The Common House of Europe

basic elements and new challenges

Looking to the mirror

• We have „lost“ about 2000 bilion euro between 2007 – 2010 due to the crisis

• This corresponds to the GDP of France or to 11% of Europe´s cumulative debt

• EU GDP has slowed substantially since crisis• 23 million people are now unemployed in the EU (10% of

the working age population), 16 mil. in the Euro area• Unemployment is twice as high for young people. It has

increased sharply due to the crisis and is now over 20%

Bratislava

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Still in shock and chaos?

• Public aid and guarantees to the financial sector amounted to 4,6 trilion euro over period, i.e. 37% of EU GDP

• Limited overall economic demand

• The crisis has resulted in a shortage of credit for non-financial firms and households

• Non-financial corporations have accumulated debts

• Household debt increased

• The level of GDP dept has increased from 60% to 80% as a result of crisis

• A Number of countries have led their borrowing costs to rise

• In 1995, services accounted for about 2/3 of the total economy, in 2010 about 3/4 of the economy

• Job creation was driven by the service sector. Primary and secondary sectors have lost about 10 million jobs since the mid 1990s

London

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Employment - jobs

• In 2000, 22% of the jobs required high qualifications while 29% required low qualifications. In 2010, it was reverse

• Apart from the car sector, a wide range of industries has lost jobs

• For every job in manufacturing it is estimated that a further complementary job is needed in a related business service. In total, some 74 million jobs therefore depend on manufacturing

• The high-tech sector represented 5,5% of total employment and about 8% of EU´s GDP

• The crisis cut our growth potential by one quarter, mainly as a result of job losses and limited working hours. Ageing will reduce our workforce and this will further reduce our capacity to grow

Roma

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EU and US

• The gap of the EU income with th US - over ¾ of the gap is explained by lagging productivity

• Labour productivity grew much more slowly in the EU than US

• The EU is lagging behind the US regarding investment in hardware, software and communications equipment. If the EU matched US levels, this would add about 5% to the GDP level in 2020

• More than half of the US leading innovators are „young“ (born after 1975), in US young leading innovative companies account 35% of total, in EU 7%

• It currently takes 15 days to start a businnes in Europe, and only 6 in the US

• EU firms much less access to venture capital, many administrative barriers

• Average EU costs of patenting is close to 35 000 euro, in US 1 850.

• Labour costs are growing again in EU

• 60% of Europeans have low or no skills, worrying also for IT graduates, the EU may lack 700 000 IT professionals by 2015

Against Eurozone and Wall Street

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Education! Every year, 6 milion of young Europeans drop out of school with at best a

lower secondary education

About 80 million people in EU have only low or basic skills

In the EU, only about one person in three aged 25 – 34 has completed a university degree, compared to well above 50% in Japan and more than 40% in the US

About 40% of consumers have used internet to purchase goods and services, but only 9% have done so from another Member State

There is little correlation between spending on primary and secondary education per pupil and PISA results. Many countries with high spending levels only show around average PISA reading scores

Lisbon, Madrid

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Reasons of the Euro area crisis

• Product of the interaction among several underlaying forces:– Mispriced risk– Macroeconomic policy misbehaviour over many years– Weak prudential policies and frameworks– Missing structural reforms

Markets became increasingly integrated, with enormous cross-border bank landing BUT supervision and regulation remained at a national level

The ECB was explicitly NOT allowed to be a lender of last resort, YET markets operated under the assumtion that the authorities (governments and central banks) would be ready with a safety net if things went wrong

The perception that economies or banking systems were too big or too complex to fail underlay the idea that their liabilities had implicit quarantees

Drastic consequences

Benelux

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Recovery – where we are today?

• Global recessions: of 1975, 1982, 1991, and 2009, which involved declines in world real GDP per capita

• 2009 – more severe and synchronized global recession during the post war period

– - declines were much deeper in 2009– - unprecedent degree of macroeconomic policy expansion has helped drive the

current recovery– - much higher unemployment– - expensive social security system

Common features of recovery:- CREDIT BOOMS (bustle in credit and housing markets)- Lack of timely, credible and coordinate policy strategy of the financial turmoil- Meagre growth as a result of dissappointing growth in domestic consumption and

investment driven by the legacy of the financial crisis (balance sheet repair, weak credit expansion and problems in housing markets – loss of competetivness

- Need of reforms

Paris, Wien

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Continued high risks

• Tightening of Fiscal Policy

• In the euro area , sovereigns and banks face significant refinancing requirements for 2012, estimated at 23% of GDP

• Fiscal withdrawal is projected to amount to about 1,5% of GDP (US 1 ¼ GDP)

• Gross-dept-to-GDP ratios will rise further (in G7 to about 130% in 2017, 256% in Japan, 124% in Italy, 113% in US and 91% in the euro area

• REASONS:

• - weak confidence

• -fiscal consolidation

• - tight financial conditions

• - slow, if any, implementation of reforms

Ljubljana, Berlin, Helsinki

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What about „me“?

• Overall down-ward trend in the labor share, because:

– College premium (the premium on wages of those with bachelor´s degree)

– The superstar effect (the disproportionate compensation of the top 1% of the income distribution

– „hollowing out“ of the middle class as a result of skill-biased technological change or the offshoring of medium-skill jobs, and law wages and unemployment

The labor share is typically countercyclical – rising during recessions and falling during recoveries

Prague, Budapest

.

Politicians? Or policy challenges• BY 2015, 90% of future economic qrowth will be generated outside

of Europe

• Downside consumer and investor confidence• Recovery remain anemic with large output gaps

• These challenges call for more policy action.– Implementing medium-term fiscal consolidation plans– Maintaining a very accommodative monetary policy stance– Providing ample liquidity to help repair household and financial

sector balance sheets– Resolve crisis without delay– Structural reforms: pensions, health care systems, labor and

product markets, housing sector, financial sector and education

Greece

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Why once more? And how many times?

• Same reasons for recovery.– Housing– Financial market problems, conditions for bussiness – Structure of economy and education

Debt restructuring is a bit better solution than increase of taxation.Restructuring is political vote – because of votes.

Factors: level of debt service and cofidence of the country These problems are likely to continue sapping the strength of the recovery

UNLESSPolicy makers adopt stronger policies to address them.

Or: this is only the end of PONZI scheme?

Greece

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