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8/19/2019 theeuropeanunionandtheglobalfinancialcrisisswufe-140715042730-phpapp02.pptx
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The European Union and the globalfinancial crisis
Professor Nigel HealeyPro-Vice-Chancellor (International)
Nottingham Trent University
10 Jly !01"#oth$estern University of %inance an& 'conomics
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vervie$
• What is the European Union?
• What is the Eurozone? Who’s in the Eurozone?
• The institutional design of the Eurozone: guaranteed to
avoid inflation and printing money?
• The performance of Eurozone 1999-!1"• The glo#al financial crisis
• $oral hazard% #ail-outs and monetisation of de#t
• The outloo& for the Eurozone
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hat is the 'ro*ean Union+
• European Union: a political and
economic union of ' European states
• (opulation: !)*#n +,hina: 1)"#n
• .and mass: ")"m &m +,hina: 9)/m
&m
• 0ross domestic product: U21')"tr+,hina: 21!)!tr3
• 04( per capita: 25/%595 +,hina:
26%5553
•
04( per capita +(((: 255%!'"+,hina: 21!)/9*3
5 3 7$8 World Economic utloo& 4ata#ase% pril !1"
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hat is the 'ro,one+
•
1' countries ;ithin the European Union;hich share: – European ,entral 51cto#er !19
"
E,< #uilding +Euroto;er%8ran&furt
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hos in the 'ro,one+
• 8rance% 0ermany% 7taly%
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./ectives of the 'ro*ean Central an (1)
•
The $aastricht Treaty’s rt) 1!*)1: – ‘The primary objective of the ECB shall be to maintain price
stability . Without prejudice to the objective of price stability, theECB shall support the general economic policies in the Communitywith a view to contributing to the achievement of the objectives ofthe Community as laid down in rticle !."
• rticle :
– ‘The objectives of European #nion are a high level of employmentand sustainable and non$inflationary growth."
• o:
–
fighting inflation is the a#solute priority – supporting gro;th and employment comes net
/
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./ectives (!)
• $a&ing the inflation o#Bective operational: does the E,< havea target?
• 7t has a definition of price sta#ility:
– ‘The ECB has defined price stability as a year$on$year increase inthe %armonised &nde' of Consumer (rices )%&C(* for the euro area
of below !+."
• Cand it has an aim:
– ‘&n the pursuit of price stability, the ECB aims at maintaininginflation rates below, but close to, !+ over the medium term."
6
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Central .an in&e*en&ence
• ,urrent conventional ;isdom is that toensure price sta#ility% central #an&sshould #e independent:
– most governments cannot resist the Dprinting press’ temptation
– the
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In&e*en&ence
• Article 7: In&e*en&ence
• neither the ECB, nor a national central ban-, nor any member oftheir decision$ma-ing bodies shall see- or ta-e instructions fromCommunity institutions or bodies, from any government of aember /tate or from any other body
• Article 21: *erations $ith *.lic entities
• overdrafts or any other type of credit facility with the ECB or withthe national central ban-s in favour of Community institutions orbodies, central governments, regional, local or other publicauthorities, other bodies governed by public law, or publicunderta-ings of ember /tates shall be prohibited, as shall the
purchase directly from them by the ECB or national central ban-s of
debt instruments
9
Politically in&e*en&ent
%inancially in&e*en&ent
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%iscal com*lications in a monetary nion
• 7n a monetary union% fiscal policy
– the only macroeconomic instrument left at national level
– government #orro;s in recession and pays #ac& in good times
– government acts as a #uffer in case of a negative shoc&
• utomatic sta#ilisers:
– ta receipts decline ;hen the economy slo;s do;n
– ;elfare spending rises ;hen the economy slo;s do;n
– rule of thum#: deficit ;orsens #y !)*G of 04( ;hen 04(
gro;th declines #y 1G
1!
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t there are fiscal *olicy 2e3ternalities4
•
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5aastricht Treaty
• 1)) $onitoring of #udgetary discipline
• The Treaty prohi#its the direct financing of pu#lic entities’
deficits #y national central #an&s +rt) 1!1% #e it overdraft
facilities% other types of credit facility or the purchase of de#t
instruments% ecept for the purpose of monetary policy) The
Treaty also prohi#its pu#lic entitiesJ privileged access to
financial institutions +rt) 1!)
• $oreover% the no #ail-outF clause in rticle 1!5 stipulates
eplicitly that neither the ,ommunity nor any $em#er tate
is lia#le for or can assume the commitments of any other$em#er tate)
1
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Prevention *roce&re6 *re-7%C attem*ts tocontrol government &eficits an& &e.t
•The ta#ility and 0ro;th (act +0(
• The 0( made permanent the 5G 04( deficit and /!G
04( ceilings
• 0( reformulated in !!* to ma&e it more flei#le: –
negative gro;th may #e eceptional – ta&e account of Dall relevant factors’
– no specific definition
• 8ines are automatic if approved
• 8unds ;ithheld from EU payments to mem#er
state
15
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The recor& of '5U so far899
• difficultF #irth and early teenage years: – an oil shoc& in !!! and again in !!6
– a ;orld;ide slo;do;n in early !!!s
– eptem#er 11% !!1
–
the stoc& mar&et crash in !! – fghanistan% 7raK ;ars
– the ;ea& U dollar
– the !!' glo#al financial crisis
– the European +Eurozone sovereign de#t crisis
–
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#orces of 'ro,one &ata
ource: http:IIsd;)ec#)europa)euIhome)do?chartAt1)/1*
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Inflation6 missing the o./ective: a little 8ntil!00; commo&ity .oom: !00;-1" financial crisis
ource: European ,entral
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The *erformance of the ero against U#<
ource: European ,entral
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7lo.al financial crisis6 the early &ays
• “ The European Central Ban-0s main tas- is to -eep inflation down.But over the past month, it has thrown caution to the wind in tryingto prevent Europe0s financial system and integrated economy fromfalling apart.
• The ECB has transformed itself into a crisis manager of the sort thatits architects could hardly have imagined when the ban- too- up itswor- 12 years ago. The ban-, charged with managing the euro, was
given a single mandate $ to -eep prices under control.• 3ately, however, the central ban- has cast aside worries about
inflation, cutting interest rates once already, with more cuts in the pipeline. t the same time, it is lending ever more cash tostrapped ban-s.4
7nternational Lerald Tri#unecto#er 1/% !!'
1'
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'arly stages of the recession
• Eurozone entered recession in !!'M5• European ,ouncil agreed pac&age to avert financial meltdo;n
in cto#er !!'
• =ational governments +not E,
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'ro,one short-term interest rate
ource: European ,entral
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7=P gro$th (> change year-to-year)
dou#le-dipF
ource: European ,entral
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7=P (!00? @ 100)
(ea&
04(
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'ro,one nem*loyment rate
ource: European ,entral
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7overnment &e.t in the 'ro,one
•
Eurozone governments are effectively #orro;ing in Dforeigncurrency’
• They cannot #orro; from their o;n central #an&s%
monetise the de#t and inflate a;ay their de#ts +li&e U
and UN
• 8inancial mar&ets demand ever-higher ris& premium from
inde#ted governments
ource: European ,entral
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'ro,one government .&get .alance (> 7=P)
ource: European ,entral
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'ro,one government &e.t (> 7=P)
ource: European ,entral
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7overnment &e.t in ey 'ro,one contries
6
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=eficits an& &e.t
ource: Eurostat
'
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%rom financial crisis to sovereign &e.t crisis
•8rom !1!% gro;ing concern a#out sovereign de#t levels in 0reece%pain% 7reland% (ortugal and 7taly
• the no #ail-out
clause in rticle 1!5 stipulates eplicitly that neither the ,ommunity
nor any $em#er tate is lia#le for or can assume the commitments
of any other $em#er tateF
9
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National long-term interest rates
5!ource: European ,entral
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The .ailots
• 7n pril !1!% #ailout mechanism used - O5!#n lent to 0reece
• 7n $ay !1!% EU esta#lished a larger fund of O6*!#n
– O""!#n from eurozone states
– O/! #illion from European ,ommission
– O*! #illion from the 7$8
• European ta#ility $echanism% agreed in 4ecem#er !1!: – issues de#t on capital mar&ets% #ac&ed #y guarantees from the
eurozone states
– lends to inde#ted eurozone governments once recovery plan +ie%austerity agreed
– ,om#ined ;ith a monitoring #ody
51
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7reece $elcomes 'U recovery *lan
5
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'C .on& *rchases
• The Treaty prohi#its the direct financing of pu#lic entities’deficits #y Cthe purchase of de#t instruments% ecept for the
purpose of monetary policyF
• 8rom mid-!11% E,< forced to #uy the #onds of ;ea&
governments% especially 7taly and pain% to stop spirally #ond
yield differentials
• ,ould #e seen as sta#ilising the mar&et if yield differentials
fall #ac&C
• C#ut can #e seen as monetising de#t of ;ea& governments
55
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'C maret sta.ilisation o*erations
5"ource: European ,entral
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Is the me&icine $oring+
• The E,< P)))is ready to do ;hatever it ta&es to preserve the
Euro) nd #elieve me% it ;ill #e enoughF $ario 4raghi% @uly!1
• com#ination of the #ailouts and the #ond purchases havesent a strong signal to the mar&ets that the EU is committedto defending the Eurozone
• EU has given #ail-outs to five Eurozone mem#ers +0% 7Q.% (%E% 7 > loans conditional on #udget cuts
• .ong-term interest rates are coming do;n
•
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A vote of confi&ence in the 'ro,one from thefinancial marets
5/ource: European ,entral
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Conclsions
• The E,< set up ;ith primary o#Bective of price sta#ility and
independent of national and EU governments > it may not directlymonetise de#t
• 7n E$U% national fiscal policy is the only macroeconomic policy
tool to adBust to negative shoc&s
•