theeuropeanunionandtheglobalfinancialcrisisswufe-140715042730-phpapp02.pptx

8/19/2019 theeuropeanunionandtheglobalfinancialcrisisswufe-140715042730-phpapp02.pptx

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The European Union and the globalfinancial crisis

Professor Nigel HealeyPro-Vice-Chancellor (International)

Nottingham Trent University

10 Jly !01"#oth$estern University of %inance an& 'conomics


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vervie$

• What is the European Union?

• What is the Eurozone? Who’s in the Eurozone?

• The institutional design of the Eurozone: guaranteed to

avoid inflation and printing money?

• The performance of Eurozone 1999-!1"• The glo#al financial crisis

• $oral hazard% #ail-outs and monetisation of de#t

• The outloo& for the Eurozone


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hat is the 'ro*ean Union+

• European Union: a political and

economic union of ' European states

• (opulation: !)*#n +,hina: 1)"#n

• .and mass: ")"m &m +,hina: 9)/m

&m

• 0ross domestic product: U21')"tr+,hina: 21!)!tr3

• 04( per capita: 25/%595 +,hina:

26%5553

•

04( per capita +(((: 255%!'"+,hina: 21!)/9*3

5 3 7$8 World Economic utloo& 4ata#ase% pril !1"


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hat is the 'ro,one+

•

1' countries ;ithin the European Union;hich share: – European ,entral 51cto#er !19

"

E,< #uilding +Euroto;er%8ran&furt


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hos in the 'ro,one+

• 8rance% 0ermany% 7taly%


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./ectives of the 'ro*ean Central an (1)

•

The $aastricht Treaty’s rt) 1!*)1: – ‘The primary objective of the ECB shall be to maintain price

stability . Without prejudice to the objective of price stability, theECB shall support the general economic policies in the Communitywith a view to contributing to the achievement of the objectives ofthe Community as laid down in rticle !."

• rticle :

– ‘The objectives of European #nion are a high level of employmentand sustainable and non$inflationary growth."

• o:

–

fighting inflation is the a#solute priority – supporting gro;th and employment comes net

/


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./ectives (!)

• $a&ing the inflation o#Bective operational: does the E,< havea target?

• 7t has a definition of price sta#ility:

– ‘The ECB has defined price stability as a year$on$year increase inthe %armonised &nde' of Consumer (rices )%&C(* for the euro area

of below !+."

• Cand it has an aim:

– ‘&n the pursuit of price stability, the ECB aims at maintaininginflation rates below, but close to, !+ over the medium term."

6


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Central .an in&e*en&ence

• ,urrent conventional ;isdom is that toensure price sta#ility% central #an&sshould #e independent:

– most governments cannot resist the Dprinting press’ temptation

– the


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In&e*en&ence

• Article 7: In&e*en&ence

• neither the ECB, nor a national central ban-, nor any member oftheir decision$ma-ing bodies shall see- or ta-e instructions fromCommunity institutions or bodies, from any government of aember /tate or from any other body

• Article 21: *erations $ith *.lic entities

• overdrafts or any other type of credit facility with the ECB or withthe national central ban-s in favour of Community institutions orbodies, central governments, regional, local or other publicauthorities, other bodies governed by public law, or publicunderta-ings of ember /tates shall be prohibited, as shall the

purchase directly from them by the ECB or national central ban-s of

debt instruments

9

Politically in&e*en&ent

%inancially in&e*en&ent


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%iscal com*lications in a monetary nion

• 7n a monetary union% fiscal policy

– the only macroeconomic instrument left at national level

– government #orro;s in recession and pays #ac& in good times

– government acts as a #uffer in case of a negative shoc&

• utomatic sta#ilisers:

– ta receipts decline ;hen the economy slo;s do;n

– ;elfare spending rises ;hen the economy slo;s do;n

– rule of thum#: deficit ;orsens #y !)*G of 04( ;hen 04(

gro;th declines #y 1G

1!


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t there are fiscal *olicy 2e3ternalities4

•


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5aastricht Treaty

• 1)) $onitoring of #udgetary discipline

• The Treaty prohi#its the direct financing of pu#lic entities’

deficits #y national central #an&s +rt) 1!1% #e it overdraft

facilities% other types of credit facility or the purchase of de#t

instruments% ecept for the purpose of monetary policy) The

Treaty also prohi#its pu#lic entitiesJ privileged access to

financial institutions +rt) 1!)

• $oreover% the no #ail-outF clause in rticle 1!5 stipulates

eplicitly that neither the ,ommunity nor any $em#er tate

is lia#le for or can assume the commitments of any other$em#er tate)

1


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Prevention *roce&re6 *re-7%C attem*ts tocontrol government &eficits an& &e.t

•The ta#ility and 0ro;th (act +0(

• The 0( made permanent the 5G 04( deficit and /!G

04( ceilings

• 0( reformulated in !!* to ma&e it more flei#le: –

negative gro;th may #e eceptional – ta&e account of Dall relevant factors’

– no specific definition

• 8ines are automatic if approved

• 8unds ;ithheld from EU payments to mem#er

state

15


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The recor& of '5U so far899

• difficultF #irth and early teenage years: – an oil shoc& in !!! and again in !!6

– a ;orld;ide slo;do;n in early !!!s

– eptem#er 11% !!1

–

the stoc& mar&et crash in !! – fghanistan% 7raK ;ars

– the ;ea& U dollar

– the !!' glo#al financial crisis

– the European +Eurozone sovereign de#t crisis

–


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#orces of 'ro,one &ata

ource: http:IIsd;)ec#)europa)euIhome)do?chartAt1)/1*


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Inflation6 missing the o./ective: a little 8ntil!00; commo&ity .oom: !00;-1" financial crisis

ource: European ,entral


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The *erformance of the ero against U#<



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7lo.al financial crisis6 the early &ays

• “ The European Central Ban-0s main tas- is to -eep inflation down.But over the past month, it has thrown caution to the wind in tryingto prevent Europe0s financial system and integrated economy fromfalling apart.

• The ECB has transformed itself into a crisis manager of the sort thatits architects could hardly have imagined when the ban- too- up itswor- 12 years ago. The ban-, charged with managing the euro, was

given a single mandate $ to -eep prices under control.• 3ately, however, the central ban- has cast aside worries about

inflation, cutting interest rates once already, with more cuts in the pipeline. t the same time, it is lending ever more cash tostrapped ban-s.4

7nternational Lerald Tri#unecto#er 1/% !!'

1'


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'arly stages of the recession

• Eurozone entered recession in !!'M5• European ,ouncil agreed pac&age to avert financial meltdo;n

in cto#er !!'

• =ational governments +not E,


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'ro,one short-term interest rate



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7=P gro$th (> change year-to-year)

dou#le-dipF



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7=P (!00? @ 100)

(ea&

04(


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'ro,one nem*loyment rate



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7overnment &e.t in the 'ro,one

•

Eurozone governments are effectively #orro;ing in Dforeigncurrency’

• They cannot #orro; from their o;n central #an&s%

monetise the de#t and inflate a;ay their de#ts +li&e U

and UN

• 8inancial mar&ets demand ever-higher ris& premium from

inde#ted governments



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'ro,one government .&get .alance (> 7=P)



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'ro,one government &e.t (> 7=P)



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7overnment &e.t in ey 'ro,one contries

6


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=eficits an& &e.t

ource: Eurostat

'


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%rom financial crisis to sovereign &e.t crisis

•8rom !1!% gro;ing concern a#out sovereign de#t levels in 0reece%pain% 7reland% (ortugal and 7taly

• the no #ail-out

clause in rticle 1!5 stipulates eplicitly that neither the ,ommunity

nor any $em#er tate is lia#le for or can assume the commitments

of any other $em#er tateF

9


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National long-term interest rates

5!ource: European ,entral


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The .ailots

• 7n pril !1!% #ailout mechanism used - O5!#n lent to 0reece

• 7n $ay !1!% EU esta#lished a larger fund of O6*!#n

– O""!#n from eurozone states

– O/! #illion from European ,ommission

– O*! #illion from the 7$8

• European ta#ility $echanism% agreed in 4ecem#er !1!: – issues de#t on capital mar&ets% #ac&ed #y guarantees from the

eurozone states

– lends to inde#ted eurozone governments once recovery plan +ie%austerity agreed

– ,om#ined ;ith a monitoring #ody

51


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7reece $elcomes 'U recovery *lan

5


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'C .on& *rchases

• The Treaty prohi#its the direct financing of pu#lic entities’deficits #y Cthe purchase of de#t instruments% ecept for the

purpose of monetary policyF

• 8rom mid-!11% E,< forced to #uy the #onds of ;ea&

governments% especially 7taly and pain% to stop spirally #ond

yield differentials

• ,ould #e seen as sta#ilising the mar&et if yield differentials

fall #ac&C

• C#ut can #e seen as monetising de#t of ;ea& governments

55


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'C maret sta.ilisation o*erations

5"ource: European ,entral


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Is the me&icine $oring+

• The E,< P)))is ready to do ;hatever it ta&es to preserve the

Euro) nd #elieve me% it ;ill #e enoughF $ario 4raghi% @uly!1

• com#ination of the #ailouts and the #ond purchases havesent a strong signal to the mar&ets that the EU is committedto defending the Eurozone

• EU has given #ail-outs to five Eurozone mem#ers +0% 7Q.% (%E% 7 > loans conditional on #udget cuts

• .ong-term interest rates are coming do;n

•


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A vote of confi&ence in the 'ro,one from thefinancial marets

5/ource: European ,entral


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Conclsions

• The E,< set up ;ith primary o#Bective of price sta#ility and

independent of national and EU governments > it may not directlymonetise de#t

• 7n E$U% national fiscal policy is the only macroeconomic policy

tool to adBust to negative shoc&s

•

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