Undergraduate Economics Association Event – Can the EU survive the EUROzone Crisis?(10/24/13)

Undergraduate Economics Association

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Announcements

Econ Talk Sunday, Nov. 27th, 12:00pm in GSU Starbucks

Writing Committee + STATA Workshop Sunday, Nov. 27th, 1:00-2:00 pm in CAS 322

Undergraduate Economics Association

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Announcements

Special Lecture by Nobuhiro Kiyotaki, Professor of Economics at Princeton University:

Monetary Policy and Macroeconomic Performance in Recent Japan

We will discuss the causes and consequences of the Japan’s recession from 1991 to present. In particular, we ask: Why did Japan stop growing? What are the roles of monetary and fiscal policies for the recession and potential recovery?

Wednesday, October 30th 5pm to 7pm Located at 1 Silber Way, SMG Building, Kenmore Room, 9th

floor, (use entrance on 1 Silber Way). A reception will follow Cocktails & light refreshments will be served following the

lecture.

Undergraduate Economics Association

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OpportunitiesVeritas Financial Group Conference

Conference on Saturday, Nov. 9th

Learn from keynote speakers in the industry Workshops in securities, capital markets, real

estate and other relevant topics. Network!

Register on the mail we will send + PDF resume to veritasfinancial@gmail.com

Representatives include Goldman Sachs, J.P. Morgan, Blackstone, Morgan Stanley, Deutsche Bank and many more.

Deadline Oct. 31st at 11:59 p.m.

Undergraduate Economics Association

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Student Articles Unemployment in Spain after the Financial CrisisJ. Sinitsky

Let’s Play MonopolyY. Tampi

Can the EU survive the EUROzone Crisis?

Vivien A. Schmidt

Boston University

Euro Crisis: A Failure of Economics or Politics?

•Is it the Economics?▫Structures and/or Policies?

•Is it the Politics?▫Institutions ? Leadership? Democracy?

•What are the dangers?▫Political Volatility, rise of the extremes? ▫End of Euro? of EU? EUtopia vs. DystopiEU

•Clash of ideas/discourse on how to explain/resolve crisis

Clash of Ideas on economic problems/solutions

• Austerity (+ neo/ordo-liberalism) (Germany/ECB/Commission)

▫ Problem: public sector profligacy, lack of discipline, excessive deficits, macro imbalances, lack of competitiveness

▫ Solution: Rapid deficit/debt reduction, fiscal consolidation, financial stability, stability ‘pacts’; S Eur: wage/price deflation, structural reform

• Pragmatism (+ NeoKeynesianism)(US Obama/UK Brown, Fed, BoE, IMF?)

▫ Problem: 2008 global financial crisis, private sector debt, the markets, Greek crisis, + lack of liquidity

▫ Solution: Slow deficit reduction, some stimulus + consolidation?

• Who wins in EU? Austerity Hawks. In US? Pragmatists so far.

IS the Problem Public Sector Profligacy or Private Debt? (Public sector finances 2000-20012)

Public Sector Debt to GDP ratio Source: Eurostat 2013

Output Loss: Potential vs Actual GDP

Source: Collignon 2013 Red Line is Potential GDP, Blue is Actual GDP

6,400

6,800

7,200

7,600

8,000

8,400

8,800

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

GDP_EA PGDP_EA

Euro Area

9,000

10,000

11,000

12,000

13,000

14,000

15,000

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

GDP_US PGDP_US

United States

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

GDP_DE PGDP_DE

Germany

1,250

1,300

1,350

1,400

1,450

1,500

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

GDP_IT PGDP_IT

Italy

130

140

150

160

170

180

190

200

210

220

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

GDP_GR PGDP_GR

Greece

640

680

720

760

800

840

880

920

960

1,000

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

GDP_ES PGDP_ES

Spain

Is the Problem Competitiveness?

Real Compensation per Employee (2000=100)Deflator Private ConsumptionSource: Ameco Database; Scharpf 2013

What about the Current Account Imbalance?

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

Germany

Ireland

Greece

Spain

France

Italy

Netherlands

Portugal

Current Account Balance with the Rest of the World 2001-2011( Euro= 1 000 million) Source: Eurostat 2013

-6

-4

-2

0

2

4

6

8

10

60 65 70 75 80 85 90 95 00 05 10

Change in inventories Gross fixed capital formation Private consumptionPublic consumption Trade balance

United States

Reagan/Bush Clinton G W Bush

Lehm

an

Obama

Consumer boomInvestmentboom

-4

-2

0

2

4

6

8

60 65 70 75 80 85 90 95 00 05 10

Change in inventories Gross fixed capital formation Private consumptionPublic consumption Trade balance

Euro Area

Euro

Or is the problem lack of investment?(Source: Collignon 2013)

Is the Problem the Structure of EMU?It is not an optimum currency area!

Source: JPMorgan May 2, 2012

Are Banks the Problem? Too big to bail?

Major European national banking systems’ holdings of public and private sector debt of ‘too big to bail’ European countries (only amounts above $60bn) (Source: Data from BIS, FT March 2013.)

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Is the Problem the Markets?

Spreads over German Bund (Sp, It) Credit default swap spreads (bank risk)

Source: Financial Times, Sept. 12, 2012

Or do Markets respond to the politics?

01/07/2

009

09/07/2

009

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009

02/08/2

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10/08/2

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01/01/2

010

09/01/2

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17/01/2

010

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10/02/2

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18/02/2

010

26/02/2

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06/03/2

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14/03/2

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22/03/2

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30/03/2

010

07/04/2

010

15/04/2

010

23/04/2

0100.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

4B: Greek-German Interest Rate Differential

Date

Perc

ent

Global Insight

December European Council

February European CouncilMarch European Council

First Greek Restatement

Second Greek Restatement

Van Rompuy Calls for Special Council

Source: Erik Jones, EUSA paper 2010

A Problem of Structures and Policies!!• Structures Matter:

No ‘E’ in EMU; banks too big to bail; deficit vs. surplus countries

• Policies Matter: ▫Gov’t rescues--turn Private into Public Debt--sovereign

debt crisis

▫Austerity--output losses, current account imbalances, recession; debt crisis becomes competitiveness crisis for South + social crisis!

▫ MISSING: Debt mutualization (Eurobonds), quantitative easing (ECB as LOLR), Bank Resolution Facility (Banking Union), EMF, EIB for investment, fiscal federalism…..social solidarity?

•And Politics Matter: • Austerity--Politically unsustainable? • Doesn’t work: Greece? Italy = ‘save Italy’, ‘grow Italy’ in wrong

order

A Problem of Political Leadership?

• A lack of EU vision? Small-state mentality (small state in glob econ vs EU as

global giant) Ideological (and country) blinders? (Austerity, Ordo-

liberalism) Focus on national interests vs EU? (esp electoral?)

• Poor decision-making? Create market panic?▫ Greek Crisis—1st Bailout 2010: German delay; Merkel fuels

negative public w discourse (bar metaphor); 2nd—Finns’ collateral; Slovakian veto threat; no Greek ref; no BRICS

▫ 2010 Irish Crisis: Bail-Out, follows talk of ESM creation, haircuts

▫ 2011 Portuguese Crisis: True Finns again; Slovakia veto threat; ▫ 2011-12 Spain/Italy in Crisis—Italy: Technical govt, then

no govt; ▫ 2013 Cyprus: initial tax on small depositors

A Problem of Institutional Actors in ‘one-size’ governing by rules, ruling by numbers?• ECB- Does what can with ‘one size fits none’

(inflation-targeting) rules▫ reinterprets rules -- buys debt 5/2010; ‘whatever it takes’

7/2012

• Council: excessive intergovernmentalism for ‘one size fits one’ rules (i.e. Germany)▫ Governing thru agreements/treaties; little joint decision-

making;▫ Pacts, packs, compacts; ever more stringent/punitive

rules

• Commission: secretariat for ‘one size fits all’ ruling by the numbers▫ European semester, vetting of nat’l budgets▫ Failure to deal w diff models of growth, varieties of

capitalism

• European Parliament ‘no size at all’

A Problem of Politics?

• EU’s ‘policy without politics Politically charged l/r policies removed to EU, depoliticized

esp. w > intergovernmental + technocracy of Eurozone crisis

• Leading to nat’l ‘politics without policy’ blame-shifting--‘EU made me do it’; Populism, rise of

extremes

• Solution: More ‘policy with politics’ ? For l/r debates▫ Elect EU Council President? (but who is the candidate?)

▫ Elect Commission President?

EP election campaigns x EU w party candidates & majority leader named Pres of Commission by European Council.

Greater political legitimacy for EP & Commission for more flexible application of rules following political orientation of EP?

• But be careful what you wish for!!! Viz rise of Euroskeptics

Different euro-sceptics: % saying membership of EU is a ‘bad thing’. Eurobarometer, 75 (3) May 2012.

To Survive the Eurozone Crisis the EU needs:

•Better Leadership and Policies•New Ideas with Persuasive Discourse•New Institutional Reforms•Reinvigorate Democracy, EU & National•Economic Policy beyond Neo-Liberalism?•A ‘moralizing’ of capitalism? •And more………………

Undergraduate Economics Association

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Article Competition

UEA Article Competition Fantastic quality of articles A very close competition Only one winner

Julia Sinitsky