Eurozone developments · • Outside ZLB, output and exchange rates are unaffected by safe asset...
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Eurozone developments Pierre Lafourcade 6/3/2016 1 Dragging down the world
Transcript of Eurozone developments · • Outside ZLB, output and exchange rates are unaffected by safe asset...
Eurozone developments
Pierre Lafourcade
6/3/2016 1
Dragging down the world
Lost decade in Eurozone
6/3/2016
Percentage point deviation from level of real GDP in 2007
2
Many countries still far off 2007 levels
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GDP per capita, percentage point deviation from level in 2007 3
Feature of EZ, not EU
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Huge toll on workforce and safety nets
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Percentage point deviation of national unemployment rate from 2008 level
5
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Austria
Belgium
Cyprus
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
United Kingdom
United States
Euro area
Several countries in outright deflation
6/3/2016 YoY headline HICP inflation in percent
6
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Austria
Belgium
Cyprus
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
United Kingdom
United States
Euro area
Aggregate demand components
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Cumulative contributions to GDP growth from 2007, percentage points
7
Euro Area tries to export its way out… …while US relies on domestic demand
Deleveraging is slow
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Where will tomorrow’s capital come from?
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Who is doing the adjusting?
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Who is doing the adjusting?
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Why converge to this?
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Who is doing the adjusting?
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Cumulated fiscal impulse 2010-2015
6/3/2016 Negative of change in the structural balance net of interest payments, as share of 2010 GDP
14
Who is doing the adjusting?
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Current account as percent of Euro Area GDP 15
Best predictor of sudden stop?
6/3/2016 Footer Text 16
Who is doing the adjusting?
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On the supply side…
6/3/2016 Unit Labor costs in the Euro Area
18
90
100
110
120
130
140
150
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Austria
Belgium
Euro area
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
ECB 2% inflation
6/3/2016 Unit labor costs in large sample of industrialized countries
19
70
100
130
160
190
220
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Germany
…why converge to the outlier?
6/3/2016 Real Effective Exchange Rate, normalized. 20
Where’s Wolfgang?
Germany
6/3/2016 Real compensation growth in percentage points
21
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006 2007
There he is.
Why isn’t France dictating policy?
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Country shares in Euro Area GDP
22
0.29
0.21 0.16 0.10
0.00
0.50
1.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
all
France+Italy+Spain
France+Germany
France+Italy
Germany
France
Italy
Spain
Public finances: belt tightening everywhere…
6/3/2016 Deficit to GDP ratio, in percent 23
…but debt ratios stubbornly high…
6/3/2016 Debt-to-GDP ratio, in percent. 24
…and nominal growth has slowed.
6/3/2016 YoY change in nominal GDP in percent 25
Refresher on debt sustainability
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Sustainability growth gap is large…
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Extra nominal GDP growth needed to stabilize debt ratio given deficit ratio (≈ 5% on average in 2015)
…as is the deficit gap…
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Extra fiscal surplus needed to stabilize debt ratio given current nominal growth (≈ 3% of GDP on average in 2015)
…but the fiscal space is non-existent…
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and the outlook for nominal growth is grim.
6/3/2016 Survey of Professional Forecasters
30
5 year ahead inflation expectations for the euro area
Basic world trade model
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Saving EA Core EA Periphery
r r*
S S*
CA CA* ř ř
Euro Area imbalances
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Saving EA Core EA Periphery
r r*
S S*
CA CA*
1. Aggregate demand expansion in EA core…
2. …reduces imbalances…
3. …and raises the real interest rate.
ř ř
The logical solution
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1. Aggregate demand compression in EA periphery…
Saving EA Core EA Periphery
r r*
S S*
CA CA* 2. …reduces imbalances…
3. …but lowers the real interest rate. ř ř
Schaüble can’t have his cake and eat it, too.
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Saving Core/Periphery Rest of World
r r*
S S*
CA CA* CAw
Sw
ř ř
Eurozone in balance in 2007…
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Saving Core/Periphery Rest of World
r rw
S S*
CA CA*
CAw Sw
1. AD compression in core+periphery…
2. …opens surplus against RoW…
3. …and reduces world interest rate.
ř
…but in massive surplus today.
EA is the new China...
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2015
…but the imbalances are now far costlier.
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The safe asset shortage
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Imbalances viewed from the capital account
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Safe asset shortage is normally irrelevant…
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…but increases spillovers at zero lower bound.
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y (US)
y* (EA)
Graphically, for EA-US case
Safe asset shortage positive spillover
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y (US)
y* (EA)
1. Decrease in safe asset supply…
2. …reduces output in both regions.
Exchange rate negative spillover
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y (US)
y* (EA)
1. Dollar appreciation increases safe asset supply…
2. …but increases the US trade deficit….
3. …magnifying EA output gain…
4. …and choking off US expansion
Policy implications
• Outside ZLB, output and exchange rates are unaffected by safe asset scarcity.
• At ZLB, scarcity depresses global output, with distribution of slumps determined by exchange rate.
• Safe public debt issuance / fiscal stimulus anywhere is expansionary (early QE).
• Developing private securitization capacity is expansionary (bank recapitalizations…)
• Maturity reducing policies reduce safe asset supply. • Slippery slope towards currency wars.
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Conclusions • Great asymmetric adjustments in Euro Area. • Manifested in massive compression of aggregate
demand. • Fiscal policy and SGP counterproductive. • In ZLB world, spillovers are large: export drive and
fiscal belt tightening dragging down RoW. • Democratic project unwinding fast:
• 2015: 20-35 year olds in EA = 22% of voting population • 2020: 20-40 year olds in EA = 29%
Greatest dereliction of global public duty since the Great Depression.
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Appendix
6/3/2016 Footer Text 48
Monetary policy: core-periphery divide…
6/3/2016 Difference between desired and realized policy rate 49
Applying a one-size-fits-all Taylor Rule to individual countries
…yet weighted by size, about right...
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…but tell that to the euro-constituents.
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Greece: squeezing until the pips squeak…
6/3/2016 Deviation from levels in 2008, percentage points 52
…but still not enough.
6/3/2016 Variables indexed at 2008 levels 53
Incomplete labor market integration
and limited wage flexibility
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Dispelling the myth of un-reformable EU
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