Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment?
43
Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment? Mark Weisbrot, Co-Director Center for Economic and Policy Research September 24, 2011
description
Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment?. Mark Weisbrot , Co-Director Center for Economic and Policy Research September 24, 2011 . Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing. - PowerPoint PPT Presentation
Transcript of Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment?
Macroeconomic Policy in the Eurozone: Are There
Alternatives to Slow Growth and High Unemployment?
Mark Weisbrot, Co-DirectorCenter for Economic and Policy Research
September 24, 2011
• Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing
• Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing
• It is the result of bad macroeconomic policies from the European authorities:
• Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing
• It is the result of bad macroeconomic policies from the European authorities:
• The “Troika” – European Central Bank, European Commission, IMF
• Three most important macroeconomic policies: Fiscal, monetary, and exchange rate
• Three most important macroeconomic policies: Fiscal, monetary, and exchange rate
• Not helping, or actively causing damage, in troubled eurozone economies (Greece, Ireland, Portugal, Spain, Italy)
• Troika, especially ECB has played game of brinksmanship with troubled economies since early 2010
• Troika, especially ECB has played game of brinksmanship with troubled economies since early 2010
• Repeatedly pushing Europe, and now much of the world economy, to the edge of serious crisis
• Troika, especially ECB has played game of brinksmanship with troubled economies since early 2010
• Repeatedly pushing Europe, and now much of the world economy, to the edge of serious crisis
• Why?
What policy failure looks like
ItalyReal GDP (Index: 2008=100)
Trend vs. Actual and Projected GDP (percent)
05
101520
03
11 11 12 14 15 16 16 17
2007 2008 2009 2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)85
90
95
100
105
110
115
120
10099
9495 95 96 96 97
9899
TrendWEO (spring)WEO (fall)
IrelandReal GDP (Index: 2008=100)
0204060
010
2634 42 48 54 59 64 68
Trend vs. Actual and Projected GDP (percent)
2007 2008 2009 2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)85
95
105
115
125
135
145
155
165
175
185
10096
90 89 90 91 9396
99102
TrendWEO (spring)WEO (fall)
GreeceReal GDP (Index: 2008=100)
010203040
0 28
1626
32 34 35 35 35
Trend vs. Actual and Projected GDP (percent)
2007 2008 2009 2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)85
90
95
100
105
110
115
120
125
130
135
99 10098
93
8987 88
9093
96
TrendWEO (spring)WEO (fall)
PortugalReal GDP (Index: 2008=100)
0
10
20
30
0 39 10
1622 24 24 25 26
Trend vs. Actual and Projected GDP (percent)
2007 2008 2009 2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)85
90
95
100
105
110
115
120
125
130
135
100 10097 99
9795 96
98101
103
TrendWEO (spring)WEO (fall)
SpainReal GDP (Index: 2008=100)
0
10
20
30
0 210
14 17 19 21 23 25 26
Trend vs. Actual and Projected GDP (percent)
2007 2008 2009 2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)85
95
105
115
125
135
145
99.143765682701810096.27896.1364713496.88152899288597.9695085634751
99.702589169963101.560048406199
103.5353913477105.445619318065
TrendWEO (spring)WEO (fall)
ArgentinaReal GDP (Index: 1998=100)
Trend vs. Actual GDP (percent)
-100
10203040
05 8
15
3223
158
1
-5
1998 1999 2000 2001 2002 2003 2004 2005 2006 200780
85
90
95
100
105
110
115
120
125
130
10097 96
92
82
89
97
106
115
125TrendActual GDP
Lessons from Argentina:
Lessons from Argentina:• Despite chaotic default, financial
collapse, and no outside help, Argentine economy begins to recover just one quarter after default
•
Lessons from Argentina:• Despite chaotic default, financial
collapse, and no outside help, Argentine economy begins to recover just one quarter after default
• Argentina reaches pre-recession GDP within 3 years, despite much deeper recession – compare to more than a decade in Greece.
• Passes trend GDP in 2006 (compare to eurozone – when?)
• Passes trend GDP in 2006 (compare to eurozone – when?)
• Real GDP growth more than 90 percent 2002-2011
• Passes trend GDP in 2006 (compare to eurozone – when?)
• Real GDP growth more than 90 percent 2002-2011
• There are ALWAYS alternatives to the years of recession, stagnation, and high unemployment that the Troika is offering to the troubled eurozone economies
The human cost of economic mismanagement
IrelandUnemployment Rate(Seasonally Adjusted)
Source: Eurostat
2008 2009 2010 20114
6
8
10
12
14
16
(per
cent
)
GreeceUnemployment Rate(Seasonally Adjusted)
Source: Eurostat
2008 2009 2010 20114
6
8
10
12
14
16
(per
cent
)
ItalyUnemployment Rate(Seasonally Adjusted)
Source: Eurostat
2008 2009 2010 20114
6
8
10
12
14
16
(per
cent
)
PortugalUnemployment Rate(Seasonally Adjusted)
Source: Eurostat
2008 2009 2010 20114
6
8
10
12
14
16
(per
cent
)
SpainUnemployment Rate(Seasonally Adjusted)
Source: Eurostat
2008 2009 2010 20114
6
8
10
12
14
16
18
20
22
(per
cent
)
• Low inflation implies there is plenty of room for expansionary monetary and fiscal policies – but eurozone countries that need it can’t implement these policies
IrelandInflation
(Seasonally-Adjusted, year over year)
Source: Eurostat
J F M A M J J A S O N D J F M A M J J A2010 2011
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
(per
cent
)
Greece
Source: Eurostat
J F M A M J J A S O N D J F M A M J J A2010 2011
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
(per
cent
)
Inflation(Seasonally-Adjusted, year over year)
Spain
Source: Eurostat
J F M A M J J A S O N D J F M A M J J A2010 2011
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
(per
cent
)
Inflation(Seasonally-Adjusted, year over year)
Italy
Source: Eurostat
J F M A M J J A S O N D J F M A M J J A2010 2011
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
(per
cent
)
Inflation(Seasonally-Adjusted, year over year)
Portugal
Source: Eurostat
J F M A M J J A S O N D J F M A M J J A2010 2011
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
(per
cent
)
Inflation(Seasonally-Adjusted, year over year)
“Internal Devaluation” doesn’t work
Real Effective Exchange Rate(Based on Unit Labor Costs of 27 Trading Partners)
Source: Eurostat
I II III IV I II III IV I II III IV2008 2009 2010
90
95
100
105
Spain Ireland
Portugal Greece
Italy
(Inde
x: 2
008Q
I=10
0)
More fiscal consolidation
Primary Balance 2011(percent of GDP)
Source: IMF
Greece Ireland Italy Portugal Spain
-8
-6
-4
-2
0
2
4
-1.3
-6.8
0.5
-1.9
-4.4
Primary Balance
Cyclically Adjusted
Total Projected Fiscal Consolidation 2010-2016(percentage points of GDP)
Source: IMF
Greece Ireland* Italy Portugal Spain
0
1
2
3
4
5
6
7
8
9
7.6 7.7
3.3
7.4
5.2
*Note: 2010 overall balance in Ireland excludes 21% of GDP in financial sector assistance.
Projected Net Interest Payments(% of GDP)
Source: IMF
Greece
2009 2010 2011(f) 2012(f) 2013(f) 2014(f) 2015(f) 2016(f)0
1
2
3
4
5
6
7
8
9
5.25.55.5
6.7
7.7
8.4 8.5
7.9
7.2
(% o
f GD
P)
• Euro zone crisis primarily a result of wrong macroeconomic policies
Conclusion
• Euro zone crisis primarily a result of wrong macroeconomic policies
• European authorities will probably resolve current crisis with bigger EFSF or other rescue mechanisms, interventions in bond markets, bank bailouts, even Greek debt restructuring
Conclusion
• But continued wrong macroeconomic policies will cause unnecessary unemployment and suffering; cuts to health care, pensions, education; trillions of dollars in lost output, and possibly more crises
Conclusion
