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European Imbalances, Domestic Disparities, and the Political - - PowerPoint PPT Presentation
European Imbalances, Domestic Disparities, and the Political - - PowerPoint PPT Presentation
European Imbalances, Domestic Disparities, and the Political Challenges of Adjustment Fritz W. Scharpf Max Planck Institute for the Study of Societies Cologne The Monetary Union as an Imbalance Producing Institution Monetary Union 1999:
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The Monetary Union as an Imbalance‐Producing System
Unitary monetary policy for divergent economies
- riented to Eurozone averages
Too loose for hi‐growth/hi‐inflation GIPS economies Too restrictive for low‐growth/low inflation Germany
2000‐2005: Germany, the „sick man of Europe“
Highest real interest rates, lowest growth, rising unemployment, falling real wages
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The Monetary Union as an Imbalance‐Producing System
2000‐2007: GIPS economies: Credit‐financed boom
Low or negative real interest rates Economic growth Low or falling unemployment Rising real wages
BUT: Growing macroeconomic imbalances
Diverging unit labor costs Diverging current accounts Diverging capital accounts
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Before 2008:
- Fiscal policy was not the problem
(certainly not in Ireland and Spain)
- Macroeconomic imbalances caused by
uniform monetary policy in economicallly non‐uniform Eurozone economies
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After 2008: Macroeconomic Imbalances + Financial Crisis Sovereign Debt Crisis
- 2007/08: International financial (Lehman) crisis
Banks rescued by states (but not in Spain) Credit squeeze hits real economies Credit‐dependent GIPS economies hit hardest Real‐estate bubbles bursting in Ireland and Spain
Steeply rising state debt Steeply rising risk premia on state bonds Threat of sovereign insolvency
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Adjustment: Two Conflicting Requirements
- Servicing accumulated debt to prevent insolvency
Rescue loans and guarantees by EU and IMF Fiscal retrenchment enforced through conditionalities
Restoring economic growth and employment
Stabilizing domestic demand Restoring international viability Challenge: Diverging real effective exhange rates BIGGS overvalued, Germany undervalued
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Problems of Present Adjustment Strategies I (domestic recovery)
Domestic demand reduced by fiscal retrenchment Domestic demand depressed by ECB interest rates
Nominal rates too high for GIPS, too low for Germany ECB likely to raise interest rates Real interest rates extremely high in GIPS
Domestic recovery prevented by present strategy
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Problems of Present Adjustment Strategies II (external competitiveness)
Competitiveness achieved through real devaluation?
Model: Germany 2001‐2006: union wage restraint ?? BUT: Divergence is so much greater. Export industries?? Requires: Drastic (nominal) wage cuts in export sector Political feasibility? Effectiveness? (UK experience in the 1970s) Requires: Significant increases in post‐tax profits Political feasibility?
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Problems of Present Adjustment Strategies III (legitimacy) Democratic self‐determination in GIPS polities? Legitimacy of supranational (Troika) dictates? Effect of inter‐national confrontation on EU?
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In Short
- Present Adjustment Strategy
– Economically unpromising – Politically dangerous at domestic level – Politically dangerous at European level
- Need to explore policy alternatives
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