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Will the EU survive its crises?Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
Instituto Europeu
14th November 2016
Lisbon
2
Will the European Union survive its crises?
• The rebirth of populism
• The economic crises
• The political crises
• Too little Europe or too much?
1. The rebirth of populism
• Populism of the right and left have emerged
• It is anti-elite, anti-foreigner and anti-trade
• It reflects a mix of economic and political forces: income stagnation, inequality, the financial crises and status anxiety
• It has produced Brexit, Trump, Le Pen, AfD, Podemos, Syriza, etc
• It is not over yet
• It now threatens the end of the postwar world
3
2. The economic crises: global
4
-25,0%
-20,0%
-15,0%
-10,0%
-5,0%
0,0%
5,0%
0,0
50,0
100,0
150,0
200,0
250,0
300,0
350,0
400,0
1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
GDP IN THE ADVANCED ECONOMIES (source: IMF)
Advanced economies 1979-2007 trend Deviation
THE SLOWDOWN IN ADVANCED ECONOMIES
2. The economic crises: global
5
CENTRAL BANKS STUCK ON ULTRA-LOW RATES
-2
0
2
4
6
8
10
12
14
16
1990 1993 1996 1999 2002 2005 2008 2011 2014
CENTRAL BANK INTERVENTION RATES
Fed BoE BoJ ECB
2. The economic crises: divergence
6
EUROZONE BECOMES JAPAN
90
95
100
105
110
115
Q1-2008 Q1-2009 Q1-2010 Q1-2011 Q1-2012 Q1-2013 Q1-2014 Q1-2015 Q1-2016
DIVERGENT IMPACT OF THE GREAT RECESSION
Eurozone GDP Eurozone Real DemandUS Real GDP US Real Demand
2. The economic crises: divergence
7
POST-CRISIS DIVERGENCE
0
2
4
6
8
10
12
14
jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 jan/15 jan/16
HARMONISED UNEMPLOYMENT RATES
Eurozone US
2. The economic crises: divergence
8
EUROZONE FAILS TO HIT ITS TARGETS
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5CORE RATE OF CONSUMER PRICE INFLATION
US Eurozone
2. The economic crises: divergence
9
POST-CRISIS DIVERGENCE
10,8%
6,2%3,9% 3,5% 2,5% 2,3% 2,2%
0,1%
-0,1% -0,3% -1,8% -2,1% -2,2%-5,8%
-7,6% -7,8%-11,0%
-16,9%
-26,9%-30,0%-25,0%-20,0%-15,0%-10,0%
-5,0%0,0%5,0%
10,0%15,0%
CHANGE IN GDP PER HEAD 2007-2016(at purchasing power parity)(Conference Board)
2. The economic crises: divergence
10
POST-CRISIS DIVERGENCE
0,0%
20,0%
40,0%
60,0%
80,0%
100,0%
120,0%
140,0%
France Greece Ireland Italy Portugal Spain
GDP PER HEAD RELATIVE TO GERMANY(at purchasing power parity)
2000 2007 2016
2. The economic crises: divergence
11
0,0%
20,0%
40,0%
60,0%
80,0%
100,0%
120,0%
140,0%
Portugal Italy France Spain Ireland Germany
NET PUBLIC DEBT(over GDP, per cent)(IMF)
2007 2016
CRISES MEAN SOARING PUBLIC DEBT
2. The economic crises: divergence
12
POST-CRISIS DIVERGENCE
0
5
10
15
20
25
30
jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 jan/14 jan/15 jan/16
HARMONISED UNEMPLOYMENT RATES
France Germany Italy Eurozone UK Portugal Spain Greece
2. The economic crises: adjustment
13
POST-CRISIS DIVERGENCE
-3,0%-2,0%-1,0%0,0%1,0%2,0%3,0%4,0%5,0%
2000 2004 2008 2012 2016 2020
Eurozone Imbalances on Current Account (as per cent of eurozone GDP) (Source: IMF, WEO Database)
Germany France Other creditorsCrisis-hit countries Others Eurozone
2. The economic crises: non-adjustment
14
DEFLATIONARY PRESSURE
-5,0-4,0-3,0-2,0-1,00,01,02,03,04,05,0
CORE CPI INFLATION
Germany France Italy Portugal Ireland Greece Spain
3. The economic crises: Brexit
15
THE BENEFITS OF CURRENCY ADJUSTMENT
90
100
110
120
130
140
150
160REAL EXCHANGE RATE FOR STERLING (J P Morgan)
2. The economic crises
• The eurozone delivers deflation and divergence, not prosperity and convergence
• This is because of:– Structural weaknesses in many economies
– Structurally weak aggregate demand
– Completely blocked adjustment mechanisms
– Insufficient financing
• There is a risk that some economies will wither away
• The UK now confronts a painful adjustment
16
3. The political crises
• The big challenges– Stagnation or prosperity
– Challenge of international relations:• The US;
• Russia;
• Middle East
– Migration
– Brexit
• Can the EU cope?
17
4. Too little Europe and too much?
• The EU has chosen to do more together than it can
• This is not an institutional question, but a political one
• It would not be so difficult if the countries were more similar, economically, politically and culturally.
• The UK has moved from being semi-detached to being fully detached – “hard Brexit” is in the offing
• But the EU’s life will not be made easier by Brexit
• Break-up is an eminently possible outcome
18