1. The Eurozone Crisis: Unnecessary and Self-Inflicted April 2013 Mark Weisbrot Center for Economic and Policy Research www.cepr.net

2. Debt crisis or policy crisis? Conventional wisdom: Eurozone governments have borrowed too much, must reduce debt (and therefore annual deficits) in order to get back to a sustainable debt level and restore growth. “Confidence fairies” (Krugman) – idea that reducing budget deficit will inspire so much confidence that growth improves

3. Alternative: debt and deficits are the result of the world financial crisis and recession. Bubble growth – overborrowing was in the private sector. This shows up in the Eurozone countries’ current account balances:

4. Spain: Current Account Balance Percent of GDP Source: Eurostat.

5. Recession cuts revenues and increases spending. Before the crisis Spain and Ireland were reducing their Debt/GDP ratio and Italy’s was stable. Spain and Ireland were running fiscal surpluses and had lower debt than Germany and France.

6. Spain: Main Fiscal Variables Percent of GDP Source: IMF WEO. 2003200420052006200720082009201020112012 Fiscal Balance-0.2-0.31.02.01.9-4.2-11.2-9.4-8.9-7.0 Primary Balance1.91.52.53.33.0-3.1-9.9-7.9-7.0-4.5 Net Interest Payments2.11.81.61.31.1 1.31.41.92.5 Net Debt41.438.634.930.726.730.842.549.857.578.6 Gross Debt48.846.343.239.736.340.253.961.369.190.7

7. Ireland: Main Fiscal Variables Percent of GDP Source: IMF WEO. 2003200420052006200720082009201020112012 Fiscal Balance0.31.31.72.90.1-7.3-13.9-30.9-12.8-8.3 Primary Balance1.62.42.73.91.0-6.2-12.1-27.9-9.6-4.4 Net Interest Payments1.21.11.0 0.91.11.83.1 3.9 Net Debt22.619.815.812.111.124.642.074.794.9103.0 Gross Debt30.829.227.124.825.044.564.992.2106.5117.7

8. Greece: Main Fiscal Variables Percent of GDP Source: IMF WEO. 2003200420052006200720082009201020112012 Fiscal Balance-5.7-7.4-5.6-6.0-6.8-9.9-15.6-10.5-9.1-7.5 Primary Balance-0.7-2.6-1.3-2.0-4.8-10.4-4.7-2.2-1.7 Net Interest Payments5.04.94.7 4.85.1 5.86.95.9 Net Debt97.398.8101.2107.3107.4112.6129.0144.6165.4170.7 Gross Debt97.498.9101.2107.3107.4112.6129.0144.6165.4170.7

9. Italy: Main Fiscal Variables Percent of GDP Source: IMF WEO. 2003200420052006200720082009201020112012 Fiscal Balance-3.6 -4.5-3.4-1.6-2.7-5.4-4.5-3.8-2.7 Primary Balance1.31.10.11.03.12.2-0.30.82.6 Net Interest Payments4.94.6 4.44.74.94.44.24.65.4 Net Debt88.488.088.989.386.988.897.299.199.6103.1 Gross Debt103.9103.4105.4106.1103.1105.7116.0118.6120.1126.3

10. Portugal: Main Fiscal Variables Percent of GDP Source: IMF WEO. 2012 Article IV Consultation. 2003200420052006200720082009201020112012 Fiscal Balance-3.7-4.0-6.5-3.8-3.2-3.7-10.2-9.8-4.4-5.0 Primary Balance-1.3-1.7-4.2-1.3-0.6-7.3-7.0-0.4-0.8 Net Interest Payments2.4 2.32.52.62.72.82.94.04.2 Net Debt51.153.157.858.663.767.479.088.997.3113.2 Gross Debt55.757.562.563.768.371.683.193.3108.1120.0

11. Eurozone Fiscal Deficits (avg. 2005-2007) Percent of GDP (Deficit Shown as Positive) Source: IMF WEO.

12. Eurozone Net Debt (avg. 2005-2007) Percent of GDP Source: IMF WEO.

13. Eurozone back in recession Last 5 quarters of real growth were negative. Why? Pro-cyclical policy:

14. Growth and Austerity in the Eurozone 2008-2012 Source: IMF WEO and Martin Wolf.

15. Unemployment in Eurozone 2005-current Source: Eurostat.

16. Compare to Europe and ECB Note the political irony: Europe has bigger left, socialist parties, but much more right-wing fiscal and monetary policy. (More on this topic later.) Result: U.S. still down about 10 million jobs; but economy is growing. 2.1% annual average GDP growth since June 2009 – not enough to get close to full employment, but a much better story than eurozone

17. The Case of Greece

18. Most important Problem: Fiscal policy is pro-cyclical 2009-2013: Greece attempts to reduce debt, cutting its structural balance by 18.7 percent. (For comparison: $2.9 trillion in the U.S.) As the economy shrinks, it becomes harder to make the revenue targets IMF has been way off in its projections and getting worse.

19. Greece: Real GDP Projection Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.

20. Greece: Unemployment Rate Projections Source: IMF various. Latest review is from January 2013, First and Second Reviews Under the Extended Arrangement.

21. Economic costs so far: Loss of 20.1 percent of GDP (among worst of past century’s financial crises), 2008 to 2012 27 percent unemployment for 2013; still more than 16 percent by 2018 (April 2013 WEO) Minimum wage cut 32 percent for youth (under the age of 25) and 22 percent for older workers Mass layoffs (150,000 public workers by 2015) Cuts to health and education Mass privatization totaling $30.77 billion projected ($2.09 billion realized to date).

22. Social costs: “Suicides rose by 17% in 2009 from 2007 and unofficial 2010 data quoted in parliament mention a 25% rise compared with 2009. The Minister of Health reported a 40% rise in the first half of 2011 compared with the same period in 2010 […] Violence has also risen, and homicide and theft rates nearly doubled between 2007 and 2009.” Kentikelenis et al. 2011. The Lancet: 52 percent increase in HIV 2010-2011.

23. Greece Employment as a Percent of Working Age Population Source: Eurostat

24. Strategy “Internal Devaluation”: how it is supposed to work Not Working Real effective exchange rate hasn’t fallen enough to pull the economy out of recession

25. Greece: Real Effective Exchange Rate Source: Eurostat

26. Greece: Debt as a Percent of GDP Source: IMF (various) and Weisbrot and Montecino (2012)

27. EU Net Interest Burden in 2011 (Percent of GDP) Source: IMF and Eurostat

28. The Troika and the World Troika is slowing the world economy for second time since last year. 2010 growth  5.2 percent 2011 growth  4.0 percent 2012 growth  3.2 percent IMF projections for world GDP growth in 2013 have been revised downward: April 2012 projection  4.1 percent October 2012 projection  3.6 percent April 2013 projection  3.3 percent The ILO estimates a record 202 million people could be unemployed in 2013.

29. The Troika and the World How to explain the Troika’s behavior? They see the crisis as an opportunity to remake European social democracy. Neoliberal “reforms.” When crisis ends, they lose their leverage over weaker Eurozone economies. A delicate balance: they don’t want to end crisis without achieving their political goals; but don’t want a meltdown either.

30. The Troika and the World ECB executive board member Jörg Asmussen, the most senior German at the bank “said it was crucial to ensure that ECB decisions did not reduce pressure on governments to reform. That is one reason why the central bank is unlikely to reveal all details of the plan on Thursday.” -- Reuters, Sep 4, 2012

31. The Troika and the World The policy advice given by the IMF to European Union countries in 67 Article IV agreements for the four years 2008-2011 shows a consistent pattern of policy recommendations: (1) a macroeconomic policy that focuses on reducing spending and shrinking the size of government, in many cases regardless of whether this is appropriate or necessary, or may even exacerbate an economic downturn; [cont.]

32. The Troika and the World (2) a focus on other policy issues that would tend to reduce social protections for broad sectors of the population (including public pensions, health care, and employment protections), reduce labor’s share of national income, and possibly increase poverty, social exclusion, and economic and social inequality as a result.

33. Recent History First crisis around Greek debt because ECB refused to buy sovereign bonds (May 2010) Continuing crises, partly because Troika insisted no haircut for creditors. But each time they compromised to avoid worse crisis. 8 aid packages, increasing in size, between May 2010 and December 2011. A small problem in early 2010 was made very big.

34. Recent History Mario Draghi takes office as ECB President last November Draghi is different from Trichet. Long Term Refinancing Operation (LTRO): €1 trillion for banks since December 2011. Despite compromises, Troika still pushed Europe into recession: this is a huge policy failure. Troika willing to take great risks to further their neoliberal political agenda.

35. The Troika and the World Financial markets are a problem too, but the ECB can overpower them ECB is therefore the main problem, as well as the potential solution. In 2011, it became clear that governments were tightening budgets – pro-cyclical policy – to satisfy the ECB, not to satisfy financial markets, which were increasingly ambivalent about fiscal tightening (e.g S &P’s latest downgrade of Spanish debt )

36. Alternatives

37. ECB, European authorities could reverse course and allow for expansionary fiscal policy in Greece and Eurozone – but won’t.

38. Default and Exit: Argentina Banking system collapsed, but only one quarter of continued recession. Then growth: 63 percent in six years. Recovers pre-crisis GDP within 3 years. Allow 2/3 reduction in poverty and extreme poverty. Large increases in social spending, reduced inequality. Huge Success.

39. Argentina vs. Greece Comparative GDP Recovery Paths: Argentina (1996-2007) vs. Greece (2005-2016) Source: Weisbrot and Montecino (2012)

40. Argentine Recovery Misunderstood Not a commodities boom. Not even export led. Led by domestic consumption and investment. Change in macroeconomic policy was key: change from pro-cyclical to pro-growth.

41. Greek advantages over Argentina Export sector twice as big. More potential sources of borrowing, if needed. More developed economy, banking system.

42. Argentina vs. Greece Exports as a Percent of GDP, Pre and Post-Devaluation Source: Eurostat and INDEC.

43. Spain

44. Debt burden is manageable at reasonable interest rates.

45. Spain: Quarterly Real GDP Growth Seasonally Adjusted Annualized Rates Source: Eurostat

46. Spain: Unemployment Seasonally Adjusted Annualized Rates Source: Eurostat

47. Spain The IMF's latest (July 2012) Article IV consultation has Spain with 20.5 percent unemployment in 2017, despite the fact that it is, by the IMF estimation, operating at just about potential GDP.

48. Spain: Projected Interest Payments Percent of GDP Source: IMF WEO.

49. Conclusion

50. Last fall: Draghi makes statement interpreted as commitment to stabilize Italian and Spanish bonds This put an end to the acute crisis – a significant step But recession continues because of fiscal tightening Note difference from U.S. : Because eurozone citizens have lost any democratic input into economic policy-making

51. Conclusion Lack of democracy is key Without credible threat to leave euro, weaker countries are subject to Troika’s decisions High unemployment, needless suffering will continue for many years or until Troika is forced to retreat