europe: what was the source of the crisis? what is the way out?
TRANSCRIPT
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Europe: What was the source of the crisis? What is the way out?
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Roadmap
• European integration: the most dramatic piece of institutional engineering of the late 20th century– but was it deeply flawed? Can it be saved?
• Europe: a different model of capitalism– welfare states, labor markets– recent German labor market reforms
• Was crisis the product of European model?– welfare state, fiscal overexpansion– eurozone: incomplete integration
• Management of crisis: the wrong narratives
• The only options: either political integration, or economic disintegration
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Labor market institutions: collective bargaining
US UK
Irelan
d
Netherl
ands
Finlan
d
Denmark
Austria
Belgium
German
y
Swed
en
Norway
Spain Ita
ly
France
0102030405060708090
100
Percent covered by collective bargaining, 2000
Source: Richard Freeman, http://www.nber.org/papers/w13242.
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Labor market institutions: employment protection
US UK
Irelan
d
Netherla
nds
Finlan
d
Denmark
Austria
Belgium
German
y
Sweden
Norway
Spain Ita
ly
France
0
0.5
1
1.5
2
2.5
3
3.5
Index of employment protection legislation
Source: Richard Freeman, http://www.nber.org/papers/w13242.
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The welfare state
US UK
Irelan
d
Netherla
nds
Finlan
d
Denmark
Austria
Belgium
German
y
Sweden
Norway
Spain Ita
ly
France
05
10152025303540
Government social spending as percent of national income, 2003
Source: Richard Freeman, http://www.nber.org/papers/w13242.
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Is the Eurozone crisis a crisis of the European “model’?
• The epicenter of the crisis was the U.S., not Europe• The crisis did not affect all European countries equally
– The worst affected were not countries with largest budget deficits (except Greece) or the most extensive welfare states, or
– They were the countries with the largest external deficits– Germany’s current account surplus was the counterpart to the
GIPSIs’ deficit
• The Eurozone as the victim of internal imbalances– Divergent patterns of labor market performance, with attendant
consequences for competitiveness– Lack of EZ-wide fiscal/legal/political institutions to attenuate and
foster rapid adjustment to “regional” crises
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The Eurozone version of global imbalances
Source: http://krugman.blogs.nytimes.com/2012/01/30/eurozone-problems/
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The (more recent) German “miracle”
• Large reduction in relative unit labor costs since 2000– despite high degree of employment protection
• After crisis, adjustment through reduction in working hours instead of reduced employment– Instruments: working time accounts and short-time work
• Made feasible in turn through– practice of cooperation between social partners– practice of firms’ investing in workers’ skills and hence incentive to
preserve employees– government subsidies for short-time work
• A model of “flexicurity”? – Generous social protection/transfers with considerable flexibility in
employment contracts
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Germany’s labor market in comparative perspective
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German labor market reforms
Source: Rinne and Zimmermann (2011)
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How does a true federal system deal with regional economic imbalances?
• Consider Florida’s “current account deficit” with the rest of the U.S.
• When borrowers in Florida go bust:– There is a common legal regime that provides for bankruptcy and debt workouts
across state lines– FL residents get welfare checks and other transfer payments from Washington– The Federal Reserve acts as a lender of last resort to any FL banks– The FDIC provides deposit insurance to depositors in FL banks – Other FL borrowers do not get shut out of credit markets– FL workers can easily move and seek jobs elsewhere in the U.S w/out language and
cultural barriers– FL has representatives and senators in Washington, D.C., who can push for remedies
for FL’s economic troubles (e.g., fiscal spending, federal assistance, debt relief)
• So perhaps trouble is not that EZ is too integrated economically , but that it is not sufficiently integrated fiscally/legally/politically
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The misdiagnosis fro GIPSIs: the structural reform agenda
• OECD/IMF structural reform agenda as growth policy:– removing entry and other restrictions in product and service markets– labor market “flexibility”: reducing cost of firing workers– privatization of state assets
• Not clear that these practices were responsible for the crisis, nor that they can stimulate growth in midst of demand slump and high unemployment– Even if desirable in “normal times”
• Short term remedies for Greece et al. limited:– “transfer union”; (cf. German unification; U.S. federalism) or– boost to competitiveness through return to national currencies
(partial break-up of EZ)
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How the crisis is spurring “reforms”Change in overall responsiveness to OECD recommendations from 2008 to 2011
Source: OECD, 2012
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The Eurozone’s dilemma
• Only one long-run path: either political union, or economic disunion– current path of externally imposed austerity only exacerbates
economic crisis and is unsustainable for any democracy– Merkel’s choice of presenting the crisis with a narrative of Greek
profligacy instead of as a narrative about European interdependence rules out the political integration path
• Economic and political consequences likely to be severe for core countries as well