High Debt, Slow Growth, Financial Instability, Growing ... · The good, the bad and the ugly...
Transcript of High Debt, Slow Growth, Financial Instability, Growing ... · The good, the bad and the ugly...
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High Debt, Slow Growth, Financial
Instability, Growing Inequality:
What Role for Economic Policy?
Paul van den Noord
Counsellor to the Chief Economist, OECD
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“Central” projection
Source: OECD (Pre-Cannes G20 release) and national sources.
growth, annualised, in per cent
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Near term outlook
• The economic outlook is highly uncertain
Heavily dependent on policy decisions in the euro area and the US.
With continued but not decisive policy intervention (baseline scenario): very weak OECD growth in the near term.
In the absence of comprehensive and preventive policy action (downside scenario): deep recession in the euro area with negative effects elsewhere.
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The sovereign crisis in Europe
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50
100
150
200
250
300
350
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50
100
150
200
250
300
350
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Italy
Greece
Ireland
Portugal
Spain
0
5
10
15
20
25
30
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5
10
15
20
25
30
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
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1
Jul-
11
Oct
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France
Austria
Belgium
Netherlands
Sovereign bond spreads over German Bunds - basis points
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Intra euro area competitiveness
Unit labour costs, 2000 = 1
0.9
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1.1
1.2
1.3
1.4
1.5
1.6
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Germany
France
Ireland
Portugal
Spain
Greece
Italy
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Euro area crisis
• S&P down-graded ratings of nine euro area countries.
• ECB three years facility provides some relief.
• Substantive policy action is required:
1. Urgently put in place credible and adequate financing backstop.
2. Urgently need resolution of debt crisis in Greece.
3. The banking system needs to be strengthened without excessive deleveraging.
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Confidence deterioration can lead to a downside
scenario
Source: OECD calculations.
-4
-2
0
2
4
6
8
10
-4
-2
0
2
4
6
8
10
2012 2013 2012 2013 2012 2013 2012 2013
United States Euro area Japan China
Baseline
Downside scenario
Intensification of euro-area crisis and excessive US fiscal consolidation
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A confidence bridge can lead to an upside
scenario
Source: OECD calculations.
0
2
4
6
8
10
12
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2
4
6
8
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2012 2013 2012 2013 2012 2013 2012 2013
United States Euro area Japan China
Baseline
Upside scenario
Euro-area debt crisis successfully defused
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Public debt has soared
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Growth is slower because of higher debt
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Empirical evidence on debt and growth
• Debt becoming more burdensome above certain levels
– OECD estimates: interest rate effects larger at gross debt
levels above 75 % of GDP (4 bps per %) .
– OECD estimates: reduced stabilisation effect (stronger saving
offset) above 75 % GDP
– Reinhart and Rogoff: lower growth at debt levels above 90 %
of GDP
– Cecchetti, Mohanty and Zampolli: lower growth at debt levels
above 85/95% of GDP
– Our own estimates: growth significantly lower at debt levels
exceeding 66 % of GDP
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A daunting task
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SWE
CH
E
DN
K
LUX
HU
N
BEL
DE
U
KOR
ITA
FIN
AU
T
NLD
CA
N
CZE
NZL
ESP
AU
S
FRA
ISL
PR
T
SVK
GR
C
PO
L
GB
R
IRL
JPN
USA
Projected 2010-12 consolidation
Additional consolidation required after 2012
Required improvement in underlying primary balances, percentage points of GDP
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A new challenging environment for economic policy
The crisis has dramatically changed the
macroeconomic landscape, especially in advanced
economies
Growth is lower;
Public debt is (much) higher;
Fiscal space is smaller;
Sovereign debt and banking fragilities interact;
Monetary policy is operating at the zero bound;
Inequality is growing
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The good, the bad and the ugly
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The good, the bad and the ugly
Dividing by D yields:
A = good B = bad Area right of B: ugly
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The good, the bad and the ugly
Germany: debt ratio falls, growth higher
Greece: debt ratio increases, growth contracts
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The good, the bad and the ugly
Greece: structural reforms pushes the economy in the stability range
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Growth impact of structural reforms
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Growth impact of structural reforms
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Structural reform and inequality
• Cutting tax expenditures (mostly benefitting the well-off) and marginal tax rates contributes to equity and growth objectives. •Shifting the tax mix away from labour towards consumption improves incentives to work and save, but raises inequality.
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Thank you!
Paul van den Noord
Counsellor to the Chief Economist, OECD