Adjustment Policies in the Euro Area: The case of Greece HELLENIC - - PowerPoint PPT Presentation
Adjustment Policies in the Euro Area: The case of Greece HELLENIC FOUNDATION FOR EUROPEAN & FOREIGN POLICY CONFERENCE HELLENIC FOUNDATION FOR EUROPEAN & FOREIGN POLICY CONFERENCE Adjusting to the Crisis: Policy Choices and Politics in
HELLENIC FOUNDATION FOR EUROPEAN & FOREIGN POLICY CONFERENCE
(September 1992 – June 2011)
Note: Monthly Averages; Annualized yields to maturity on fixed
#/-,0
600 700 800 900 1000 1100
Greece
Portugal Ireland
yields to maturity on fixed coupon bonds. Eurostat estimates whenever monthly 10- yr yields were not available. Source: Eurostat
100 200 300 400 500 Sep-92 Jan-93 May-93 Sep-93 Jan-94 May-94 Sep-94 Jan-95 May-95 Sep-95 Jan-96 May-96 Sep-96 Jan-97 May-97 Sep-97 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11
Italy Spain Portugal
236.1% 157.7%
150 200 250
34.0 52.3
European crisis is a crisis of cohesion Worst change occurred in Ireland Least deterioration in DEBT/GDP in EA Worse performance in UK than in Spain, yet markets worry more about Spain
112.0% 98.3% 101.7% 87.7% 84.2% 68.1%
50 100 Japan Greece Ireland US Portugal Euro area UK Spain
2007 2011
32.0 33.4 21.5 52.3 87.0 36.0 39.7
Source: European Commission, 2011 Spring Forecasts
A political project. Academic literature on Optimum Currency Areas was ignored. Necessary economic criteria were thought to adjust by themselves and converge
automatically correct deviations from the competitiveness norm. Criteria for OCA:
1) Open economies with highly interconnected external trade sectors 2) Liberalized labor, capital and product markets 3) Adequate degree of integration / uniformity of:
flexibility, pension systems, competitiveness rules, uniform degree of state intervention in the private sector
the private sector 4) Adequate synchronization of economic cycles
include product differentiation, uniform/ integrated product markets (i.e. symmetric shocks in the terms of trade)). 5) Existence of a fiscal mechanism to smoothen the effects of the asymmetric shocks
The Stability and Growth Pact (SGP) together with the establishment of the independent European Central Bank (ECB) were considered as the two main pillars for the Euro area stability ECB independence worked, Stability & Growth Pact did not It was believed that SGP would be enforced due to the system of penalties and the “No Bailout Clause” It did not work
FI LU BE NL AT DE 5 10 15
Balance 1 - 2008
Uncompetitive South vs. competitive North Fiscal profligacy almost everywhere
ES IE AT EA FR IT PT GR
y = 1.80x + 2.29 R
2 = 0.45
2 4 6
General Government Balance % GDP, avg. 2001 - 2008 Current Account B % GDP, avg. 2001
IRELAND Housing market Banks public debt High private debt PORTUGAL Low competitiveness GREECE Low competitiveness High fiscal deficits & debt
400%
/0$12,$-1- In Greece Private Debt is low, below EA average, 9th largest The strong private sector has saved Greece from collapse
Large fiscal deficits, but not debt High private debt SPAIN Low competitiveness Housing market Small savings banks High private debt
50 100 150 200 250 300 350
Lux/burg Cyprus Ireland Greece Portugal Spain Neth/lands Italy Malta EA-16 Austria France Belgium Germany Finland Slovenia Slovakia
Public Non MFI Corporations Households
/0$12,$-1- 3)()455*(67895:;
Greece EA16 World
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* EU-27
2 #/1/-1-G2/
3.1 5.9 4.4 2.3 4.3 1.7 1.8 1.8 0.2 2.8 3.0 1.8 2.3 1.2 1.2 1.9 3.9 3.1 3.0 2.7 1.7 2.5 2.8 1.2 1.8 2.9 0.6 1.0 5.2 3.4 4.2 4.5 3.4 3.4 3.6 2.4 2.1 2.0 0.7
1 2 3 4 5 6 7 % Forecasts
Relative Living Standards
Source: EU, IMF, EC 4th Review Forecasts (July 2011)
0.2
0.6
0.7 0.0
4.5 5.4 1.3 4.7 4.2 3.0 3.3 3.5 3.0 3.4 3.9 3.7 2.9 2.1 0.3 3.3 2.1 2.2 2.2 2.1 2.1 2.3 2.4 2.1 1.1 1.2 1.7 1.6
1 2 3 4 5 6
%
Source: IMF
0.3 1.1
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Greece EA -12
C / 8$ ,-22,- *3D7)6)? *()D
*(3<
?B ! *=733B< *D) "# (=B= )(
Source: EUROSTAT
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Rank
Starting a business (days) Cost of registering property (% p. value) Protecting Investors (0-10) Exporting Goods (days) Paying Taxes (hours per year)
'
implementation of reforms aiming to boost competitiveness ,
$-@
.,
Source: World Bank, Ease of Doing Business 2011
70 75 80 85 90 95 %
$-%,/,-,/.-, *3>.7I.,,()/2,- 43))(J 3))B@780$; Excessively optimistic expectations about future income motivated borrowing (facilitated by low interest rates) and consumption Fiscal laxity is a separate imbalance
5 10 15 20 25 30 35 40 45 50 55 60 65 70
Greece Bulgaria USA UK Romania Malta Portugal Lithuani Cyprus Turkey Latvia Poland Iceland Croatia France Italy EA-16 Germany Mexico N.Zealan Hungary Slovakia Spain Japan Canada Belgium Australia Sweden Denmark Estonia Slovenia Finland Austria Neth/nds Czech Swit/lan Korea Norway Ireland Lux/bour
Private Cons. Government Cons.
40.2 40.2 39.1 37.3 39.9 40.0 39.2 38.6 38.1 39.0 40.3 40.9 43.5 41.3 40.5 39.0 37.4 36.7 36.3 49.5 49.7 49.6 52.7 49.6 46.3 44.9 43.8 45.6 44.7 45.0 45.3 47.2 44.4 44.3 44.9 44.1 45.7 44.6 46.4 44.1 41.7 44.8 40.5 39.2
35 40 45 50 55% GDP
37.3 37.4 36.7 34.5 33.2 31.8 30.8 28.4 28.9
25 30 35
EU forecasts
Greece increased revenues prior to joining EMU Expenditure kept below 46% GDP prior to 2008 2008 deterioration despite real growth of 1.0%
Greece was almost always in fiscal trouble, but fiscal mess grew prior to the onset of the 2009 recession
Source: European Commission, Spring 2011 forecasts
46.1 50.4 50.5 50.6 49.3 48.4 48.0 46.2 47.2 47.5 48.0 47.5 47.3 46.6 46.0 46.9 50.8 49.1 48.5
47 48 49 50 51 52% GDP
EU forecasts
4.8% of GDP, whereas in Greece 6.4% Yet +3.3% Cum. growth in Greece, -0.8% in EA16
44.9 44.9 44.5 44.5 44.9 45.3 45.3 44.8 44.5 44.9 45.0 45.4 46.2 45.6 46.3 46.6 46.1 46.6 46.0
42 43 44 45 46
Source: European Commission, Spring 2011 forecasts
EMU countries reduced public expenditure prior to joining Revenues were always higher in EA
Fix system’s parameters reduce the expected increase in future annual state pension liabilities (by 2060) from 12.5%
Retirement age for everyone at 65 by 2015, increasing in line with life expectancy after 2020
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48$;
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((3 ((6 (<3 (<= New pension Law adopted on July 2010:
* Ratio of pensioners to contributors
Source: European Commission 2009 ,0
120
with life expectancy after 2020 with minimum contributory period of 40 years by 2015 Early retirement restricted to the age of 60 by 2015, will be penalized more than before (6% loss per year, including those insured prior to 1993) Size of pension linked to life- time contributions List of heavy and arduous professions to be reduced drastically, under a ceiling of 10% of labor force
34,9 36,3 37,0 42,0 42,3 49,1 53,8 54,4 57,8 59,0 59,3 60,6 62,9 64,5 69,5 72,4 81,1 81,2 82,5 85,9 89,1 95,7 100,0
20 40 60 80 100
IE JP UK DE US FR SE PT FN PL CH OECD EU-27 IT TR IN AR ES CN BR NL GR SA
(median earners) Source: OECD Pensions at a glance 2011
5 10 15 20 25 30
US C H AT JP N Z N L U K AU FR C A IE O EC D FN D K D E N O SE B E PT ES IT G R 2008-2009 1999-2000
Yes, lack of structural reforms and in particular, the disorganized, neglected & inefficient public sector EMU acted as a sleeping pill not to do the required structural
O
1.12 0.81 0.80 0.76 0.71 0.70 0.69 0.68 0.66 0.65 0.65 0.56 0.53 0.52
0,2 0,4 0,6 0,8 1 1,2
GR IT SK FR PT BE DE ES AVG AT FN NL IE LU
Source: OECD Economic Surveys Greece 2009
Source: Schneider, F. (2009) “The size of the Shadow Economy in 21 OECD Countries Using the MIMIC and Currency Demand Approach”
(Ratio of effective (revenue from value added taxes to private consumption) to statutory rates)
The disorganization of the public sector is evident in the size of the underground economy or in the lack of ability to collect taxes the required structural reforms, exactly when most needed
Real GDP growth around 2.8% from 2015 on, below the 1996-2008 average. Inflation subdued, never above ECB target of 2%: Its necessary to break up
Current Account Balance of -4.4% GDP in 2015 (still no external equilibrium)
Primary Expenditure from 47.9% of GDP in 2009 to 30.5% in 2020, meaning a huge reduction in the relevant size of the public sector.
a huge change of 9.3 b.p. of GDP between 2010 – 2014
Interest expense from €14.6 bn in 2010 to 21.4 in 2015, 23.7 in 2020 or 7.3% of GDP
Optimistic predictions on spread over Bunds, especially in short-run: 300 b.p. in 2013, 250 b.p. in 2020: The expected increase of the Bund rate to 3.5% points towards the right direction. Yet, still nominal interest rate at 5.7% - 6.0%, which is higher than the nominal growth rate (4.2 – 4.8%): Huge primary surpluses needed in order to obtain fiscal sustainability.
Public debt at 130% of GDP in 2020. With1 ppt higher growth each year 2020 public debt at 91%. Alternatively, if only privatizations are used as debt reduction mechanism 2020 public debt at 112%.
2009 2010 2011 2012 2013 2014 2015 2020
GDP Growth (%)
0.6* 2.1* 2.3* 2.7* 3.0
GDP deflator (%)
1.5 2.3 1.6 0.4 0.8 1.2 0.6 1.8
Nominal GDP (€ bn)
235 229 226 229 236 244 252 315
Current Account (% GDP)
4.8 4.9 4.6 5.0 5.4 5.7 5.7 5.9
Bund Rate (bps)
275 350 350 350 350 350
Spread over Bund (bps)
525 350 300 300 300 250
Spread over Bund (bps)
525 350 300 300 300 250
Interest Expense (€ bn)
12.4 14.6 15.1 17.3 19.7 21.2 21.4 23.7
Interest Expense (% GDP)
5.3 6.4 6.7 7.5 8.3 8.7 8.5 7.5
Primary Expenditure (% GDP)
47.9 43.5 44.0 41.7 38.5 33.2 32.2 30.5
General Gov Revenues (% GDP)
37.8 40.4 43.1 42.8 42.0 39.3 38.5 36.5
Primary Balance (% GDP)
1.0 3.5 6.0 6.3 5.9
General Gov Deficit (% GDP)
General Gov Deficit (€ bn)
General Gov Debt (% GDP)
127 143 153 159 158 154 151 130
General Gov Debt (€ bn)
298 327 345 364 373 375 381 409
EC/ECB/IMF Adjustment programme, Eurobank EFG Research
* According with European Commission’s 4th Review of the EC/ECB/IMF Adjustment (July 2, 2011)
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*&$) $& $(
Our Assumptions: Real disposable income -10.8% in 2011, -2.4% in 2012, (consumption)
= 70% (disposable income) [intertemporal consumption smoothing], Exports a function of ULCs & unitary elasticity w.r.t. trading partners’ growth rates, elasticity of imports w.r.t. net disposable income: 1.0
Source: Eurobank EFG Research
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%$& $& $'
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Elements of strategy:
rents, reduce bureaucratic cost to business, open-up markets and closed professions, emphasize education and R&D
may bring FDI. Privatizations should not be viewed as cash machines
sentiment, fight corruption, stabilize tax regime, simplify legislation
led one) based on price- and quality-competitiveness, support a switch from non-tradeables to tradeables sectors
sector
corruption
Areas of Adjustment 2011-15 % GDP
1
Rationalization of the Public Wage Bill
2.18 0.9
2
Reduction in Operational Expenses
0.58 0.2
3
Closure/merger of public entities and reduction in grants
0.77 0.3
4
Reorganization of State-owned Enterprises
1.31 0.6
5
Reduction in Defence Expenditures
1.20 0.5
6
Rationalization of costs of public healthcare services
0.75 0.3
7
Rationalization of medical pharmaceutical expenditures
0.99 0.4
8
Reduction in SSF spending and other social spending
4.48 1.9
Source: Ministry of Finance
8
Reduction in SSF spending and other social spending
4.48 1.9
9 Increased revenues of SSF and reduction in contribution evasion
3.07 1.3
10 Improved tax compliance and reduction in tax evasion
3.00 1.2
11 Reduction in Tax Exemptions / increases in other tax revenue
6.08 2.7
12 Increase in revenues of Local Governments
1.36 0.6
13 Rationalization of Public Investment Budget (PIB) expenditure
0.50 0.2
Measures to be finalized
1.37 0.6
Contigency measures
1.22 0.5
Total fiscal impact
28.26 12.0
Fiscal impact of expenditure measures
14.82 6.3
Fiscal impact of revenue measures
13.44 5.7
800 1000 1200 %
Greek banks did not over-expand and did not hold toxic assets; they were not affected by the international financial crisis This is one reason the recession came to Greece with a lag The financial risk is due to the sovereign
351.7% 223.6%
200 400 600
Ireland Malta Cyprus UK Denmark France Neth/lands EA Austria Germany Spain Portugal Belgium Sweden Finland Italy Greece Latvia Slovenia Estonia Hungary Czech Bulgaria Lithuania Slovakia Poland Romania
Source: IMF, March 2011 Need to rebuild confidence, which rests on further action by the government The risk to banks
State’s inadequacies and its lack of credibility Citizens typically confuse the State’s %
Only a small part of the drop in deposits is reflected in capital outflows, since households and corporations are using deposits as a cushion to declining incomes and/or credit restrictions Most of the bad information is out
reaction of scared citizens is absorbed
expectation is for deceleration of withdrawals confuse the State’s bond restructuring discussion with a loss of their personal deposits March 2011: Deposits & repos of non MFIs €275.7 bn or 119.8% of GDP Of this amount, €199.2 bn or 86.5% of GDP belong to domestic residents
G,@ 0/-A
Contrast June-07 with June-10 and May-11 Deceleration in ECB lending after June-10 It used to be German banks needing support Now, Greek banks cannot use €50 bn of GGB collateral, plus
* April 2011 data
(a) Total Lending from the ECB (€ bn), (b) Total Banks Assets (€ bn), (c) % ratio a/b
Continued support from the ECB is required for the stability of the system GGB collateral, plus have lost €40 bn of deposits: It is all the State’s fault De-leveraging abroad is not a solution for Greek banks as current profitability comes from abroad, exactly where the liquidity need arises
0/-1@,/,-1-
Only if Greece were to gain credibility on the sustainability of its debt profile This appears difficult in the short-run, hence another solution
has to be found The solution will be an EMU decision July 2011 decisions: EMU as a caretaker with possible voluntary rescheduling Future ESM may be able to intervene in the secondary market Eurobonds for up to 60% of Debt/GDP
1) The independence of the European Central Bank 2) The Stability and Growth Pact plus the NO BAILOUT threat What is there to do? Not politically possible: I. Dissolve EMU II. Establish a fiscal union with fiscal transfers & little national authority Hence,
1) Conflict resolution mechanism 2) Fiscal coordination 3) Competitiveness divergences among EMU members 4) Stability of the financial system
1) Permanent European Stability Mechanism 2) Strengthening of the SGP with the inclusion of the Van Rompuy proposals 3) Euro + : Decrease the competitiveness gap among the Eurozone members 4) Stricter supervision of the Financial sector
competitiveness; it is not a zero-sum game
Greece
the subsequent Economic Adjustment Program.
than the requirements of the new Euro Area architecture.
than the requirements of the new Euro Area architecture.
after a decade, when Greece will hopefully have freed itself from the debt burden
adjustment process of the Greek economy will not derail; it is an one-way road
Van Rompuy Task Force proposals will bring added fiscal discipline, plus ESM could bring long-run stability; E-bonds could materialize in the future
It either does nothing and gets trapped in a prolonged period of stagnation and huge unemployment, with contracting living standards
the burden of past sins in the form of both higher unemployment and higher debt
sector and pursue the structural reforms that were avoided for decades
Despite huge risks and sacrifices, Greek society is ready Many reforms still pending: Health sector, Public sector enterprises, Local governments, Educational reform Need to tackle special interest groups Privatizations can instill confidence among foreign investors and help mainly by jump-starting the economy State has to capture the underground economy, zero the deficits and then simplify the tax system and reduce marginal tax rates
I wish to thank my colleagues at Eurobank EFG for their comments Disclaimer
This report has been issued by EFG Eurobank Ergasias S.A. (Eurobank EFG), and may not be reproduced or
This report has been issued by EFG Eurobank Ergasias S.A. (Eurobank EFG), and may not be reproduced or publicized in any manner. The information contained and the opinions expressed herein are for informative purposes only and they do not constitute a solicitation to buy or sell any securities or effect any other
perform for their own account, for clients or third party persons, investments concurrent or opposed to the
reliable and all due diligence has been taken for its process. However, the data have not been verified by EFG Eurobank Ergasias S.A. (Eurobank EFG), and no warranty expressed or implicit is made as to their accuracy, completeness, or timeliness. All opinions and estimates are valid as of the date of the report and remain subject to change without notice. Investment decisions must be made upon investor’s individual judgement and based
may not be suitable for certain investors depending on their investment objectives and financial condition. The aforesaid brief statements do not describe comprehensively the risks and other significant aspects relating to an investment choice. EFG Eurobank Ergasias S.A. (Eurobank EFG), as well as its directors, officers and employees accept no liability for any loss or damage, direct or indirect, that may occur from the use of this report.