Embed Size (px)
Citation preview
How Europe Ended Up Someplace Else
Ashoka Mody EuroTragedy: A Drama in Nine Acts
New York: Oxford University Press, June 2018
Thesis: monetary union would lead Europe into political union.
Early warnings it would not.
• Nicholas Kaldor, March 1971:
o Single currency would amplify economic divergence, and
o A house “divided against itself cannot stand.”
• Robert Marjolin, crucial catalyst of Treaty of Rome, in the 1970s:
o Political efforts to counteract economic divergence would be
impeded by the sovereignty barrier:
o European leaders “obviously not ready” to give up core
sovereign functions;
o Change required was “too profound.”
A flawed euro, which the French desperately wanted, on German terms.
• Chancellor Helmut Kohl—despite
severe initial misgivings—pushed the
euro, overriding German public’s
deep opposition to giving up the
deutsche mark
• Seeking the Bundestag’s
authorization on April 24, 1998, he
twice said:
• “According to the treaty rules, the
community shall not be liable for the
commitments of the member states
and there are no additional financial
transfers.” Translation: Germany will
not pay the bills of other member
countries.
• Kohl’s mantra: euro would ensure
Europe’s peace.
But there was no conception of what the end goal was …and, hence, no idea of how Europe would get there.
“If you don’t know where you are going,
You'll end up someplace else.”
Yogi Berra
The tragedy: the euro inevitably pushed Europe into a “someplace” else that was not good.
Kaldor’s ghost stalks:
The euro divides Europe
The great divergence in euro-area incomes and employment.
Per capita incomes (In thousands of US dollars, corrected
for purchasing power parity)
Unemployment rates (Percent)
Sources: Conference Board, “Total Economy Database (Adjusted Version),” http://www.conference-board.org/data/economydatabase/; IMF, World Economic Outlook Database, https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx.
34
36
38
40
42
44
46
48
50
2003 05 07 09 11 13 15
Germany
France
Italy
4
5
6
7
8
9
10
11
12
13
2003 05 07 09 11 13 15
Italy
France
Germany
The euro-area north-south divergence: public debt and youth distress. Public debt Youth unemployment and inactivity
Source: IMF, World Economic Outlook Database; Eurostat (edat_lfse_20). Note: Countries on the left side correspond to the countries on the right side. The “unemployed” are those who are looking for a job but are unable to find one; the “inactive” are not looking for a job and neither are they in an educational or training program. The sum of the unemployed and inactive is known as “neither in employment, education or training” (NEET).
0 50 100 150 200
2017Netherlands 2007
2017Germany 2007
2017Austria 2007
2017Finland 2007
2017Portugal 2007
2017France 2007
2017Spain 2007
2017 Greece 2007
2017 Italy 2007
Public debt as a percentage of GDP
0 5 10 15 20 25
20162007
20162007
20162007
20162007
20162007
20162007
20162007
20162007
20162007
Percentage of population 15 to 29 years old
Inactive Unemployed
Divergence was predictable, not an accident: southern euro area suffers from weak governance and institutions, which weaken growth potential:
The euro is cruel on countries with low growth potential.
Source: World Bank, Worldwide Governance Indicator. Note: The overall index presented is an average of measures of government effectiveness, regulatory quality, rule of law, and control of corruption. Each individual measure is normally distributed, with a mean of zero, a standard deviation of 1, and an approximate range of –2.5 to 2.5. Larger values indicate better governance.
0.0 0.5 1.0 1.5 2.0 2.5
2015Netherlands 1998
2015Germany 1998
2015Austria 1998
2015Finland 1998
2015Portugal 1998
2015France 1998
2015Spain 1998
2015 Greece 1998
2015 Italy 1998
Better governance and institutions
Poorer long-term growth prospects a trap: persistently low R&D rates in
the euro-area periphery, hence persistently low growth potential. (R&D as a percentage of GDP, 2016 versus 1997)
Source: OECD Statistical Database.
Austria
Belgium
DenmarkFinland
France
Germany
GreeceIreland
Italy
Netherlands
Portugal
Spain
Sweden
United Kingdom
United States
0
0.5
1
1.5
2
2.5
3
3.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
R&
D/G
DP
rat
io (
per
cen
t) i
n 2
016
R&D/GDP ratio (percent) in 1997
Predictably, German exporters shift their sights away from the euro area. (Percent of total German exports to the various countries)
Source: IMF Data, http://data.imf.org/regular.aspx?key=61013712.
Undercuts the idea that the euro would promote trade and, hence, growth.
United States
Italy
Czech Republic, Hungary, and Poland
0
2
4
6
8
10
12
1999 2007 2016
France
China
Kaldor’s ghost stalks also the eurozone’s politics
Italians lost trust in Europe: economic wounds left political scars. (Decrease in percentage of respondents who trust the European Union, 2016 relative to 2001)
Source: Standard Eurobarometer survey, available at http://zacat.gesis.org. Note: Respondents answered the following question: “I would like to ask you a question about how much trust you have in certain institutions. For each of the following institutions, please tell me if you (Tend to trust it; Tend not to trust it): The European Union.” The chart presents the change in share of people who said they trusted the EU. For each year, 2001 and 2016, responses for the two available quarters are averaged.
-40
-35
-30
-25
-20
-15
-10
-5
0Italy France Germany
“European chancellor” Merkel held eurozone together:
Became polarizing force.
Between 2010 and 2016, Merkel
was de facto European
chancellor, a goal that Kohl had
dreamt of.
Ipso facto, she became a
politically polarizing figure,
dividing Europe.
• In Italy, February 2013 election:
o Rise of the anti-euro Five Star
Movement
o Silvio Berlusconi, whose party also
performed well, asked at his rallies,
“Do you want a government that that
is subject to the diktats of Europe?”
o Pro-European Mario Monti
electorally humiliated.
• In Germany, starting in 2012:
o Breakaway group from Merkel’s
Christian Democratic Party (CDU)
formed Alternative für Deutschland,
initially as an anti-euro party and
then as an anti-immigrant party.
Looking ahead:
The future ain’t what it used to be
For now, Greece has lost its democracy.
• Failure to provide substantial
and upfront debt relief implies
o Large primary surpluses
o Historically hard to maintain
o Will constrain government investment
o Keep growth low
• More seriously
o Greek parliament will mainly rubber-stamp decisions made in Berlin, Brussels, and Frankfurt.
The ECB has reached its political limits
ECB tardy in initiating bond purchases:Euro-area inflation rate began dropping in mid-2013, delivering the
lowflation wound. (Three-month moving average of “core” annual inflation rates, percent)
Source: Eurostat: “HICP—All Items Excluding Energy and Food”; St. Louis Fed, FRED: “Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index).”
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Jun2012
Dec12
Jun13
Dec13
Jun14
Dec14
Jun15
Dec15
Jun16
Dec16
Jun17
Dec17
Jun18
United States
Euro Area
The ECB keeps forecasting a rise in inflation:
Inflation remains stubbornly low.
Sources: ECB’s Macroeconomic Projections made in March of the year, https://www.ecb.europa.eu/pub/projections/html/index.en.html. Note: 2018 core inflation is the average of months January to September 2018.
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2012 13 14 15 16 17 18 19 20
2013 forecast
2014 forecast
2015 forecast
2016 forecast
2017 forecast
Solid line is the actual euro-area
core inflation
2018 forecast
The ECB lacked commitment to bond purchases, even more so than the
Bank of Japan.
Note: Exchange rate for JPY/USD equals 100 on January 4, 2013 (date of the announcement of quantitative easing by the Bank of Japan) and exchange rate for EUR/USD equals 100 on January 22, 2015 (date of the announcement of quantitative easing by the ECB). Source: For USD and Japanese Yen, https://www.investing.com/currencies, for USD and Euro rates ECB, https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=120.EXR.D.USD.EUR.SP00.A&periodSortOrder=ASC.
80
90
100
110
120
130
140
150
-100 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400
Number of days from the quantitative easing announcement
JPY/USD
EUR/USD
Depreciation relative of the dollar
Start of quantitative easingJanuary 4, 2013: Bank of JapanJanuary 22, 2015: ECB
February 1, 2016
July 1, 2016
January 1, 2017 September 15, 2017
October 24, 2017: ECB begins tapering QE
Taper talk
Taper talk
June 14, 2018: ECB announces QE end date as end-2018
World trade rather than ECB’s bond purchases moves eurozone growth.
(Annual growth rates, percent; three-quarter moving averages)
Source: For world trade growth data World Trade Monitor, https://www.cpb.nl/en/data; for the industrial production of Germany, France and Italy Eurostat, code [sts_inpr_m]. Note: The three-month average of growth over the same three months in the previous year.
-1
0
1
2
3
4
5
6
7
Aug2015
Nov15
Feb16
May16
Aug16
Nov16
Feb17
May17
Aug17
Nov17
Feb18
May18
Aug18
World tradeGermany industrial productionFrance industrial productionItaly industrial production
ECB bond purchases in flow from March 2015, but
unable to raise economic
Italy: theater of EuroTragedy
Italy needed—and needs—the crutch of a depreciating currency to offset its abysmal productivity growth.
The depreciating lira (Number of liras for one D-mark)
Italian productivity fell relative to German (annual total factor productivity growth)
US Dollar/Euro exchange rate is back where it began, 1999-2018
Italian productivity collapsed while even German fell behind the U.S.
(annual total factor productivity growth)
Source: Top left panel: Banca d'Italia, https://tassidicambio.bancaditalia.it/timeSeries; top right panel: ECB data warehouse https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=120.EXR.D.USD.EUR.SP00.A&periodSortOrder=ASC; bottom left and right panels: The Conference Board, https://www.conference-board.org/data/economydatabase/index.cfm?id=27762.
0
200
400
600
800
1000
1200
1400
70 74 78 82 86 90 94 981970
0.0
0.5
1.0
1.5
2.0
2.5
1970-79 1980-89 1990-98
Italy Germany
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
99 02 05 08 11 14 171999
The euro's starting
exchangevalue
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
2008-08 2009-16
Italy Germany United States
Young college-educated Italians leave Italy in growing numbers.
Source: Italian National Institute of Statistics.
Italy's low growth trap: poor opportunities, the educated leave, R&D remains weak, and opportunities remain poor.
0
2
4
6
8
10
12
14
16
0
5
10
15
20
25
30
2002 04 06 08 10 12 14 16
Sh
are of 2
5 to
34
years-old
s amo
ng m
igrants
with
college d
egrees
Nu
mbe
r o
f co
lleg
e-ed
uca
ted
mig
ran
ts o
lder
th
an
25
(th
ous
and
s)
25-34
Number of collegegraduates leavingItaly (left)
Number of collegegraduates returningto Italy (left)
Share of 25 to 34 year-olds among migrants with college degrees (right)
Italy’s financial problems:
The government-bank “doom loop,” always latent, has remerged.
Sources: FTSE Italia All-Share Financial Index: Global Financial Data, ticker IT8300 Index; FTSE Italia All-Share Index: Global Financial Data, ticker FTSEMIB Index; Italy ten-year bond yield: Datastream International, code S310DT. Notes: The graph presents the relative performance of financial stocks and the Italian 10-year bond yield from 2 January 2015 to 18 September 2012. The relative performance of financial stocks for Italy is the ratio between the FTSE Italia All-Share Financial Index and FTSE Italia All-Share Index.
0.8
0.9
1.0
1.1
1.2
1.5
2.0
2.5
3.0
3.5
4.0
Jan2018
Feb18
Mar18
Apr18
May18
Jun18
Jul18
Aug18
Sep18
Oct18
Government bond yield (left, percent)
Financial sector performance(right, index)
Sovereignty barrier remains as strong as ever
The myth of Franco-German friendship.
At the December 2012 European Council, Herman Von Rompuy proposed a eurozone budget. Merkel asked, “Where will the money come from?” French president François Hollande helpfully suggested to Merkel that she think of it as a “solidarity fund.” Again, Merkel coldly asked, “And where will the money come from?”
The search for a savior.
How the saviors fall:Matteo Renzi and Emmanuel Macron approval ratings.
(Approval ratings, percent)
Source: Ipsos polls for Matteo Renzi, www.ipsos.it; Ifop for Emmanuel Macron, https://www.ifop.com/wp-content/uploads/2018/08/Indices-de-popularit%C3%A9-Ao%C3%BBt-2018.pdf. Note: Percent "Don't know" excluded.
May 2017 May 2018 May 2019 May 2020 May 2021
10
20
30
40
50
60
70
May 2014 May 2015 May 2016 May 2017 May 2018
Matteo Renzi
Emmanuel Macron
There are no saviors.
Europe: a declining continent for over a century:
The future does not look much better, as Asia surges ahead.
(US patents granted annually to companies in different countries, numbers in thousands)
Source: World Intellectual Property Statistics Database, https://www3.wipo.int/ipstats/index.htm.
0
2
4
6
8
10
12
14
16
18
1995 97 99 01 03 05 07 09 11 13 15
Republic of Korea
Germany
China
France
Italy
The warnings were sounded. It
need not have been. It almost was
not. The rest followed. It could
get worse, a lot worse.
• The euro has hobbled many of
its member countries.
• It has created bitter political
division among Europeans.
• If Aristotle were alive today, he
would see how “eminently
good and just” men and women
enacted the EuroTragedy, “not
by vice or depravity,” but by
“error or frailty.”
