The euro crisis. A tale of divergences Alb… · >Troika ,EFSF IE(10.10) PT(5.11) contagion GR2 (2.12) contagion Conventional Liquidity (LTRO

ADG INTERNATIONAL AFFAIRS

The euro crisis. A tale of divergences Enrique Alberola(*) Master de Gestión Bancaria

Valencia, 6 de Mayo

(*) The views expressed here do not necessarily coincide with those of Banco de España or the Eurosystem


OUTLINE

•  Two issues

• Update of economic situation and perspectives

• Progress in crisis management and prevention

•  Under a very specific light:

2

Divergence, n. 1. The act of moving away in different direction from a common point; 2. A difference between conflicting facts or claims or opinion

Economic The ones you see Political Economy The ones you perceive

ADG INTERNATIONAL AFFAIRS 3

DIVERGENCE IN THE DYNAMICS OF CRISIS AT THE GLOBAL LEVEL

Euro Area

Euro periphery

Global economy

Ñ 0

5

10

15

20

25

30

0

15

30

45

60

75

90

2007 2008 2009 2010 2011 2012 2013VIX SRM1(Escala1dcha.)

%

VIX $Y $S Y S TEMIC $R IS K $MEAS UR E $(S RM)$(a)

sas

(a)1S RM:1P robabilidad de1una1 quiebra1s imultánea1de1dos 1o1más 1grandes 1grupos 1bancarios


ECONOMIC DIVERGENCES WITHIN THE EURO AREA. Growth dynamics and internal adjustment

!40!35!30!25!20!15!10!505

1015

GR IE P T ES IT UEM NL F I FR BE DE AT

DEMANDA7 INTERNA IMPORTACIONESEXPORTACIONES PIB

DEMANDA INTERNA, IMPORTACIONES, EXPORTACIONES Y PIBVARIACIÓN 2008-2012%

•  Euro area double dip, with large divergences

•  Internal demand slump is very severe in periphery, in core it is stagnant

90

95

100

105

2007 2008 2009 2010 2011 2012

ESTADOS.UNIDOS ZONA.DEL.EURO ITALIA

ALEMANIA PORTUGAL ESPAÑA

GRECIA

2007T1=100

EVOLUCIÓN DEL PIB REAL

82%


ECONOMIC DIVERGENCES. External adjustment

ITAESP

POR

IRL

GRE

FRA

BEL

GER

NED

AUT

FIN

015

010

05

0

5

10

15

015 010 05 0 5 10 15

Current'account'balance'in'2012

Current'account'balance'in'2007Sources:;Eurostat,;IMF;;and;Banco de;EspañaSources:;Eurostat,;IMF;;and;Banco de;España

Regression line

Less than average

surplus reduction

More than average

deficit reduction

Worsen deficit

Improve surplus

•  Extremely sharp in periphery. Spain > 10 pp GDP

•  Limited, insufficient in core

!20

!15

!10

!5

0

5

10

GR PT ES IE IT FR UEM BE F I NL AT DE

2008 1998 2012 PROMEDIO8 1999!2012

SALDO DE LA BALANZA POR CUENTA CORRIENTE

% 8del8P IB

Global imbalances adjustment, G-20 & euro area


ECONOMIC DIVERGENCES. Internal devaluations

95100105110115120125130135140145

IE ES GR PT IT NL F R BE UEM F I AT DE

2008 2012

COSTES LABORALES UNITARIOS TOTAL ECONOMÍAÍndice>1998> = >100

95

100

105

110

115

120

1998 2000 2002 2004 2006 2008 2010 2012

C LU RE LAT IVOS , DE ,E S PAÑA,FR E NTE ,A,LA,Z ONA,DE L ,E URO

1998=100

•  Competitiveness adjustments have been remarkable.

• Spain has recovered more than 70% of previous loss

•  …at a high cost. Productivity <<< employment loss, rather than wage restraint (there’s too)


ECONOMIC DIVERGENCES. Indebtedness

•  Easy financing leads to excess indebtedness in the periphery

• But not only (NL), not always (IT)

•  Reduction in denominator –income/wealth- limits the process of deleveraging

0

50

100

150

200

250

300

2000 2008 2012DE FR IT ES NL

FI IE GR

ENDEUDAMIENTO*HOGAR ES% 2RBD


ECONOMIC DIVERGENCES. Fiscal adjustment

•  Fiscal consolidations feasible in the core

•  But extremely difficult and risk of becoming self-defeating in the periphery

!12!10!8!6!4!202468

2000 2008 2012DE FR IT ES NLFI PT IE GR

S AL DO&PR ES UPUES TAR IO% 4P IB

020406080

100120140160180

2000 2008 2012DE FR IT ES NLFI PT IE GR

DEUDA%PÚBL IC A% 3P IB


ECONOMIC DIVERGENCES. Financing

•  Financing stress on sovereigns and overall

• Lead to extreme divergences.

•  Reflecting a massive capital reversal…to the core

!15

!10

!5

0

5

10

15

2010 2011 2012ALEMANIA,-HOLANDA,-FRANCIA-Y-FINLANDIAITALIA,-ESPAÑA,-PORTUGAL-Y-GRECIA

FLUJOS FINANCIEROS CON EL EXTERIOR (a)(Acumulado desde diciembre de 2009 hasta

diciembre de 2012)% -del-P IB

0

2

4

6

8

10

12

14

16

03 04 05 06 07 08 09 10 11 12 13ALEMANIA FRANCIA ITALIAESPAÑA PORTUGAL IRLANDA

FINANCIACIÓN DEL TESOROTIPOS DE INTERÉS A 10 AÑOS%


ECONOMIC DIVERGENCES. The role of ECB •  Liquidity provision through TARGET alleviates the strains.

• Unconventional policies are decisive

• Sort of international reserves

•  But the capital draught remains

!450

!350

!250

!150

!50

50

150

250

350

450

550

650

750

Euro.Crisis.MonitorInstitute.of.Empirical.Economic.Research.Osnabrück.University

Net.Balance.with.the.Eurosystem./.Target.[bn.€]

Finland France

Germany Greece

Ireland Italy

Netherlands Portugal

Spain Luxembourg

!400

!200

0

200

400

600

800

1,000

1,200

1,400

2004Q1

2004Q3

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

ENTRADAS(FLUJOS(FINANCIEROS(0ZONA(EURO,(PAISES(CON(ESTRÉS(FINANCIERO

Otra2inversión,2autoridades2monetarias2(variación2de2pasivos)

Entradas2flujos2financieros2!excluyendo2OI,2autoridades2monetarias

Desmbolsos2de2programas2del2FMI/UE

m.m.2USD

EURO(AR EA(F INANC IAL LY (S TR ES S ED(C OUNTR IE SF INANC IAL (INFLOWS

OTHER (INVES TMENT.(MONETARY (AUTHOR IT IE S ((OI/MA)

OTHER (F INANC IAL (INF L OWS ,(EXC L .(OI/MA

R E INBUR S MENTS (F R OM(OF F IC IAL (P R OGR AMMES (IMF /EU


POLITICAL ECONOMY DIVERGENCES

11

EMU fragile foundations • Economic

• Disparities in economic structures • Markets are procyclical, no discipline • EMU shock destabilizing

• Institutional • Imbalances dismissed • Failure of fiscal discipline framework • Implications financial integration dismissed • Lack of crisis management mechanisms

Euro crisis

CRISIS PREVENTION (the long run/ end point)

Deep institutional reform More integrated Europe

CRISIS MANAGEMENT AND RESOLUTION (the short run)

Rescues & backstops v Adjustment

Closely interlinked Economic rationale -refoundation -moral hazard Political rationale -bargain core-periphery

DIVERGENCE


POLITICAL ECONOMY DIVERGENCES. Crisis management and resolution

• Traits and patterns

• Slow, dubitative response. Discoordination, cacophony, undecisiveness

• Sharing of responsabilities gives way to shirking of responsabilities

• Increasing credibility gap.

• Painful adjustment with little return so far

• Back and forth from the brink

• Action is only under pressure

• Outcome

• The extension of crisis has not been contained: GR, IE, PT, SP-b,CY,… SL?

• Increasing strains among actors

• Disproportionate role of ECB, relative to national governments

• Credible backstops are evasive

•  Some remarkable bright spots:

•  Regain access to markets, reduction of financing costs

•  Progress in resolution schemes: ESM, successor of EFSF


POLITICAL ECONOMY DIVERGENCES. Crisis prevention

•  Deepening of crisis fosters institutional reform

•  Two stages

• Reaction to first wave of crisis (2010-2011) <<< fallout from small economies

• Reaction to second wave of crisis (2012-) <<< contagion, redenomination risks

•  Multiples areas of action

• Fiscal discipline

• Macroeconomic surveillance

• Financial surveillance and supervision

• Political underpinnings: more integration

•  …but one is spared:

• The ECB mandate: just price stability

• Does not prevent, policy hyperactivity


POLITICAL ECONOMY DIVERGENCES. An overview of the euro crisis

Management & resolution

Crisis prevention

ECB role

Fiscal Economic Financial Political

1st stage 2008- 2012

Greece (5.10) >Troika,EFSF IE(10.10) PT(5.11) contagion GR2 (2.12) contagion

Conventional Liquidity (LTRO<1) Bond purchases (SMP) LTRO<3

6-pack (10.11) ESFS: +EBA+ESMA… ESRB(12.10) =macroprud +supranational integration

Swift constitutional changes Speedy ratification (Asymmetric) Intergovern- mentalism

Revision SGP Excessive Imbalance Procedure

2-pack Fiscal compact (3.12)

Euro+

2nd stage Summer 2012-

ESM (9.12) SP-b (11.13) CY (4.13)

MTOs Announced (7.12)+ establish’d (9.12) Not used yet

NEW UNION (Council June 2012)

European Budget/Treasury

ECCM BANKING UNION SSM+SRM

Legitimacy


POLITICAL ECONOMY DIVERGENCES. Wrap-up

•  Key elements

•  The EU response is subordinated to the intergubernamental decisions

•  Divergences in the interpretation of the crisis

•  Discrepancies in allocation of responsabilities

•  Moral hazard concerns compound with reluctance to support by core

•  Thus, creditor countries dominate the process. Commission and debtors follow

•  Dynamics between management, resolution and prevention determined by bargaining process

•  Divergences

• Intertemporal. The urgency (M&R) lags behind the priority (prevention). Backtracking, too

• Leadership. ECB leads short-term response. Relatively, governments drag their feet

• Keys to resolution …beyond the ECB realm (under actual basis-mandate,euro arch)

• Internal incumbent governments lose social support

• External increasing strains among partners


CONCLUSIONS

•  Divergences provide a key to interpret the euro crisis

•  Intersection of economic and political divergences have generated powerful negative feedbacks

•  Explains that the crisis is being much worse and extended than…

•  Anticipated

•  Could and should have been

•  Is progress in management catching up with these divergences?

•  Prevention proceeds at the speed of light

•  Interaction of management and prevention is falling into place = progress

•  But the economic and political divergences are not decreasing, overall

•  The jury is still out


Thanks. Gracias

Support slides, below

17


ANNEX. Comparison with Latam. External Adjustment


ANNEX. Comparison with Latam. Financing

Gráfico(1.(Flujos(financieros(brutos

Fuentes:(FMI((IFS)(y(Datastream(a) Argentina, Brasil, Chile, Colombia, México, Perú y Venezuela(b) Grecia, Italia, Irlanda, Portugal y España(c) Excluido "pasivos otra inversión, autoridades monetarias"

0

200

400

600

800

1000

1200

1400

0

1

2

3

4

5

6

7

Q1(1998 Q1(2000 Q1(2002 Q1(2004 Q1(2006 Q1(2008 Q1(2010

América(Latina((a).(Entradas(de(flujos(financieros(brutos(y(EMBI

Entradas(de(flujos(financieros(brutos

EMBI(Global(de(América(Latina((Esc.(Derecha)%PIB pb

0

100

200

300

400

500

600

700

800

900

Q10

Q5

0

5

10

15

20

25

30

35

Q1(1998 Q1(2000 Q1(2002 Q1(2004 Q1(2006 Q1(2008 Q1(2010

Países(de(la(Zona(Euro(con(tensiones(financieras((b).((Entradas(de(flujos(financieros(y(diferenciales(

de(deuda(soberanaEntradas(de(flujos(financieros(brutos((c)

Diferencial(deuda(soberana((Esc.(Derecha)%GDP pb


ANNEX. ECB RESPONSE

Standard monetary policy response: • Reduction of interest rates and provision of liquidity

+ Non-standard measures • Fixed rate full allotment, extension of maturities, extension of collateral ellegibility, • Currency swaps + New programs to address impaired transmission of monetary policy • Covered Bonds Program (CB) • Securities Market Pogram (SMP) + Additional liquidity meassures • Two Longer Term Refinancing Operations (LTRO) with a maturity of 3 years each • Reduction in the reserve ratio to 1% • Further increases in collateral availability (including new assets like bank loans). The silver bullet?: Outright Monetary Transactions (OMT, unlimited purchases of sovereign bonds in secondary markets)

20

Documents

The euro crisis. A tale of divergences Alb… · >Troika ,EFSF IE(10.10) PT(5.11) contagion GR2 (2.12) contagion Conventional Liquidity (LTRO