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The Threat of European Disintegration
Prof. Dr. h.c. Michael Burda, PhDHumboldt-Universität zu Berlin
Public Lecture, Eesti Pank18 August 2016
The Threat of European Disintegration 2
Overview• 2016 has been a difficult year for economic policy – but not
necessarily a bad year for the European economy • The danger of deterioration or even disintegration of the EU:
A bird´s eye view• The shadow of secular stagnation and the north-south divide • Points of light – and possible solutions
The Threat of European Disintegration 3
The Problem• My bachelor-level course „European Integration“ at Humboldt University
stresses economic forces behind European integration…- Autonomous capital accumulation and convergence to a common European norm- Capital mobility- Labor mobility- Trade in goods and services- Convergence of institutions, rule of law, harmonization of both macroeconomic
disturbances and fiscal policy- Political convergence in general and the free flow of ideas• …all have been thrown into reverse gear over the past year!
The Threat of European Disintegration 4
The ProblemEconomic Growth: • Growth has not been so low for a long time: D 2015: 1.5% • Not just central Europe – around the world, at the same time • Moveover, divergence in Europe is emerging (2015)
• Italy 0.8%• France 1.1% • Greece -0.2%• Germany 1.5%• Spain 3.2%• Ireland 7.8%
• Life-threatening in a monetary union – a persistent problem
The Threat of European Disintegration 5
Quelle: World Bank
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201410000
15000
20000
25000
30000
35000
40000
45000
50000
55000
60000
Pro-Kopf BIP (Niveau), USD von 2005
France Germany Greece ItalyUnited Kingdom Spain Ireland
European Divergence: Real GDP per capita (2005 USD)
The Threat of European Disintegration 6
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201420000
25000
30000
35000
40000
45000
50000
55000
Pro-Kopf BIP (Niveau), Int.USD von 2011
France Germany Greece ItalyUnited Kingdom Spain Ireland
Quelle: Weltbank
European Divergence: GDP per capita (USD int.2011)
The Threat of European Disintegration 7
Quelle: Weltbank
European Divergence: Real GDP per capita (2005 USD)
The Threat of European Disintegration 8
The ProblemCapital mobility: • In the course of the sovereign debt crisis at the Euro-periphery
and half-hearted reforms in these countries, investment has ground to a halt – investment, that could stimulate demand and supply
• Capital flight from the crisis countries continues• Mixed with nationalist/nativist tendencies, opposition to foreign
capital is growing
The Threat of European Disintegration 9
European Divergence: Target-2 Balances
The Threat of European Disintegration 10
The ProblemLabor mobility: • The Schengen agreement was supposed to facilitate a slower
process of wage convergence, and suppress migration for all but the poorest countries
• After in-migration of more than 1,2 million people to Germany, the free mobility of labor is threatened by the reimposition of border controls
• The deployment of migrants in Germany is occurring, but only slowly
The Threat of European Disintegration 11
The ProblemTrade: • Intra-European trade has suffered from the crisis• The voices of protectionism have grown louder – as the
discussion of TTIP and Brexit have shown• The EU-referendum outcome in June shows potential dangers
of populist sentiment – and may follow if the UK has a soft „Brexit“
The Threat of European Disintegration 12
The ProblemConvergence of institutions and policies • Background: The financial and sovereign debt crises have
focused our attention once again on sovereign solvency • Focus on government debt relative to GDP – not debt levels• Facts: Public budget balances, consolidated, 2012 (% des BIP)
Country Fiscal Balance Interest service Primary balance Debt / GDP
D 0,1 2,4 2.5 81,0
F -4,8 2,6 -2,3 90,2
PL -3,9 2,8 -1,1 55,6
GR -9,0 5,0 -4,0 156,9
IRL -8,0 3,2 -4,8 120,2Source: IW Köln
The Threat of European Disintegration 13
The ProblemConvergence of institutions and policies • Background: The financial and sovereign debt crises have
focused our attention once again on sovereign solvency • Focus on government debt relative to GDP – not debt levels• Facts: Public budget balances, consolidated, 2014 (% des BIP)
Source: IW Köln
Country Fiscal Balance Interest service Primary balance Debt / GDP
D 0,3 1,4 1,7 74,0
F -3,9 2,0 -1,9 95,6
PL -3,3 1,9 -1,4 51,6
GR -3,9 3,9 0,0 178,4
IRL -3,9 3,5 -0.4 107,5
The Threat of European Disintegration 14
Recall the dynamics of sovereign debt
• The dynamics of debt are simple: Debt = - Consolidated government balance= Spending – Income= Government consumption + transfer payments+ government investment+ interest payments- revenues- debt repayment
The Threat of European Disintegration 15
• Market interest rates reflect aggregated trust of creditors - and the reputation of the borrowers
• Income normally grows, tax revenues should grow at the same time – assuming there is growth
• The relevant number is therefore the debt-GDP ratio! • The central formula for a stabilized and sustainable fiscal stance:
Primary surplus/GDP = (r–g)(Total government debt/GDP) where r=interest rate on government debt and g=growth rate
Recall the dynamics of sovereign debt
The Threat of European Disintegration 16
The Dynamic of Government Debt• Primary versus total „headline“ Deficit – latter includes
interest payment• At the moment interest rates are at lowest levels in a century,
lower than 7 decades ago• … but growth has also slowed considerably• Causal for the debt crisis: Chronic primary deficits in a time
when g was greater than r, then collapse of growth (g)
The Threat of European Disintegration 17
Sovereign debt, Euro-Länder (ESA95 Basis)% of GDP, 1990-2015
18
Yields on Eurozone government debt,10 year bonds, % p.a., 1990-2016
19
Monetary policy appears helpless
19991999
19992000
20002001
20012001
20022002
20032003
20042004
20042005
20052006
20062006
20072007
20082008
20092009
20092010
20102011
20112011
20122012
20132013
20142014
20142015
20152016
20160
500
1000
1500
2000
2500
3000
3500
Total ECB assets and unconventional policy measures
Size of the ECB's balance sheet Securities held for monetary purposes LTRO
EUR
billi
ons
The Threat of European Disintegration 20
The ProblemRegional divergence is poison for a monetary union: • Mundell (1961)• Nominal wage growth 1999-2015:
Germany
Italy
France
Netherlands
Portugal
Spain
Ireland
Greece
Euro area (12 co
untries)
020406080
100120140160180200
2008
Germany
Italy
France
Netherlands
Portugal
Spain
Ireland
Greece
Euro area (12 co
untries)
020406080
100120140160180200
2016
Quelle: Eurostat/AMECO
The Threat of European Disintegration 21
SolutionsGrowth – and productivity growth – is the key • But the key is lost! How to find it? Look under the right lamppost• Is Germany part of the problem? Or a key to the solution?• More austerity? More spending? Tax cuts? • Infrastructure? • Human capital program for migrants?
The Threat of European Disintegration 22
Austerity as priority?• Solution: Does „Schulden“ mean „guilt“?• Many have expressed strong views on this point, also in
Germany• Negative demand effects in the short run – Greece, Italy,
Portugal, Spain, Ireland• But the long run is a string of short runs• Ireland v. Greece• Is hope in sight in Ireland? Spain? Greece?
The Threat of European Disintegration 23
The growth solution• What can policy do about the situation?• Growth, growth, growth! Europe must „grow up“ - to the
leading countries at the technological frontier • More reforms are necessary: Labor reforms: Learn from the German success story Product market reforms: Learn from Scandinavia and the UK Infrastructure program: The „Summers No-brainer“
The Threat of European Disintegration 24
Ray of hope, I: Labor market reforms
The Threat of European Disintegration 25
The price of labor market success: Wage inequality
Quelle: Dustmann, Fitzenberger, Schönberg, and Spitz-Oener (2014)
Reallöhne, Vollzeit, Westdeutschland
The Threat of European Disintegration 26
…in particular for part-time and marginal jobs
Real wages, part-time, western Germany
Source: Burda and Seele (2015)
Inde
xed
wag
e gr
owth
The Threat of European Disintegration 27
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1.2
1.7
2.2
2.7
3.2
3.7
90-10 Percentile ratios, full-time workers
Germany Sweden FranceSource: OECD
Evident in international comparisons
The Threat of European Disintegration 28
Personal inequality has not increased more in Germany than in other OECD countries
The Threat of European Disintegration 29
Ray of hope, II: Demand boom in Germany
The massive influx of refugees in the past year – of more than one million people – will trigger new economic impulses, that might help mend the situation: It will induce 1) A Keynesian demand stimulus, possibly €20-30b. per annum2) A reversal of the still-rising current account surpluses of
Germany with southern Europe, similar to the fashion they were reduced after German unification 1990-1995
3) Nominal wages are finally rising in Germany, especially at thelow end, which will help take the edge off German „über-competitiveness“
The Threat of European Disintegration 30
Ray of hope, III: Growth is possible• It has become fashionable among scholars of macroeconomics
to talk of „secular stagnation“ again (Alvin Hansen 1939)• Protagonists: Lawrence Summers, Paul Krugman, as well as
Robert Gordon und Martin Wolf • Growth in the past two decades has indeed been remarkably
modest, even in the USA since the Great Recession• Despite this, there are points of strong growth today: Ireland,
Poland, Nordic countries – and Estonia• Extensive economic growth as an alternative: Why not?
The Threat of European Disintegration 31
Real per capita GDP growth, 1980-2015
The Threat of European Disintegration 32
US growth took a hit after the crisis
Quelle: Fernald (2015)
The Threat of European Disintegration 33
…but US labor productivity continues to grow… Value added per hour, cumlative relative to value in 1973 (%)
Source: Fernald (2015)
34Source: Fernald (2015)
…while the rest of the world is falling behind Value added per hour, relative to US value (%)
35
World Bank Ease of Doing Business Indicator, 2013
Source: www.doingbusiness.org The Threat of European Disintegration
36Source: www.doingbusiness.org The Threat of European Disintegration 72
(2011: 87)
(2011: 100)
World Bank Ease of Doing Business Indicator, 2013
The Threat of European Disintegration 37
Infrastructure investment• What can policy do about the situation?• For Europe to „grow up“ - to the leading countries at the technological
frontier – it needs to modernize its infrastructure• Facts (% of GDP):
1991 2002 2013D: 2,6 1,8 1,6F: 3,6 2,9 3,2PL: - 3,4 3,9
• Infrastructure investment has been week for more than a decade• Summers‘ logic – the rate of return is certainly high enough
The Threat of European Disintegration 38
Conclusions• 2016 will be a year of tectonic (not only teutonic) challenges –
„meta challenges – for the EU“: Migration, Euro, reforms, Brexit• The outcome may depend more on the politics than economics• Brexit is only the beginning • The survival of the Euro, low interest rates of ECB and non-
reforms in F, I, P, S and GR mean further divergence • I don´t dare make a forecast – but am happy to speculate!
The Threat of European Disintegration 39
The Threat of European Disintegration
Prof. Dr. h.c. Michael Burda, PhDHumboldt-Universität zu Berlin
Public Lecture, Eesti Pank18 August 2016