INTO THE FINANCIAL AND ECONOMIC CRISIS: THE CHALLENGES AHEAD ETUC Summer School Lisbon, 8th September 2009

Structure of the presentation Update on most recent indicators: Is the recovery already there? Beyond the short term : Automatic ‘Destabilizers’ and Structural drags on medium term growth Structural analysis: Why this recession is different and why (conventional) demand side policy is now limited. Special focus: Youngsters and the crisis

Major (demand) shock: Europe more severely hit than the US (Source: IMF, Summer Economic Outlook)

‘Green shoots or the first signs of ‘bottoming – out’ … (Source: Flash Natixis 6th August nr 358)

‘Green shoots or the first signs of ‘bottoming – out’ … Most recent number (August): –Euro Area: a level of 50,indicating a stabilisation of overall activity (manufacturing plus services) –Germany: 54 for manufacturing sector, indicating renewed expansion of industrial production (but from a very low level).

First signs of ‘bottoming – out’ … (Source: Ibidem)

Industrial production, month-on- month (Source: Ibidem)

…together with similar signs on the side of the ‘credit squeeze’ (Source: ECB BAnk lending survey July 2009)

…together with similar signs on the side of the ‘credit squeeze’ (Source: ECB Bank lending survey July 2009)

…and with ‘credit demand’ starting to contract less severily as well (Source: Flash 10th July nr 321)

…showing up in a second quarter stabilisation for the euro area (on average!)… … (Source: Natixis Special Report 232, 14th August)

Main cause : Recovery plans providing fiscal stimulus …

…in particular ‘car replacement premiums’

Summary overview of recovery measures

Looking beyond the recent months ‘Automatic’ and self feeding negative feedback loops: –Fiscal stimulus is programmed to be withdrawn –Unemployment projected to increase substantially –A second round of banks tightening credits –Wages and deflation danger

Withdrawal of fiscal stimulus

Second round effects form soaring unemployment

Backlog in productivity implies unemployment forecast may well be underestimated

Second round of credit tightening: Still problems in European banks’ balance sheets

On the eve of deflation ? Similarities between Japan mid nineties…..

…and Europe at this moment

Household perceive falling prices

A Structural analysis In the past, demand and growth were driven by a (permanent) increase in private sector indebtedness, with credit also insuring recovery from slump despite zero growth in real wage income

A Structural analysis With the private sector now facing high debt loads, ‘deleveraging’ will be the ‘name of the game’ for the period to come

Households continue to face high debt loads …

Special focus: Foreign currency lending in Central and Eastern Europe …

…and IMF- European adjustment plans

Danger of temporary output loss becoming structural… Closing the output gap, not by restoring effective output to potential but by allowing letting potential GDP …implying an increase in structural unemployment … as well as permanent higher public deficits

Conventional demand policy reaching its limits A one off demand injection into the economy will only have a limited effect. To sustain economic activity (growth), deficits would need to become (increase) permanent

Japanese experience: Not reassuring

Conventional monetary policy ‘pushing a string’

Massive support for banks: A black hole without a (real economy) bottom ?

Time for ‘unconventional’ policy ? Pushing the limits of sustainable (high) public deficits : Distributive tax policy agenda (including taxing banking profits)

Time for ‘unconventional’ policy ? Pushing the limits of sustainable (high) public deficits: Quantitative easing for the benefit of the public sector

Real European level recovery initiative Investment on a massive scale : 1% of European GDP Identify large European Investment projects Funded by European Growth Bunds with support from the ECB and the ESCB Big advantage: Support for economic activity for all member states and not just the ones with access to financial markets

More equality as a new motor for demand Instead of hoping that ‘China’ will become the engine of world growth and European exports (vain hope!)… … end this excessive reliance on ‘exports’ and ‘competitiveness’ by tackling the root cause of it: High and rising inequalities Common European Principles concerning wage policy

Labour market policy and the return of mass unemployment Mass unemployment and the excess ‘supply’ of labour … implies that the ‘old’ supply agenda (make work pay, longer working hours, higher retirement age, cuts in wages and wage costs) is unadapted to this new situation… … and will deepen and intensify the negative demand shock

A renewed ‘demand’ focus in labour market policy Direct programms to create new jobs (social services) ‘Jobs’ guarantee, certainly for those being ‘bumped off the jobs ladder. Policies to ‘rotate’ (share and redistribute!) jobs Al of this can/should be linked to the skills agenda (‘New skills for new jobs’instead of ‘New skills for No jobs’!)

Youngsters : Avoiding a lost generation Young people undergoing the impact of the crisis in many ways: –Temporary contracts: vulnerable to job losses –Temporary contracts : weaker access to social security –First (starting) wage : First to be cut –Credit squeeze and banks’ high intrest margins : Youngsters are net borrowers –If a new ‘bubble’ would take off, asset prices rise : Youngsters pay more for housing

Youngsters : Avoiding a lost generation