Crash, Euro crises and welfare futures

Outline: from 2008 to 2012

• Why the crash in 2007-8? – On mortgages, banks and public expenditure

• How the disease spreads– Banks and states: the PIIGS• Italy and Greece• Spain, Ireland (and Portugal)

– States and bond markets• The mess we are in

The crash in 2008

• 1990s – 2000s: growth of derivatives markets– Bonus-based promotions of mortgage loans & debt

• US / UK property bubble bursts: – Mortgage defaults– Property prices collapse / negative equity – Bank balances inadequate (run on banks)– Governments step in to forestall bank collapse

• Private debt becomes public debt.• Economies contract: unemployment rises (CEE)

Banks and currencies

• 2008-9 bailouts = public account deficits• Bang goes the Stability and Growth Pact as

borrowing rises• Bond market (finance government borrowing)

steps in– Cost of loans rise for vulnerable economies– Enter the Eurozone PIIGS– Portugal, Italy, Ireland, Greece, Spain

The problem in Spain (Ireland)

• Massive expansion of (& investment in) property 1990s and 2000s. Post-crash:– Abandoned development projects– Domestic banks undermined

• Rising unemployment hits state revenues– Result: massive public sector deficits– Result: mass youth unemployment

http://images.google.co.uk/url?sa=i&rct=j&q=piigs+debt+crisis&source=images&cd=&cad=rja&docid=4xAvGDl3N-fDmM&tbnid=tA6DMBs2vZuQkM:&ved=0CAUQjRw&url=http://www.allvoices.com/cartoons/c/93070080-bailout-for-spain&ei=Jt49UfW2M4O70QWShoCgBg&bvm=bv.43287494,d.ZGU&psig=AFQjCNErS1sNoYwpnpbRqjBt7KlBlC_E_Q&ust=1363094982571114

The problem in Greece (Italy)

• Heritage of extensive government borrowing– Small Eurozone economy slips sub EconFin radar

• Public expenditure sews together coalition parties (insider privileges & public pensions)

• Problems with taxation: lost revenue, constant borrowing to shore up deficits.– Greek problems affect Cyprus

http://images.google.co.uk/url?sa=i&rct=j&q=piigs+economic+crisis&source=images&cd=&cad=rja&docid=v_gopq2KNDAP5M&tbnid=igoIYaOkDlwukM:&ved=0CAUQjRw&url=http://www.leftbusinessobserver.com/OldEurope.html&ei=hNk9UYTMBLC00QXFu4HQBA&bvm=bv.43287494,d.ZGU&psig=AFQjCNE-pt9iXC-AmM_Nt2tgfgjArJi2PA&ust=1363094123926981

The issue of the Euro

• How to cure debt: – Devalue currency (impossible under Euro)– Raise interest rate (same + higher unemployment)– Renegotiate repayments (the IMF & ECB solution +

‘firewall’ of ECB guarantees)• The risk of default: the message of the bond

markets

The markets react: 2010

Moody’s + S & P ratings for Eurozone

http://images.google.co.uk/url?sa=i&rct=j&q=piigs+economic+crisis&source=images&cd=&cad=rja&docid=CNng710PujQODM&tbnid=SsQ1yaPTslRviM:&ved=0CAUQjRw&url=http://theshortsideoflong.blogspot.com/2011/07/keeping-one-eye-on-piigs.html&ei=ONo9UdfmNMHM0QWSo4EQ&bvm=bv.43287494,d.ZGU&psig=AFQjCNF7Sr5Ts-rqGOsl8TdbwoFhRHj1-w&ust=1363094380932413

Seen from the other side …

Impact on welfare…

• Market imperative is imposing cuts, mostly welfare, that hurt the most vulnerable– Real pension cuts (Spain, Portugal, Greece)– Real reductions in unemployment support.

• Reduced consumption, falling employment, austerity bites

• ECB: Eurobond bailouts: only agreeable to Germany if controls exerted over PIIGS fiscal policy

Public protest:

And good argument

Temporary dictatorship…

Rejected outright

Europe’s future in German hands?