The euro crisis, labour markets and the analytical future of the European integration 17th May 2017 Masaryk University Oddělení strategií a trendů EU, Úřad vlády ČR Aleš Chmelař, M.Sc. Content 1.Euro a critical element of the crisis 2.The consensus narrative of the crisis 3.Consequences for the labour market 4.How to make the euro viable and robust? • – • Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png The situation before 1999 •Everything was different –Different inflation expectations –Different perceived interest rates –Different wage setting mechanisms –Different nominal interest rates –Floating exchange rates Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png What happens when imbalance? •if money stock too high => inflation => real value of money lower • •if money stock too high (due to external debt) => devaluation • •if inflation too high => nominal interest rates high => real interest rates stable • •if wages rise faster than productivity => higher inflation => lower exchange rate • Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png The situation before 1999? •Some nations got used to higher inflation –Their „inflation expectation“ rose •Inflation expectations influences real perceived interest rates –But in borrowing there is nothing but perceived real interest rates •Some nations had perceived the same nominal interest rates differently Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png With the euro, everything is different Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png With the euro, everything is different Because some things are the same... Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png The situation after 1999 •Everything was different, but... –Different inflation expectations –Different perceived interest rates –Different wage setting mechanisms –Same nominal interest rates –No exchange rates Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Explanation 1: Wages Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png • Explanation 2: Wages! Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Wages and public debt as a motor of the crisis? •South was used to higher inflation •Therefore (or because?) wages rise more quickly –Faster than productivity •The price competitiveness decreases •Imports rise faster than exports •Trade deficit is created •People/companies/government borrow to finance this • But what about those nominal numbers? Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Wage rise Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Wage rise Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png • Wage rise Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png • And the cost of capital rise! Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png • And the cost of capital rise! Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png • Those damn wages Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png ULC drive prices Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png One-size-fits-all monetary policy One size fits France Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png You need more than wages •But how can you rise wages if you don‘t get pay for it? –By borrowing to sustain them? •There is a need for deliberate debt accumulation (public debt) •Or an investment bubble... •In reality the real exchange rates can‘t do the trick if interest rate and investment overhang doesn‘t follow • The consensus narrative •Sudden stop of cross-border lending when the crisis came –Due to rising risk premiums –Banks and governements were cut off the capital flows they got used to •Weak growth produced higher budget deficits •Monetary union enabled the build-up of the imbalances unnoticed •Incomplete architecture enabled a sudden loss of trust in deficit countries • • • The consensus narrative •Too much public and private debt •Big capital flows from the core (DE, FR, NL) to EA periphery (IE, PT, ES, EL) •Not a problem solely of public debt –Just EL had one of the highest public debt in EA –IT and BE had over 100% debt yet did not need bailout, IE and ES with under 40% needed one •Current account deficits of crisis countries –No country with surpluses was hit • • The consensus narrative •EA govs did not have a lender of last resort (LoLR) –Without a LoLR: the deficits and higher risk premiums lead to insolvency •Devaluation impossible •=> a sudden stop crisis (developing countries) •Close link between banks and govs –Vicious cycle – doom loop •Slowing economy –i.a. due to lower bank funding in bank-oriented economies (basically all EU) –also lower gov spending, lower overall investment • • The consensus narrative •Rigidity of product and service markets makes restoring competitiveness slow and painful –High loss of output •Mistakes were made in crisis management (“Greece is solvent!“) •But mainly: no institutional infrastructure to deal with the crisis on this scale •You cannot deal with a financial/economic crisis together with a constitutional crisis • The consensus narrative •Crisis management made mistakes (but mostly for objective reasons) –Because we were simultaneously fire-fighting + institution building –Interests of debtors and creditors hugely divergent –Economic crisis craved stimulus, while fiscal crisis craved consolidation –European citizens closely watching •Extreme dead-weight losses both due to the crisis and to its management • • Implications •Structural weaknesses of the EMU: –A tendency to develop imbalances as a feature of the systém, “not a bug“ –Inherent deflationary bias •The EMU architecture as an “assymetric shock“ by itself •The signalling function of exchange rates lost •Markets cannot correct imbalances •Different business cycles and inflation expectations led to one-way capital flows •Demand shock – different ULCs • • The story of the DE current account Implications •Positive and stat.significant correlation with DE bank exposure and current account (bilateral one) •Relatively lower investment activity in DE •The correlation continues •The crisis caused by demand shocks and investment inflow •Vendor-financing operation • • The story of the DE current account Implications •Positive and stat.significant correlation with DE bank exposure and current account (bilateral one) •Relatively lower investment activity in Germany •The relationship continues •The crisis caused by demand shocks and investment inflow •Vendor-financing operation • • Implications •Imbalances decreased by deacreasing demand of deficit-countries, but the causes remain •Investment and demand not restored in surplus countries so to stimulate imports •No common instruments for demand management –If only national level and if only adjustment through internal devaluation (= in most cases deflation) •Deflationary bias •Lower growth in good times, longer stagnations in bad times • Two possibilities for the eurozone • • 1.Growth with imbalances 2.Stagnation without imbalances • • Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png • Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Explanation 2: Capital flows • Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Low, zero and negative interest rates Screenshot 2015-03-17 23.09.40.png Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Explanation 1: Low, zero and negative interest rates Screenshot 2015-03-17 23.09.40.png Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Screenshot 2015-03-17 23.12.17.png Interest rate and investment •Nominal convergence of interest rates •If you have high inflation expectations, the interest rates you „see“ are low •Nominal interest rate reacts to the same monetary policy of the whole EA –And banks were not able to discriminate properly within the EA (one of the largest market failures in human history) •Too cheap money + economy booming => unproductive investments Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png 10yr bond yields • External debt Screen Shot 2013-08-29 at 14.58.21.png Not just public Screenshot 2015-03-10 16.50.53.png You need more • • Trade balance of which country? Screen Shot 2013-08-29 at 15.13.43.png And this one is just the other way around Screen Shot 2013-08-29 at 15.16.47.png Share in exports by complexity Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Top 10 Top 100 1 2 3 4 5 6 Austria 1.73 1.62 1.58 1.49 1.10 1.23 0.85 0.23 Belgium 3.76 2.26 3.21 2.89 2.01 2.05 2.60 1.85 China 1.22 1.28 2.72 8.08 10.78 13.97 12.96 13.35 Finland 0.50 1.09 1.05 1.38 0.59 0.72 0.29 0.22 France 5.11 3.57 5.78 6.08 5.43 5.58 3.08 1.59 Germany 12.24 17.99 17.73 13.50 8.01 7.64 4.65 1.89 Greece 0.01 0.02 0.03 0.16 0.13 0.24 0.31 0.37 Ireland 1.25 0.80 2.71 2.26 1.21 1.50 0.51 0.11 Italy 1.40 3.07 4.04 4.30 3.15 3.87 4.69 2.56 Luxembourg 0.81 0.15 0.14 0.30 0.15 0.20 0.11 0.03 Netherlands 5.11 3.50 2.93 3.51 3.17 2.76 3.50 2.73 Portugal 0.05 0.04 0.30 0.23 0.48 0.48 0.56 0.52 Spain 0.23 0.88 2.23 2.36 1.70 1.85 2.46 1.28 Deleveraging – the quick and the stable debt Screenshot 2015-03-17 23.19.57.png What happened during the crisis? •Some sectors went bust (e.g. construction) •Unemployment in some sectors rises •The output of the economy goes down •Monetary policy cannot react if those shocks are localised unevenly and if you have just one •Fiscal policy is national and it was ultimately prevented from borrowing After the start of the fi nancial crisis in 2008, almost 4 million jobs were initially lost in euro area labour markets, with employment decreasing by 2.5% from its peak, in the fi rst quarter of 2008, to its trough, in the fi rst quarter of 2010. Differences in recent labour market developments can only be partially explained by differences in the extent of the slowdown in economic activity across countries. Expectations about the length of the crisis might have infl uenced the extent to which fi rms in some countries shed (or hoarded) labour during the crisis. Using investment expectations as a proxy for the perceived length of the crisis Regressing the elasticity of unemployment to output during the present crisis on the variables mentioned provides some evidence that positive investment expectations, the existence of a tripartite council and the extent to which fi rms engage in “on–the-job training” may mitigate the impact of the crisis on unemployment Asymmetric crisis •Assymetric impacts of the crisis on different countries, especially on labour markets –Huge increase of unemployment (by 4 pp.) –Muted response of employment (large heterogeneity) –Young and low-skilled workers hit most heavily •Explaining heterogeneity –Presence of imbalances before crisis (such as previous booms in the construction sector or accumulated competitiveness losses) –Export oriented countries hit less (related to the role of expectations if the shock is only temporary) After the start of the fi nancial crisis in 2008, almost 4 million jobs were initially lost in euro area labour markets, with employment decreasing by 2.5% from its peak, in the fi rst quarter of 2008, to its trough, in the fi rst quarter of 2010. Differences in recent labour market developments can only be partially explained by differences in the extent of the slowdown in economic activity across countries. Expectations about the length of the crisis might have infl uenced the extent to which fi rms in some countries shed (or hoarded) labour during the crisis. Using investment expectations as a proxy for the perceived length of the crisis Regressing the elasticity of unemployment to output during the present crisis on the variables mentioned provides some evidence that positive investment expectations, the existence of a tripartite council and the extent to which fi rms engage in “on–the-job training” may mitigate the impact of the crisis on unemployment Dead-weight loss in the job market The case of US Automatic fiscal stabiliser Automatic fiscal stabiliser Shock absorber •How should it help? –Transfers from less severely hit to those in the worst situation –Risk sharing –Avoidance of fiscal policy constraints –Gains for everybody – lower impacts of crisis, reduced public debt, confidence effects •Drawbacks –Moral hazard problem –Need for consensus on a more harmonised social model •Avenue for further harmonisation of labour markets? – Social pillar •Drawbacks of schock absorbers –Moral hazard problem –Need for consensus on one social model •Reminiscent of something? Banking union –Harmonise, reduce risks –Then share risks (most difficult) •Social pillar is to the shock absorber what is stage 1 of the BU to SRF/EDIS Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Fiskální pojišťovací mechanismus Zdroj: Andor (2014) Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Fiskální pojišťovací mechanismus Zdroj: Andor (2014) C:\Users\korbel\Desktop\10000201000001E000000168FF4A3FAF.png Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png European Unemployment Insurance Scheme Basic features of EUI Zdroj: Andor (2014) •Size of insurance •Length and eligibility •Permanent or crisis transfers •Some countries with negative balance or negative system? •Euro-area or EU? • – Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png How to prepare for the next crisis? Varianta 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Basic 0,00 0,00 -3,51 -7,66 -8,03 0,00 0,00 -4,02 -8,10 -8,17 -44,86 Catastrophic, 60% -1,53 -1,95 -2,81 -3,07 -3,21 20,79 14,63 10,86 -11,74 -13,89 7,52 One rate, 80% 0,00 0,00 -3,51 -7,66 -12,05 0,00 0,00 -4,02 -8,10 -12,26 -55,33 Differentiated, 60% 0,00 3,26 0,00 -3,83 -4,02 7,84 7,91 4,02 0,00 0,00 22,49 Differentiated, 80% 3,06 3,26 0,00 -3,83 -4,02 11,77 7,91 4,02 0,00 0,00 32,15 Impacts on Czech Republic in billions of CZK Zdroj: Modelace a Bruegel chmelar.ales@vlada.cz Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Change in Greek debt holders Screenshot 2015-02-26 22.47.55.png Harmonization vs. Competing social models? • •What has happened in last few years? –Harmonization in market of services –Not a single social model and no convergence –Social dumping? •Minimum wage and united rules for the whole EU? •Social (tripartite) dialogue on EU level? –National Competitiveness Councils Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Země bez minimální mzdy - Cyprus, Austria, Denmark, Finland, Italy and Sweden €1,200 gross. In the southern countries, it varies between €600 and €800, whereas in Eastern Europe, the figure is closer to €400. Lucembursko - €1,923, Bulharsko – 184 euro; ČR – 332, 4. nejnižší The minimum wage has been a hot topic in the EU over the past years, especially in 2014, when Germany introduced a minimum wage, and when the issue was being debated as part of the European Parliament and Commission President candidate elections. Commission's President Jean-Claude Juncker has stated on many occasions that he would work towards introducing a minimum social wage in each member state. Addressing the Parliament in July, before a vote to confirm his appointment, Juncker announced, "For all countries in the European Union, we set in place a minimum social wage, a minimum income, a guaranteed minimum income." Austria, Cyprus, Denmark, Finland, Italy and Sweden are the only EU member states which have not introduced a minimum wage. http://www.euractiv.com/sections/social-europe-jobs/minimum-wage-lives-its-name-many-eu-member-stat es-survey-312455 Debata oživla i kvůli Německu which measures the minimum wage as a percentage of the national median wage – mimochodem ČR s Estonskem nejnižší minimální mzdu vzhledem k mediánu – 36% Minimální mzda a zaměstnanost – původní neoliberální pohled jasný. Ovšem empirická literatura vliv na zaměstnanost nepotvrzuje, a to z několika důvodů – vyšší minimální mzda zvedne celkovou úroveň mezd v ekonomice a podpoří tak poptávku; a zadruhé vyšší mzda zvyšuje produktivitu. Jednodušše řečeno, když zaměstnance zaplatíte víc, tak se bude i více snažit. Technické problémy Impossible trinity Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png Impossibility of creating a common currency •Werner report –Brettonwood context •Snake in a tunnel •European monetary system –European currency unit •It did not work (?) –Internal and external devaluation –Drop-offs from EMS Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png What enabled the euro? •Monetarist revolution –Monetary policy can be technocratically created –How many states had an independent central bank? •Reunification of Germany •Mundell II Macintosh HD:Users:aleschmelar:Desktop:Dropbox:Screenshots:Screenshot 2014-02-23 15.30.39.png •ECSC and Euratom •European Economic Communities •Single market •Euro –Maastricht criteria –Stability and Growth Pact •Banking and fiscal crisis –Fiscal compact – Fiscal union –Aid programmes –Banking union History of the EU – History of Rules Common regulation and supervision •One set of rules that we can all agree on •There is one best solution for everybody •No discretion on the supranational level •European commission is a rule processor •Democratically elected EP merely controls The Rules •Perfect – no discretion necessary •Amovible – otherwise moral hazard •Consensual – everybody agrees The rules •One perfect monetary (monetarist) policy –Targeted inflation and nothing else –No direct financing of government liabilities –Rigid mandate –No political meddling •But what if the rules stop working? ÞCrisis management: Unconceavable The Rules of the Euro CCTB •“Stability and Growth Pact didn’t work… let’s make it more binding” –Mismatch of economic and political ÞNeed for a (more) political union to balance •Rules more binding? Or more political topics? –Already political functions •Security •Judicial cooperation •Common foreign policy •What is political? –Democratic Economic vs. Political •No margin for policy flexibility –Incapacity of crisis management •Constitutional changes to cope with crises •If discretion needed then illegitimacy –Troika, aid packages •People’s despair –Elections don’t change policies –No hope for change Technocracy Technocracy Democracy Legitimacy Output Input Decision-making Consensus (lowest common denominator) Majority Executive power Pre-determined (bureaucracy) Flexible Democratic power Controls the functioning Determines the functioning •Political mandate for the supranational sovereign •Flexibility •Operational executive –the Commission, not the Council •Ministers should not legislate Democratic Union •1. The Commission accountable to the EP –More control, more responsibility, more power and legitimacy –2. Mandated officials to the Council –Transparent positions – publishing minutes –“Ministers should not legislate” Towards a Democratic Union •Maybe not –But then the EU will never go beyond the “bureaucratic, illegitimate, over-paid foreigners” •Unfeasible! But what’s the impediment? –People fearing loss of sovereignty? –Or the governments fearing loss of power? Can it happen?