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THE GLOBAL ECONOMIC CRISIS AND THE EUROPEAN MANUFACTURING INDUSTRY
Marco FortisVice-President Fondazione Edison
Professor of Industrial Economy and International Trade, Catholic University of Milan
Europump, Stresa, May 25, 2012
2
ORIGIN OF THE GLOBAL CRISIS
• The global crisis was originated by the biggest housing-financial bubble of the last decades, which was fed by a true private debt explosion.
• According to McKinsey Global Institute, between 2000 and 2008 the overall public and private debt in the major advanced economies rose by over 40,000 billion dollars. About 75% of the increase was not produced by the states through public debt but by the private sector, through the debts of households, banks and businesses.
• Among advanced countries, the 3 Eurozone “core countries” (i.e. Italy, France and Germany), have the lowest private debt levels.
3
4
AT THE BEGINNING OF THE CRISIS IT WAS CLEAR THAT THE REAL PROBLEM WAS THE PRIVATE DEBT.
“THE ECONOMIST”: A SPECIAL REPORT ON DEBT
June 24, 2010
• “Debt increased at every level, from consumers to companies to banks to whole countries. The effect varied from country to country, but a survey by the McKinsey Global Institute found that average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008”.
5
“Americans and Britons may have been living in a fool’s paradise for a decade, saving less than they should because they thought share and house prices would stay high for ever. Now they have learnt the awful truth, they may decide to save a lot more, making the recession even worse than expected”.
“The Economist”, 6-12 December, 2008, p. 78
RETHINKING AN UNSUSTAINABLEMODEL OF GROWTH
6
Domestic Demand and Households Debt: 2002-2007
0%
5%
10%
15%
20%
25%
30%
35%
-20% -10% 0% 10% 20% 30% 40% 50%
change of households debt/GDP ratio
% change of domestic demand
IRELAND
SPAIN
UNITED STATES
ITALY
UK
FRANCE
JAPAN
GERMANY
"BUBBLE" ECONOMIES
PRIVATE-SECTOR LESS INDEBTED
ECONOMIES
RETHINKING AN UNSUSTAINABLEMODEL OF GROWTH
7
BEFORE GREECE, THE EYES OF THE WORLD WERE CONCENTRATED ON U.S. AND U.K. DEBTS
“I suspect that the reason the ratings agencies have not downgraded the UK may be that if they did so, they would, in logic, have to downgrade the US, too. Yet we also cannot escape from an“inconvenient truth”. Neither the UK nor the US is quite as wealthy as it once believed. There are losses to be shared, much of which will fall on public spending, taxation, or both. Once it becomesevident that neither of these countries can rise to the challenge, fiscal crises are inevitable. It would only be a question of when”.
Martin Wolf, “Financial Times”, November 24, 2009
8
TODAY THE PRIVATE DEBT, EXPECIALLY HOUSEHOLDS’ DEBT, REMAINS STILL VERY HIGH, EXCEPT IN THE 3 EUROZONE “CORE COUNTRIES”
Private debt in selected countries: 3rd Q 2011 (% of GDP)
Source: compiled by Fondazione Edison on data from Bank of Italy,
"Financial Stability Report", No. 3, April 2012
45 60 5688 67
98 82 93120
82 70106
77 100
105 136154
169
0
50
100
150
200
250
300
350
ITALY
GER
MANY
FRANCE
UNIT
ED S
TATE
S
JAPAN
UNIT
ED K
ING
DO
M
SPAIN
PORTU
GAL
IREL
AND
Households Non-financial enterprises
9
IMPACT OF THE CRISIS ON PUBLIC FINANCESAND ON THE REAL ECONOMY
• In 2008-2009 the world crisis could have had catastrophic developments, which were avoided thanks to bank bailouts and “stimulus” plans. But these actions, combined with a drop in fiscal revenues, had huge costs in many countries in terms of public finance deterioration.
• In addition, the Governments’ efforts could not prevent the financial crisis from transferring very quickly its negative effects to the real economy, in terms of higher structural levels of unemployment, lower private consumption and industrial over capacity.
• A clear indicator of the impact of the financial crisis on the real economy is the “Proust Index” elaborated by “The Economist”.
10
The “Proust Index”
• “Our clock uses seven indicators of economic health, which fall into three broad categories. Household wealth and its main components, financial-asset prices and property prices, are in the first group. Measures of annual output and private consumption are in the second category. Real wages and unemploymentmake up the third.
• A simple average of how much time has been lost in each of these categories produces our overall measure”.
The Economist, February 25th 2012
11
Advanced economies have gone backwards by a decade or more as a result of the crisis
Source: The Economist
The 3 Eurozone“core countries”have gone backwards less than “bubble”economies.
12
THE EVOLUTION OF THE DEBT CRISIS: FROM LEHMAN BROTHERS TO “ACROPOLIS NOW!”
Source: “The Economist”, May 10th 2010
13
FROM PRIVATE TO SOVEREIGN DEBT
• Only the Greek crisis was mainly originated by public debt. On the contrary, in the rest of advanced world the financial crisis and its economic consequences produced a big shift from private to sovereign debt.
• In the U.S., for example, the public federal debt (excluding the debt of individual States, some of which, like California, are in big trouble) rose from 9.2 trillion dollars at the end of 2007 to 15.2 trillion at the end of 2011 (+65%). For comparison purposes, Italy’s public debt rose from 1,602 to 1,897 billion euros (+18.2% only) over the same period and Germany’s public debt rose from 1,582 billion euros to 2,088 billion euros (+32%, i.e. the half of U.S. debt growth).
• The “Third World War” is a war of debts. It is also a war of communication towards the markets, which the Eurozone is losing face to the U.S., U.K. and Japan because of a lack of strategy. The Eurozone sovereign crisis is convenient to U.S. and U.K. and, almost in the short time, to Germany too, which benefits of low interest rates originated from the “flying to quality”.
14
BUT GREECE AND THE EUROZONEARE REALLY THE BIG PROBLEM?
NIALL FERGUSON: PIGS ‘R’ US
Niall Ferguson, Fiscal Crisis and Imperial Collapses: Historical Perspective on Current Predicaments, Ninth Annual Niarchos Lecture, Peterson Institute for International Economics, Washington, DC, May 13, 2010
1515
ADVANCED ECONOMIES: DEBT ABOVE 80% OF GDPSource: Carlo Cottarelli, IMF
AUS
AUT
BEL
CAN
CZE
DEN
DEU
ESP
FIN
FRA
GBR
GRC
ICE
IRE
ISR
ITA
JPN
NED
NZL
PRT
SLK
SLV
USA
0
50
100
150
200
2502007
19%
1616
Advanced Economies: Debt Above 80 percent of GDP
AUS
AUT
BEL
CAN
CZE
DEN
DEU
ESP
FIN
FRA
GBR
GRC
ICE
IRE
ISR
ITA
JPN
NED
NZL
PRT
SLK
SLV
USA
0
50
100
150
200
250
19%81%
2011
ADVANCED ECONOMIES: DEBT ABOVE 80% OF GDPSource: Carlo Cottarelli, IMF
17
CUMULATED PRIMARY BALANCE 2011-2013 G-7 Countries and most important other EU Economies
(Percent of GDP)
Source: IMF, Fiscal Monitor, April 2012
-25.5
-17.8
-15.1
-13.2
-10.8
-10.2
-9.7
-6.6
0.7
3
7.8
-4.5
-2.8
-2.2
-1.5
-30 -25 -20 -15 -10 -5 0 5 10
JAPAN
UNITED STATES
UNITED KINGDOM
SPAIN
DENMARK
NETHERLANDS
CANADA
FRANCE
FINLAND
POLAND
SWEDEN
AUSTRIA
BELGIUM
GERMANY
ITALY
ONLY FEW ADVANCED COUNTRIES ARE ACTUALLY MANAGING WITH SUCCESS THEIR FISCAL BALANCES,
AMONG WHICH ITALY AND GERMANY
18
ITALY IS REALLY DIFFERENT, FOR THE BETTER!
Dynamic of cumulated primary balances, 2006-2013 (% of GDP)
Source: compiled by Fondazione Edison on data from European Commission and IMF
15.2
9.5
-16.3
-32.1
-43.0
-50
-40
-30
-20
-10
0
10
20
2006 2007 2008 2009 2010 2011 2012 2013
ITALY GERMANY FRANCE UK USA
19
ITALY IS REALLY DIFFERENT, FOR THE BETTER!
Dynamic of cumulated primary balances, 2006-2013 (% of GDP)
Source: compiled by Fondazione Edison on data from European Commission and IMF
15.2
-24.7
-28.4
-57.0
-15.3
-70
-60
-50
-40
-30
-20
-10
0
10
20
2006 2007 2008 2009 2010 2011 2012 2013
ITALY SPAIN GREECE IRELAND PORTUGAL
20
GENERAL GOVERNMENT BALANCE, 2012 (Percent of GDP)
Source: IMF, Fiscal Monitor, April 2012
-8.5
-8
-7.2
-6
-5.9
-4.6
-4.6
-4.5
-4.5
-4.2
-3.5
-3.2
-3.1
-3
-2.4
-1.4
-0.8
-0.1
-2.9
-9 -8 -7 -6 -5 -4 -3 -2 -1 0
IRELAND
UNITED KINGDOM
GREECE
SPAIN
DENMARK
FRANCE
SLOVENIA
PORTUGAL
NETHERLANDS
SLOVAK REPUBLIC
CZECH REPUBLIC
POLAND
AUSTRIA
HUNGARY
BELGIUM
ITALY
FINLAND
GERMANY
SWEDEN
3% Maastricht Target
ONLY FEW EUROPEAN COUNTRIES ARE ACTUALLY RESPECTING THE MAASTRICHT TRESHOLD
21
GENERAL GOVERNMENT BALANCE, 2013 (Percent of GDP)
Source: IMF, "F iscal Monitor", April 2012
-7.4
-6.6
-5.7
-4.9
-4.6
-4.2
-3.9
-3.7
-3.4
-3.4
-3
-2.8
-2.5
-2.4
-2.2
-1.5
0.5
-0.6
-0.8
-8 -7 -6 -5 -4 -3 -2 -1 0 1
IRELAND
UNITED K INGDOM
SPAIN
NETHERLANDS
GREECE
SLOVENIA
FRANCE
SLOVAK REPUBLIC
CZECH REPUBLIC
HUNGARY
PORTUGAL
POLAND
DENMARK
AUSTRIA
BELG IUM
ITALY
FINLAND
GERMANY
SWEDEN
3% Maastricht Target
ONLY FEW EUROPEAN COUNTRIES ARE ACTUALLY RESPECTING THE MAASTRICHT TRESHOLD
22
GENERAL GOVERNMENT CYCLICALLY ADJUSTED BALANCE, 2012 (Percent of GDP)
Source: IMF, Fiscal Monitor, April 2012
-6.2
-4.6
-4.2
-3.9
-3.7
-3.3
-3.2
-3.1
-2.9
-2.5
-2.2
-2.1
-2
0.7
-0.6
-0.3
-0.2
-7 -6 -5 -4 -3 -2 -1 0 1 2
IRELAND
GREECE
DENMARK
SPAIN
SLOVAK REPUBLIC
FRANCE
POLAND
NETHERLANDS
SLOVENIA
AUSTRIA
BELGIUM
HUNGARY
PORTUGAL
GERMANY
ITALY
SWEDEN
FINLAND
(1)
(1) Fiscal Compact Upper
Target
(2) Fiscal Compact Lower
Target
(2)
ONLY FEW EUROPEAN COUNTRIES ARE APPROACHING SUCCESSFULLY THE NEW FISCAL COMPACT TARGETS
23
GENERAL GOVERNMENT CYCLICALLY ADJUSTED BALANCE, 2013 (Percent of GDP)
Source: IMF, Fiscal Monitor, April 2012
-5.4
-3.6
-3.3
-3.2
-2.8
-2.8
-2.7
-2.6
-2.6
-1.9
-1.3
-1.1
-0.9
0.5
0.6
0.8
-0.5
-6 -5 -4 -3 -2 -1 0 1 2
IRELAND
SPAIN
NETHERLANDS
SLOVAK REPUBLIC
GREECE
HUNGARY
FRANCE
SLOVENIA
POLAND
AUSTRIA
BELGIUM
DENMARK
PORTUGAL
GERMANY
SWEDEN
ITALY
FINLAND
(2) (1)
(1) Fiscal Compact Upper
Target
(2) Fiscal Compact Lower
Target
ONLY FEW EUROPEAN COUNTRIES ARE APPROACHING SUCCESSFULLY THE NEW FISCAL COMPACT TARGETS
24
THE 3 EUROZONE “CORE COUNTRIES” DON’T HAVE A HUGE PUBLIC DEBT PROBLEM, IF DEBT IS MEASURED CORRECTLY,
NOT AS A RATIO OF GDP BUT AS A “DEBT/EQUITY”
Ratio of Public debt to GDP and to private financial wealth (%): Year 2010
Sources: compiled by Fondazione Edison based on data from Eurostat
82,3 83,2
118,4
48,361
92,5
144,9
58,0 66,1 67,7 74,0 78,7
123,2
260,6
0
50
100
150
200
250
300
FRANCE GERMANY ITALY FINLAND SPAIN IRELAND GREECE
Public debt/GDP Public debt/Households net financial assets
25
AND IF PUBLIC DEBT IS COMPARED TO TOTAL PRIVATE WEALTH (FINANCIAL AND NON-FINANCIAL), THE UNITED
STATES ARE THE MOST VULNERABLE, TOGETHER WITH THE EUROZONE “PHERIPHERAL COUNTRIES”
Gross public debt in selected countries: year 2011
(% of households non-financial and net financial wealth)Source: compiled by Fondazione Edison on IMF data and Credit Suisse Global Wealth Databook 2011
5
17
52.1
39.3
35.2
31.6
27.427.126.622.622.6
20.720.117.9
16.214.9
9.68.6
23
0
10
20
30
40
50
60
AUS
CHN
SW
EDNK
UK
FRA
FIN
BEL ITA
GER
SPA
CAN
AUTNET ICE
INDUSA
POR
BRA
IREG
RE
20% threshold 21.6 21.6
26
Nonfinancial-sector Debt, Year 2011 (Percent of GDP)
Source: Banca d'Italia, Financial Stability Report, April 2011, table 1.1, p. 10
81120
86103
6986
165
108 108
60
45
56
88
82
98
61
93120
70
82106
77136
105
66154
169
0
50
100
150
200
250
300
350
400
450
GERMANY ITALY FRANCE U.S. SPAIN U.K. GREECE PORTUGAL IRELAND
Public debt Household debt Corporate debt
27
HOW TO REDUCE THE NONFINANCIAL-SECTOR TOTAL DEBT?
One-time wealth tax to reduce nonfinancial-sector debt
to 180 percent of GDP: Year 2011 Sources: compiled by the author on data from Boston Consulting Group, Eurostat, Banca d'Italia and Credit Suisse
211
248 248
289 287 293
268
355
397
29 35
5872
86
108 113
175
200
0
50
100
150
200
250
300
350
400
450
GERMANY ITALY FRANCE U.K. SPAIN GREECE U.S. PORTUGAL IRELAND
Nonfinancial-sector debt (household, corporate and government), percent of GDP
One-time wealth tax that would be charged on each adult with a financial and nonfinancial wealth exceeding 100,000 U.S. dollars to reducenonfinancial-sector debt to 180 percent of GDP (Euro per adult)
28
IN PERCENT OF GDP, THE U.S. FEDERAL DEBT IS GOING TO APPROACH THE ITALY’S LEVELS
General Government Gross Debt: Italy and United States (Percent of GDP)
Source: compiled by Fondazione Edison on data from IMF "Fiscal Monitor", April 2012
6065707580859095
100105110115120125130
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
ITALY UNITED STATES (without State and Local Governments)
35.9%
of GDP
5.9% of
GDP
29
IN PERCENT OF PRIVATE WEALTH, THE U.S. FEDERAL DEBT IS ALREADY ABOVE
THE ITALY’S LEVELS
Gross Public Debt in United States and Italy:
percent of households' total wealth (financial and non-financial) Source: compiled by Marco Fortis on data from Banca d'Italia and FED; © Fondazione Edison
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
ITALY UNITED STATES
30
BUT WHICH IS THE REAL LEVEL OF THE PUBLIC DEBT OF THE UNITED STATES?
31
THE WAR OF DEBT WILL BE WORSENED BY A WALL OF INCOMING CORPORATE DEBT
MATURITIES: A “PERFECT STORM”
• A formidable wall of corporate debt maturities and new money requirements over the next five years or so (which Standard & Poor's estimate at $43 trillion to $46 trillion), along with a volatile geopolitical climate that is causing skittishness in financial markets, poses downside risk of a perfect storm for global credit markets.
• Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances. A perfect storm scenario would likely cause financing disruptions even for borrowers that are not highly leveraged.
32
Bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate
borrowings between 2012 and 2016
33
IN THIS NEGATIVE DEBT SCENARIO THE EUROZONE ECONOMIES ARE EXPERIENCING A NEW SLOWDOWN
• April 2012 - Deeper downturns in output were signalled in both the manufacturing and service sectors, as the rates of contraction accelerated in both cases. Both sectors were hit by marked declines in new business. Manufacturers were also hurt by lower levels of new export orders, with trade between Eurozonenations especially weak.
34
ONLY THE EMERGING ECONOMIES CONTINUE TO GROW SUCCESSFULLY. FOR EUROPEAN ECONOMIES TO INCREASE
EXPORTS TOWARD THEM IS A STRATEGIC CHOICE
35
36
How works the TRADE PERFORMANCE INDEX UNCTAD/WTO
It is a composite indicator that ranks the competitiveness of 184 countries in 14 world trade macro-sectors, based on 5 sub-indexes:
1) Value of net exports;
2) Per capita exports;
3) World export shares;
4) Markets diversification degree;
5) Products diversification degree.
37
UNCTAD/WTO Trade Performance Index 2009. All productsCurrent index (*). Ranking of international competitiveness.
Number of top 10 placings in the world rankings for foreign trade competitiveness in 14 sectors (§)
Number of
best
positions
Number of
second
positions
Number of
third
positions
Number of
fourth
positions
Number of
fifth
positions
Number of
sixth
positions
Number of
seventh
positions
Number of
eighth
positions
Number of
ninth
positions
Number of
tenth
positions
1 Germany 8 1
2 ITALY 3 4 1
3 China 3 1 1 1 1 1
4 France 2 1 1 1 1
5 Australia 1 1
6 Japan 3 1 1 1
6 Turkey 1 1 1
8 United States 1 1
9 Russia 1
10 Indonesia 1 1 2
11 Canada 1 1
11 India 1 1 1
13 Brazil 1 1
13 Argentina 1 1
15 South Korea 1 2
16 United Kingdom 1
16 Saudi Arabia 1
18 Mexico
18 South Africa
(*) Net exports, per capita exports, share in world market, product diversification, market diversification.
(§) Fresh food, Processed food, Wood products, Textiles, Chemicals, Leather products, Basic manufactures, Non-electronic machinery,
IT & Consumer electronics, Electronic components, Transport equipment, Clothing, Miscellaneous manufacturing, Minerals.
Source: compiled by Fondazione Edison on data from International Trade Centre UNCTAD/WTO
38
GERMANY’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009
World competitiveness in 14 sectors
Source: International Trade Centre, UNCTAD/WTO
39
ITALY’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009
World competitiveness ranking in 14 sectors
Source: International Trade Centre, UNCTAD/WTO
40
CHINA’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009
World competitiveness in 14 sectors
Source: International Trade Centre, UNCTAD/WTO
41
FRANCE’s COMPETITIVENESSUNCTAD-WTO INDEX: YEAR 2009
World competitiveness ranking in 14 sectors
Source: International Trade Centre, UNCTAD/WTO
42
Trade balance in non-electronic machinery (billion of euros)
Source: compiled by Fondazione Edison on data from Eurostat
-0,2
2,3
7,1
48,3
93,2
-20
0
20
40
60
80
100
2007 2008 2009 2010 2011
SPAIN FRANCE UNITED KINGDOM ITALY GERMANY