Abstract
Paradoxically, the fact that financial markets believed that real convergence between the Euro periphery and Euro core would have occurred as a consequence of the Euro led to real divergence and external imbalances within the Eurozone. After the outbreak of the European debt crisis, austerity policies in the peripheral countries of the Eurozone simply had no alternative, given the refusal on the part of the markets to go on financing levels of private and public expenditures structurally in excess with respect to the value of the goods and services that the peripheral countries were able to supply at competitive prices. Could the resulting recession in the periphery have been made less severe by larger inflow of funds from the rest of the Eurozone and prompter interventions of the ECB? And why the Euro periphery made only modest gains in competitiveness during the 3 years of acute recession that followed the outbreak of the crisis? This is a crucial issue since there is no possibility of sustainable long-run growth for the periphery without restoring its competitiveness vis-à-vis the Euro core and the rest of the world.
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Notes
- 1.
With the exception of Greece, that was admitted from January 1st, 2001.
- 2.
In the debate on the Commission’s plan, two main approaches emerged: the ‘monetarist view’, held by France, and the ‘economists’ view’, embraced by Germany (see Wyplosz 2006). In a nutshell, the former was against discriminating among the candidate countries on the basis of demanding entry conditions: the European institutions in charge of the monetary integration and the very same integration process would have reset past expectations and habits. The economists camp, on the contrary, considered the participation in the monetary union as the very last stage of a long-term convergence process, along which the candidate countries adopt a stability culture and more similar socio-economic systems. Notably, the adoption of the Maastricht criteria to select the members of the union was not a victory of the economists camp: the convergence criteria focused exclusively on few aspects of nominal convergence, their respect was monitored only over a short period of time before the irrevocable fixing of the exchange rates, and their interpretation was quite loose. Markets and policymakers acted as if convergence had been achieved, although—as timely argued by various scholars, such as Lane (2006) and Wyplosz (2006)—it had not.
- 3.
The disappearance of interest spreads between the core and the periphery of the Eurozone was also encouraged by the EU’s prudential guidelines, according to which the government bonds of all countries belonging to the monetary union carried risk weights of 0 %, thus exempting banks and insurance companies from holding equity against periphery’s bonds. Since the start, the European Central Bank accepted all the EMU government bonds at the same conditions for the conduct of its monetary policy operations, thus reinforcing the idea that they were equally secure (Ullrich 2006).
- 4.
From the irrevocable commitment to the Euro at the Madrid Summit of December 1995 to the Lehman Brothers’ collapse of September 2008, the total rate of appreciation of the peripheral countries (Greece, Ireland, Portugal, Spain, Italy, Cyprus) taken together relative to the rest of the Eurozone was—if both price changes and exchange rate adjustments since 1995 are considered—30 %. In particular, Italian prices increased by 27 % relative to the rising prices in the rest of the Eurozone, and by 48 % relative to German prices.
- 5.
The European authorities could not actively intervene to ensure greater convergence, mainly because the European treaties focused on fiscal policy and neglected macroeconomic coordination and financial surveillance. Moreover, the Commission had been severely weakened in the early 2000s by its struggle against Germany and France over the adoption of excessive deficit procedures, notwithstanding the favorable judgment of the European Court of Justice in 2004. Focusing on the progressive worsening of the Greek external position, Katsimi and Moutos (2010) argue that European authorities have been unable or unwilling to intervene. If Greek budgetary data were misreported, the ongoing large current account deficits were well visible and clearly dangerous. On the disappointing performance of Portugal and the evident signs of its lack of progress over time, see Baer et al. (2013), whereas on the Spanish parabola, see Neal and García-Iglesias (2013).
- 6.
The reforms implemented in Germany in the first half of the 2000s in order to gain in efficiency and competitiveness are sometimes dubbed “beggar-thy-neighbor” policies by radical Keynesians. This is a theoretical mistake since undertaking structural reforms aimed at increasing productivity and efficiency is not a zero-sum game: if the peripheral countries had done the same in those years the final result would have been higher sustainable growth in the Euro area. Moreover, to dub in such a way those reforms is at odds with the foundations of modern growth theory, which recognizes in the gains in productivity and efficiency driven by competitive pressure the only source of long-run improvements in per-capita standards of living.
- 7.
For a fact-based evaluation of the performance of the main EU economic governance pillars (Stability and Growth Pact and Lisbon Strategy), see Ioannou and Stracca (2014).
- 8.
For an empirical assessment of the bank/sovereign spillovers see De Bruyckere et al. (2013).
- 9.
With regard to this, one cannot neglect the role played by officials of China and other countries holding huge reserves of U.S. government securities in reassuring the investors about their country’s willingness to hold U.S. securities and go on purchasing them.
- 10.
For an interpretation of the German point of view towards the European debt crisis, see Bonatti and Fracasso (2013b).
- 11.
Since May 2010, a series of intergovernmental support mechanisms were created by the euro area Member States: the European Financial Stabilisation Mechanism (EFSM); and the European Financial Stability Facility (EFSF), followed by the European Stability Mechanism (ESM) in October 2012. Four large financial assistance programs were created to support Ireland, Greece, Portugal, and Spain. Smaller rescue packages were established to the benefit of smaller (EMU and non EMU) countries (Latvia, Hungary, Romania and Cyprus). For what Ireland is concerned, in December 2010 an Economic Adjustment Programme was agreed, which included financial assistance over 2010–2013 for €85 billion (EFSM €22.5 billion; EFSF €17.7 billion; the U.K. €3.8 billion, Sweden €0.6 billion and Denmark €0.4 billion; as well as funding from the IMF €22.5 billion and the Irish Treasury and National Pension Reserve Fund €17.5 billion). The resources devoted to Greece under the two adjustment programmes were about €80 billion for 2010 and 2011, and €164.5 billion for 2012–2014 (of which, €144.7 billion committed by the EU via the EFSF and €19.8 billion contributed by the IMF). Portugal could tap EU financial resources in 2011 for a 3-year programme of €78 billion (€26 billion committed by each of the following: EFSM, EFSF, IMF). In 2012–2013 Spain received financial assistance via the EFSF, and then the ESM, of up to €100 billion for backing the process of reform and stabilization of its weak banking sector.
- 12.
TARGET stands for “Trans-European Automated Real-Time Gross Settlement Express Transfer”, which is the European transaction settlement system whereby one commercial bank of an Euro-area member country can make payments to one commercial bank of another member country. The TARGET2 balances of a country belonging to the Euro area are the claims or the liabilities of its central bank vis-à-vis the Eurosystem and are a measure of the accumulated surpluses or deficits of this country’s Balance of Payments with other countries of the Euro-area (see Cecchetti et al. 2012 and Cour-Thimann 2013). In April 2012, Germany, the largest economy of the Euro core, had net claims of €644 billion, while Italy, the largest economy of the Euro periphery, had net liabilities of €279 billion. Notice that at the outbreak of the crisis both countries had TARGET2 balances close to zero (see Sinn and Wollmershäuser 2012).
- 13.
The ECB developed 2 special 3-year LTROs for about €1 trillion: on 21st December 2011 for €489 billion to 523 banks and on the 29th of February 2012 for €530 billion to 800 banks. In fact the net increase in liquidity was far smaller, respectively €193 and €310 billion: one is to consider the simultaneous expiration of previous operations to provide liquidity and the reduction in ordinary three month LTROs. The Bank of Italy supplied its counterparties with circa €250 billion (about €140 billion net).
- 14.
In 2013 this excess liquidity has diminished because the banks in the core exploited the opportunity of an early repayment (of about a quarter of) the money received with the two three-year LTROs. Unsurprisingly, this pattern was accompanied by a marked reduction also in the TARGET2 imbalances.
- 15.
An additional condition is that the ESM commits to purchase these very same securities on the primary market. OMTs refer to purchases of government securities, for which the Eurosystem has no preferred creditor status.
- 16.
One can find a good example of this tendency during the months preceding the fall of the Berlusconi’s government in November 2011, when the Italian government tried to backtrack on its budgetary commitments anytime that the pressure of financial markets on it was temporarily relieved thanks to some statement or action of the ECB and other European authorities in support of the Italian public debt.
- 17.
Let us note in passing that this would be at variance with the recent reduction in the overall EU budget due to the fierce opposition of non-Euro area countries (e.g., the U.K.) to expand the competences and the resources of the Union.
- 18.
Focusing on the inflation differentials since 2009, only Ireland exhibited a lower HICP inflation rate than Germany. In fact, all the other periphery countries recorded rates not below the Euro-area average. Setting the HICP indices at 100 in 2009, in 2013 the index of the Euro area (17) reaches 108.43, while Germany 107.55, Greece 108.15, Spain 109.36, Italy 109.37, Portugal 108.38 (source: Eurostat). The picture would improve for Greece and Portugal, were one focusing on the index excluding energy, food, alcohol and tobacco. Admittedly, these numbers are at most suggestive for three reasons: first, periphery countries decided to increase the VAT rates so as to facilitate an internal devaluation; second, external competitiveness is better captured by export prices (provided the composition and the quality of the export is unchanged); third, administered prices in the periphery countries increased by a very large extent also because of measures directed to raise government revenues. However, the patterns of export price deflator over the entire period not provide a different picture. Setting the indices at 100 in 2009, it reaches 108.42 for the Euro area (17), 106.36 for Germany, 107.14 for Ireland, 112.79 for Greece, 108.10 for Spain, 108.78 for Italy, 110.60 for Portugal (source: AMECO). Clearer improvements occurred in some peripheral countries only recently, in 2013. It must be observed, however, that these price developments hide more favorable patterns of unit labor costs, due to an increase in profit margins as well as to higher indirect taxes and administered prices. Notably, profit margins increased relatively more in the tradable sector in Portugal and Spain: though reducing price competitiveness, this does help to attract investment in these activities. Italy (and Cyprus), instead, showed no signal of sectoral price and margin adjustment.
- 19.
Current accounts progressively improved in several peripheral countries. Ireland moved into positive territory in 2010 and in 2013 run a surplus of 4 % over GDP (against the 2, 5.6 and 5.6 % deficits in 2009, 2008, 2007). The deficit in Greece fell from 17 % in 2008 to 2.3 % in 2013. Portugal, Italy and Spain all recorded a positive current account balance in 2013 (respectively, 1, 1 and 1.4 %) (source: AMECO). Although the reduction in the yields of sovereign and private securities did contribute to the improvement in the current accounts, similar patterns can be observed for the trade balance.
- 20.
With this we do not mean that growth and debt-sustainability in the periphery countries can be ensured only through a greater export-oriented approach, in turn requiring all EMU countries to behave even better than Germany. This conclusion would clearly suffer of a sort of fallacy of composition. Rather, as mentioned above, it suggests to recognise that higher productivity and efficiency lead not to a zero-sum game: homogenously high levels of productivity and efficiency are compatible with homogeneously high living standards, whereas heterogeneous levels of productivity and efficiency are conducive to greater divergence and hence to deep tensions within the EMU.
- 21.
It should be noted that the effects of deep structural reforms can vary a lot over time. While the beneficial effects of structural reforms in the long term are uncontended, it is well possible that they aggravate the effects of simultaneous efforts in fiscal consolidation in the short term. See on this, among others, Barkbu et al. (2012), Bouis et al. (2012), Eggertsson et al. (2014), and Anderson et al. (2013). When this is the case, the implementation of structural reforms requires then a lot of forward-lookingness by the authorities and exceptional patience in the population.
- 22.
According to an oft-stated opinion, the fact that a country’s households are relatively rich should reassure international investors about the long-term solvency of their governments. In principle, however, the political cost of defaulting on the debt held by foreigners is lower for a government than that of confiscating some wealth owned by domestic households in order to service the debt held by foreigners (and also lower than the political cost of defaulting on the debt held by domestic investors). Hence, international creditors of periphery’s governments have no reason to feel particularly reassured by the knowledge that periphery’s households are relatively rich.
- 23.
According to Davies et al. (2011), for instance, the mean and the median wealth per adult (expressed in thousands of PPP $) in 2000 were equal to 115 and 39 in Germany, 150 and 80 in Italy, 117 and 72 in Spain. Table 1, which reports some empirical evidence in ECB (2013), provides a similar picture. It is worth mentioning that these figures, as well as those in Credit Suisse (2010), should be taken with caution and subject to various caveats, for the complicated accounting and surveying issues regarding data collection on wealth.
- 24.
According to ECB (2013), in all the Southern European countries 70 % (or more) of the households own their main residence, against a percentage between 45 and 55 in Germany, Austria, Netherlands and France (see Table 2). This is consistent with the fact that non-financial wealth in Spain and Italy tends to be larger than financial wealth, at odds with what observed in most EU countries (Credit Suisse 2010). Table 2 reports the breakdown of the fraction of households that own their residence by income and net wealth: from these figures it appears clearly that in Italy, Greece, Spain and Portugal even households with low income or low net wealth tend to purchase their residence.
- 25.
- 26.
Notably, a more even distribution of income and wealth across agents and sectors in the peripheral countries (typically suffering of the negative impact of diffuse cronyism, corruption and rents) could not only help to tackle the distortions hindering growth on the supply side, but also improve the composition and the level of domestic demand. The rapid growth in households’ indebtedness, and then aggressive deleverage, can also be partly ascribed to the compression of the purchasing power of certain groups of population. This calls for redistribution, not for larger public expenditures.
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Bonatti, L., Fracasso, A. (2014). Crisis in the Eurozone: Some Popular Fallacies and a Few Unpleasant Remarks. In: Paganetto, L. (eds) Wealth, Income Inequalities, and Demography. Springer, Cham. https://doi.org/10.1007/978-3-319-05909-9_5
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