Austerity in the Eurozone (Bretton Woods Project)

Seminar at the Spring meetings 2012, 19 April 12

Sponsor: Center for Economic and Policy Research

Speakers: Mark Wiesbrot (CEPR)

Presentations

Mark Weisbrot

Greece

Massive cuts in spending (8.9% of GDP within 2 years)
Troika projections way off – both on GDP and employment
Huge economic costs – 15.8% GDP decline, 21% unemployment, wage cuts; huge social costs in terms of health, suicides, security and violence
Strategy: Internal devaluation, but even real effective exchange rate still higher than in 2005
Debt-GDP ratio more likely to follow leaked pessimistic scenario – meaning essentially there will be a chaotic default; interest burden is key – 6.8% of GDP; after restructuring goes down to 4% for 1 year, but then above 6% a year again
Alternatives: ECB needs to reverse course and allow expansionary fiscal policy; there wouldn’t be much inflation

Lessons from Argentina – Default and exit

Banking collapse but only 1 quarter of recession; 63% growth in 6 years
Increases in social spending, reduced inequality, 2/3 reduction in poverty and extreme poverty, pre-crisis GDP in 3 years
Return to trend growth in 7 years, it was not a commodities boom (exports only 12% of growth)
Greece has export sector twice as big as Argentina; more potential sources of borrowing

Eurozone in general

Bad growth prospects, spending cuts are harming prospects
Unemployment high
Interest burden matters most – the ECB could help with this
EU crisis is not a debt crisis but a policy crisis

Mahmood Pradhan

Despite default and exit – Greece still has a primary deficit
There is a debate and discussion of the trade-offs given that the countries need financing
Without a Troika programme, the austerity would be tougher
Countries need to regain competitiveness, trend appreciation of real exchange rate through 2000s was a clear problem
Japan and Greece are very different, Greece cannot raise money domestically
Debt burdens are very large in EU, for example Spanish corporate debt
Latvia in a similar situation, debt-GDP ratio from 90% to 45%; wages fell 10-25%
We work with desires of country authorities in terms of their exchange rate regime
Massive cross-border exposures in the eurozone, default and exit could be really disastrous – Argentina style default and exit may not be possible
ECB has a larger balance sheet than the Fed – different mechanisms than the Fed, but the ECB is acting

Discussion

Mark Weisbrot

ECB may have large balance sheet, but there is no ceiling on Spanish and Italian bond yields, they could end the acute and dangerous part of the crisis by that intervention
Greece could find lenders in the int’l environment – Venezuela, China, for example
Hard question is how much of the deficit can you finance by printing money before inflationary impact
Greek government shouldn’t care what happens to the rest of Europe
Austerity was tough for only 1 quarter in Argentina then austerity was gone
EU had bubble growth in the 2000s – it was brought on by private sector over-borrowing
US has a bubble burst too – but had stimulus and loose monetary policy
Latvia lost 25% of GDP and 10% emigration – huge social costs for restoration of 2.5%

Recovery would have been faster if they had devalued; Poland put of eurozone

Jon Serper

the policies in Greece are just protecting elites
high energy costs mean what for ECB? What about Japan now having trade deficit

Mahmood – Japan problems partly energy, partly tsunami, partly demographic
Larry Elliot – how do you calibrate a programme for euro countries? Esp because there is no external adjustment

Mahmood

How much competitiveness can you gain with internal devaluation, you want change in productivity levels
These programmes are VERY large with lots of financing, allows longer adjustment time
We make an effort to protect social spending; Troika does not make every spending decision though
Greece has a problem of implementation of policy, lack of implementation means projections will be wrong

Mark – projections were wrong mainly because of spending cuts shrinking the economy, not because of failed reforms for taxi drivers or some other supply side measures

Werner Pushra, FES – need to discuss Germany’s role in the mess; system was unsustainable from the beginning because of debt burden; Greece was never competitive because German labour costs stagnant, what must Germany do?

Mark – German wages should rise

Mahmood – fiscal policy will not solve adjustment problems

Bob Woodward – role of private financial institutions in this?

Mahmood – LRTO is not just giving money away, there is collateral requirements

Mark – QE means banks are giving a gift here, ECB should be doing this for governments that ran into trouble because of bad behaviour of the financial sector, not just for banks;