hit countries
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0
20
40
60
80
100
120
140
160
180
200
Ireland Spain Portugal Italy Greece
GROSS PUBLIC DEBT (over GDP) (Source: IMF)
2007 2014
RISK OF DEBT DEFLATION
3. Crisis-hit countries
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GREECE IS NOW ISOLATED
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
Italy Spain Greece Ireland Portugal
CONSENSUS FORECASTS FOR 2015
Jan-14 Nov-15
3. Crisis-hit countries
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GREECE IS NOW ISOLATED
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
Italy Spain Greece Ireland Portugal
CONSENSUS FORECASTS FOR 2016
Jan-14 Nov-15
4. Challenges of a bad marriage
• The eurozone has dealt with its crisis far too slowly
• But it has made progress:
– The ECB is almost a normal central bank, except that it
cannot act as a normal lender of last resort
– The European Stability Mechanism is an important back-
stop, but it is too small and too hedged with restrictions
– Some useful (and less useful) rules have been introduced
• Nevertheless, it is not a true “adjustment union”
• It is a “discipline union” that is externalising its
failings
• It might well be swept away in the next crisis
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4. Challenges of a bad marriage
• The eurozone will not become a true federal union
• Solidarity has been greatly weakened by the crisis
• The eurozone will remain a gold standard
mechanism, but with an active central bank
• Challenges for the eurozone if it is to become a
“better marriage”:
– A minimum fiscal union, to back the banking union
– Greater use of fiscal policy at eurozone and national levels
– Greater reliance on risk-sharing finance
– Faster and deeper resolution of bad debt
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4. Challenges of a bad marriage
• The challenge for Greece:
– This is a challenge of development, not just of
macroeconomic adjustment
– The starting point must be a deep and permanent write-
down of the present value of Greek debt
– But, if Greece wishes to stay inside the eurozone, it must
become a normal European country, in terms of policies and
institutions
– This will take decades, not years
– If Greece cannot live with this, it should consider leaving
– But it has little reason to expect better performance in the
long run if it does
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