Governance in the Eurozone and the Management of the Crisis

1
Governance in the Eurozone and the Management of
the Crisis

• Maria Markantonatou
• University of the Aegean
• Department of Sociology

2
Karl Polanyis The Great Transformation (1944)

• Gold Standard of the 19th century Functional for
  international trade and exports, but
• required hard currency policies ? deflationary
  policies
• If a country had external deficit ? need to
  prevent gold outflow ? reduction of wages and
  prices ? recession, unemployment ? social
  conflicts
• The above bear some resemblances with the
  Eurozone
• But, interventions by national central banks
  characterized the 19th century Gold Standard,
  contrary to EZ and ECB
• The euro itself was to become the quintessential
  gold that would be removing money altogether from
  the control of the nation state. In fact, the
  euro was, in some ways, much less flexible than
  the gold standard
• (Seccareccia/Correa 2013).

3
Background the 1970s Crisis

• Falling profits Global Norths industrial
  output -10.
• Also high inflation in the US and Europe
• ?Increasing capital mobility for better
  investment opportunities
• ? Unemployment ? tax revenue shortfall ? less
  funding for welfare state
• Remedy the deflationary policy known as Volcker
  shock
• (after Paul Volcker, chairman of the Federal
  Reserve, 1979-1989)
• Rise in interest rates from 11.9 (1979) to 20
  (June 1981) ?Median family income -10 and
  Unemployment 11
• Similar policies followed in Europe. In Germany
  monetarist policies are promoted by the
  Bundesbank.

4
(No Transcript)
5
(No Transcript)
6
The European Monetary System (EMS)

• Main trends since the mid-1970s
• - Market liberalization/ monetarist policies
• Market internationalization/ capital volatility
• Aspiration for common monetary regime in
  Europe.
• 1979 European Monetary System (EMS)
• National currencies pegged to the ECU currency
  basket

7
From EMS to EMU

• Difficulties related to the functioning of EMS
• Member states could not adjust easily to
  Bundesbank s patterns/not all governments agreed
  politically with the German model
• Differences between German unions and those in
  other states
• 1989 Recommendation for Single Currency (Delors
  Committee)
• 1992, Maastricht Treaty
• Inflation and interest rates close to three
  lowest in Europe,
• deficit lt3, debt lt60 and exchange rates
  conforming to EMS
• 1990s Convergence Period
• 2000s Euro as a Single Currency

8
The European Monetary Union (EMU)

• Reducing costs of exchange
• In 1990, estimated to 0.4 GDP of future EMU
  member states
• Reducing exchange rate insecurity
• New exchange rates alter prices agreed upon
  earlier, so either importers or exporters may
  loose money
• Preventing competitive devaluations
• If many countries devaluate to boost their
  exports, devaluation spiral and inflation may
  emerge.
• Preventing speculative attacks
• If many speculators believe that a currency will
  devaluate and sell their holdings, they will
  undermine confidence in it.
• BUT Since states give up their monetary policy
  tools, what happens in case of a recession given
  ECBs role?

9
After 10 years of Euro Asymmetries in the EZ

• EZ benefits countries with an export orientation
  that manage to keep wages low
• Germany tight wage moderation policy. Nominal
  wage increases tended to decline from 1999 to
  2005? higher competitiveness
• Greece, Portugal, Spain, and partially Italy have
  lost a significant amount of wage and price
  competitiveness ?Deterioration of trade balances
  in the EZ
• After the crisis new division in the EZ
  Center-Periphery ?

10
German wage policies
P. De Grauwe The Fragility of the Eurozones
Institutions, Open Econ Rev, December 2009
11
Current Account Imbalances GR/DE
Source Eurostat
12
Towards the 2008 Crisis

• Monetarist policies tamed inflation in the 1970s/
  unemployment/recession? tax revenues were
  decreasing ? increase in public debt in the 1980s

13
The 2008 Crisis in the US

• Monetarist policies tamed inflation in the 1970s?
  unemployment/recession? tax revenues were
  decreasing ? increase in public debt in the
  1980s? markets started to push states, in order
  to get their money back ? states cut public
  expenditure, privatizations etc. ?
  Financialization as a tool for growth ? increase
  in private indebtedness in the 1990s and 2000s.
• New options for the poor through real estate
  loans and self-funded pension schemes.
• This model crashes in 2008? Global Crisis?the
  Great Bail Out (about 20 trillion for banks
  worldwide)
• ? the crisis spreads in Europe

14
Public Support to the Financial Sector (as of
February 2009, of GDP)
Source International Monetary Fund (2009).
15
Eurozone Responses to the Crisis

• European Financial Stability Facility (EFSF,
  2010) temporary rescue mechanism to member
  states in crisis. It issues bonds and lends
  countries under a program.
• European Stability Mechanism (ESM, 2012)-ratified
  by Treaty permanent agency for lending countries
  in difficulties under EU supervision on the term
  of fiscal adjustment. Also private agents
  participate ? no debt mutualization
• Fiscal Compact (2012) Requires Balanced national
  budgets (deficits lt 0.5, debt lt60)? to be
  incorporated at a national constitutional level.
  In case of deficit states have to submit an
  adjustment plan. Automatic corrections. A state
  can ask for the financial sanction of another
  state.

16
Six Pack, Two Pack

• Six Pack (2011) Countries have to balance their
  budget within a Medium Term Objective (MTO)
  plan of 3 years,
• Excessive Deficit Procedure If a country does
  not reduce its structural deficit within the
  MTO plan? sanctions. Can be also triggered if the
  debt is gt60 and not decreasing fast enough
• Reverse Qualified Majority or automaticity
  Commission can impose sanctions, except if 2/3
  vote against it (a way to bypass national vetos,
  which formerly functioned with about ¼ of the
  vote).
• Two Pack Countries submit draft budgets by
  Mid-October every year, EC evaluates it and may
  revise it.

17
Critical Remarks to Fiscal Compact,the ESM and
Stability Bonds

• A Self-inflicted Crisis ESM requires funding
  from member states? new increases in public debt
  ? new austerity?
• Constitutionalization of Fiscal Discipline
  States have to pass budgetary restrictions in
  their Constitutions? a tendency for parliamentary
  rights to decide budget ti become conditional?
• Even the Stability Bonds (EC proposal, 2011)
  require political stability and predictability?
  homogeneity in economic policy regardless from
  electoral results?
• Deepening democratic deficit through the reverse
  majority?

18
Countries in Crisis Greece, Ireland, Portugal,
Spain

• Greece
• Background Public debt/deficit, current account
  deficit
• A period of high growth comes to an abrupt end
  (1995-2008).
• Developments Bailout, strict austerity, vicious
  circle of recession
• 2010-2013 Series of IMF/EU rescue loans on
  the condition of heavy wage cuts, taxation,
  labour deregulation. Constant recession and
  unemployment
• Ireland
• Background Low public debt/ bubbles in banking
  sector
• 2008 Six banks involved in 100 billion property
  bubble ? government undertakes the burden? rising
  debt and deficit, despite austerity.
• 2008-2009 Credit and construction sector
  disaffected ? unemployment ? Fall in tax revenues
• Developments 2010 Troika package ? Public
  sector downsizing (health, education, security),
  wage/benefits cuts, increased taxes.
• 2012 Fiscal Compact incorporated in
  Constitution, following a referendum.

19
Greece, Ireland, Portugal, Spain

• Portugal
• Background low public debt, chronic current
  account deficit, low growth before the crisis
• Developments Troika package and bank
  recapitalization (2011)
• Increases in taxes, freeze of public sector
  hiring, downsizing, public sector wage and
  pension cuts? Unemployment rose from 12 to 16
  in 2011-2012. Spain
• Background low public debt, real estate bubble
• Construction sector hit by the 2008 crisis ?
  unemployment from 8 to 20 in two years.
  Recession, bank bailouts ? public indebtedness
• Developments Banks recapitalized by the EFSF
• 2012 gave about 137 billion to the banks (100
  EFSF, 37 own resources)
• Austerity plan, tax increases, wage/benefit cuts
  to reduce public deficit.
• Unemployment up to 27.
• 2011 Constitution amendment along the lines of
  the Fiscal Compact

20
Source Eurostat
21
(No Transcript)
22
Europe as a Competition Agent

• After the 1970s crisis Emergence of the
  Competition State (Joachim Hirsch) promotes
  all needed regulations to increase national
  competitiveness in its own territory
• Similarly for Europe EEC/customs union ? Free
  trade zone ? Free capital movement/common
  market/EMU
• International forces undertake the post-war
  reconstruction of Europe and its integration in
  Atlantic Fordism through a Keynesian orientation.
  This is replaced by a Schumpeterian orientation
  at the EU-level (competitiveness,
  entrepreneurship, labor deregulation (Jessop
  2002), as can be seen from the Maastricht Treaty
  to the Fiscal Compact

23
Europe and the Markets Some Open Questions

• Fiscal Europe or Social Europe?
• The financial crisis has reinforced national
  egoisms even further but, strangely enough, it
  has not shaken the underlying neoliberal
  convictions of the key players. Today, for the
  first time, the European project has reached an
  impasse (Habermas, 2011)
• Have bond markets become the masters of national
  governments (Palley 2011)?
• Conflict of two different versions of the
  European project? on the one hand, European
  integration as a democratic process and on the
  other, as a market-friendly neoliberal one.
• The Future of EZ Towards integration or breaking
  up?

24

• Thank you!!