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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


  1. 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 Europe ������������������������������ Prof. Gikas A. Hardouvelis University of Piraeus & Eurobank EFG ��������������������

  2. ������������������������� �������� �� ������������������������������� ��������������� ��� �������� �!�������������� �����! �����! ���� ������������"��#"�� �$��������� ������%��$$���������� �&� ��$!���������#����������� �'������������������������ 2 ��������������������

  3. � . Markets woke up to Euro Area imperfections ()*+�����,-����-���-���.����������� �,�� 1100 (September 1992 – June 2011) Greece 1000 900 #��/�-��,��0���������� 800 700 Ireland Note: Monthly Averages; Annualized 600 Portugal Portugal yields to maturity on fixed yields to maturity on fixed coupon bonds. Eurostat 500 estimates whenever monthly 10- yr yields were not available. 400 Source: Eurostat 300 Spain 200 Italy 100 0 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 3 ��������������������

  4. � . The change in Euro Area debt is smaller than in other regions ��,����������,/�,-���1- (% GDP & Change from 2007 to 2011 in pp GDP) � European crisis is a crisis of cohesion 250 236.1% � Worst change occurred in Ireland � Least deterioration in DEBT/GDP in EA 34.0 200 � Worse performance in UK than in Spain, 157.7% yet markets worry more about Spain 150 52.3 52.3 112.0% 101.7% 98.3% 87.7% 84.2% 100 33.4 36.0 68.1% 21.5 87.0 39.7 32.0 50 0 Japan Greece Ireland US Portugal Euro area UK Spain 2007 2011 Source: European Commission, 2011 Spring Forecasts 4 ��������������������

  5. � . Economic theory of Optimum Currency Areas was ignored A political project. Academic literature on Optimum Currency Areas was ignored. Necessary economic criteria were thought to adjust by themselves and converge once the common currency forms via a political path, i.e. market mechanism would 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: � Macro economic indicators and fiscal policies � The structure of the real economy and its development stage e.g. price and labor market flexibility, pension systems, competitiveness rules, uniform degree of state intervention in the private sector the private sector 4) Adequate synchronization of economic cycles � Avoidance of asymmetric shocks in the participating countries (necessary measures 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 5 ��������������������

  6. � . External and internal (fiscal) imbalances became large � Uncompetitive South vs. competitive North � Fiscal profligacy almost everywhere 15 �������������� 10 LU Balance 1 - 2008 NL DE FI 5 BE Current Account B % GDP, avg. 2001 AT AT EA 0 Source: European Commission FR IT IE -5 ES PT -10 y = 1.80x + 2.29 GR 2 = 0.45 R ������������� -15 -6 -4 -2 0 2 4 6 General Government Balance % GDP, avg. 2001 - 2008 6 ��������������������

  7. � . Different euro area countries face different problems today GREECE � IRELAND � Low competitiveness � Housing market � High fiscal deficits & debt � Banks � public debt � � In Greece Private Debt is low, below EA average, 9 th largest � High private debt � The strong private sector has � PORTUGAL saved Greece from collapse � Low competitiveness 400 % ��/��0�$�1��2��,��$����-����1- ��/��0�$�1��2��,��$����-����1- 350 � Large fiscal deficits, but 3)()�455*(67�8�95:; 300 not debt 250 � High private debt 200 � SPAIN 150 100 � Low competitiveness 50 � Housing market 0 Portugal Spain Neth/lands Italy EA-16 Austria Belgium Finland Slovenia Slovakia Lux/burg Cyprus Ireland Greece Malta France Germany � Small savings banks � High private debt Public Non MFI Corporations Households 7 ��������������������

  8. II. �� ������������������������������� ��������������� ��� �������� �!�������������� �����! ���� ������������"��#"�� �$��������� ������%��$$���������� �&� ��$!���������#����������� �'������������������������ 8 ��������������������

  9. II. Greece: General characteristics 2009 Greece EA16 World ((�< <3=�( 67>?6�) $�.���-��, 4/���; (<3�) 37?>B�B ?()7)>3 ���@��.A�2������� 4�/ 3 ; 3)7B3)�= 3>73(B�= >7>)D�= ��$�.���2�.�-� 4C; 3? (> !���,@��-�,����� 4�����,��,@��/�,@�(B3 2��,-����; B) B)�? 66�( !�0���E.�2-�,2+ 4+����; D)> ?)6 ���� .�� ()))��,A�1�-�,-� 43))6; 3�B B�B ���2���� "�())�-A����,� �,A�1�-�,-� <�( <�( (�> (�> 6�) 6�) $��/��+���2-�� 48���$; $��/��+���2-�� 48���$; (<�< (>�= <)�6 ��2�,���+���2-�� 48���$; >=�( >D�3 6<�D ���-���+���2-�� 48���$; (?�3 B�( F =�< ������/ 48���$; D�? 6�< ��,�-��2-��, 48���$; ?3�> ?)�B $�1��2���2-�� 4��,��������E.�,��-���� 8���$; (B�B <6�< �E.��-� 48���$; 3=�6 <?�) �/.��-� 48���$; ><�? ?B�3 $����-����,��/.-��,�48���$; (3>�( >=�< ��,���������1- 48���$; * EU-27 9 ��������������������

  10. II. Real growth rates in Greece were higher than in EU-15 from 1996 through 2009 ����2��� #��/�1��/�-��1��-�����G�2�/�� 7 % ������� ��-��,��H����1���/�@��G-A Forecasts 6 5.9 5.2 4.5 5 4.2 4.4 3.6 4.3 3.4 3.4 4 2.9 3.0 3.9 2.8 3.1 2.5 3 3.4 2.4 3.1 1.7 1.8 3.0 2.3 2.3 2.7 2.8 1.8 2 2.1 1.2 1.9 1.7 1.0 2.0 1.8 1.8 1 1.2 1.2 0.7 0.7 0.2 0.2 0.6 0.6 0 0.0 -0.3 -1 -2.0 -2 Relative Living Standards -1.6 �� -15=100 in PPS -3 1991 76.5 -3.8 -4 -4.3 2009 87.4 -4.5 -5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 � U-15 Greece Source: EU, IMF, EC 4 th Review Forecasts (July 2011) 10 ��������������������

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