EuroCrisis-Basics by Rock

От автора Moscowguy Studentki в группе Crock HSE Money Talk Group · Редактировать документ

You may notice that I have been stressing the European crisis this semester. It is the biggest challenge to the global economy today and can make all of us worse off if it develops in the worst way possible. Hence, high likelihood (predict your professor's behavior! ;-) to maybe ask a question or more on the final exam about this Number 1 issue in money, banking and financial institutions.

So I made this document up to help you master a complex of issues under this heading. Cheers., Doc Rock

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The Eurozone crisis update:

First, just below: Summary points (A,B,C & D) of financial/monetary problem etc. in Eurozone;

Second, after, Graphics links on Eurozone crisis;

Third, at end: Answers (policies to adobpt) 3-ideologies to cure market crisis of ‘real economy’ crisis

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What is this European “financial crisis”? Here is a listing of the elements that make this situation so serious and so dangerous (threat of decline of the real economy, and the political instabilities and dangers that make many recall the evils that came to power in the 1930s in that era of economic failure). These aspects are found both in the Eurozone (euro-economies) and in some other EU-member/non-euro countries, as well as in other non-EU European countriest:

A: FINANCIAL AND MONETARY ASPECTS:

--(1) ‘The Eurodebt Crisis’: Sovereign (GOVERNMENT) DEBT of several countries REFINANCING PRICE (INTEREST RATE) IS HIGH, around 7% currently for Italy and some other countries, and even higher for Greece. Succeeding in the repayment of debt become more difficult at higher prices and government debt can even grow larger with these high prices (refinancing interest rates).

----Possible Negative Effects of Eurodebt crisis: Many countries pay more to keep borrowing or refinancing existing debt as needed. For individual countries who defaultàDifficulty borrowing at all or having to pay extraordinarily high rates with special conditions (e.g.Greece so far cut repayment to 50% of value ‘voluntarily’ agreed to by banks.) Cannot carry out desired stimulus policy at all, due inability to borrow.

--(2) The ‘European Banking Crisis’: Balance sheets of European banks are not in good shape. They have a lot of BAD OR DOWNGRADED ASSETS (e.g. European Governments’ bonds). Some banks also face a loss of investor and depositor confidence in them, so there may be DECLINING DEPOSITS on the liabilities side of the balance sheet. Many banks CAPITAL IS TOO LOW to be able to provide a cushion in case of further balance sheet deterioration.

----Possible Negative Effects of Euro Banking crisis: Banks may reduce lending to business (slowing economic activity or making growth even negative). Some banks require governmental bailouts (already several countries, e.g. Ireland, Belgium) that are quite costly to public budgets. Bank panics as people and other depositors withdraw funds from banks, http://www.guardian.co.uk/business/2011/dec/16/greeks-fearing-collapse-of-eurozone-bailout-pulled-record-sums-from-bank accelerating the crisis for these banks and making some go into insolvency (legally bankrupt) and disappearing or being taken over by government (bailouts).

--(3) A possible ‘Systemic Financial Crisis’: The potential necessity for widespread ‘Government Spending or Financing of Banks in Trouble.’ If banks become severely illiquid or bankrupt they will need help to survive and prevent ‘contagion’ where all banks lose the trust of consumers & investors that can produce further bank weakening of balance sheets. Some banks will/may need EXTERNAL BAILOUTS of some kind to survive.

----Possible Negative Effects of Financial System crisis: Worst case: Credit freeze of no lending to anyone. Major banks across Europe go into failure (illiquidity hits some, many, most…no one knows for sure to what extent banks are near such a point if they cannot borrow for liquidity purposes) and ‘general banking panic’ as everyone tries to take cash out of banking system. Market system as a whole is threatened with full-scale collapse; if so, then expect novel, radical political changes in economic policies and intervention on a massive scale to try and stop such a crisis from leading to total collapse. Not the worst scenario: Credit becomes very very difficult to obtain for non-financial businesses and the market system slows down very rapidly as businesses have to operate without traditional credit access; some non-financial firms may go into insolvency (if highly leveraged balance sheets and not enough income flows to sustain operations) and/or massive lay-offs of employees. European-wide effects and more slowly, major global impact of this, especially on trading partners and especially those exporting a lot to Europe (e.g. China, Asia, USA, etc.)

--(4) ECB as the LENDER-OF-LAST-RESORT? This is another monetary/financial question for the Eurozone (countries using the Euro currency) is what role can be expected from the Euro-Central Bank (ECB). The charter of the ECB specifically states that the ECB CANNOT PURCHASE GOVERNMENT DEBT from its member countries so this alternative seems off the table of possibilities at present. It may also be legally impossible (without a change in rules) for the ECB to ISSUE EUROBONDS BACKED BY THE ENTIRE EUROZONE system; this would effectively make the bonds for any country guaranteed by all the members of the Eurozone (the 17 of the 27 in the EU; 10 are not members of the Euro currency). The ECB can help lend to banks, but is reluctant to do so on a large scale (and question of bank holdings of public debt is unclear it appears). An alternative being followed is for the ECB to use the IMF (International monetary Fund, a global institution) as intermediary for providing help to Eurozone governments in difficulty. Political pressures in each of the 17 member countries of the Eurozone make agreement on what to do very difficult to achieve. This is as much a political as an economic crisis situation; this is usually true in economic crises.

--(5) Should there be ONE KIND OF EUROBOND for all countries? Essentially this would mean collective responsibility for all government debts by ALL countries part of the Eurozone (i.e. using the currency and ECB as their own money and Central bank in effect). This would mean a FISCAL UNION of some kind for the Eurozone countries. They’d have to have some sort of COMMON PUBLIC BUDGET since their currency would become the guarantor of all Euro-denominated bonds issued by any one of the 17 country-members of the Euro. There is a sort of agreement on this but the Germans do not want to give the guarantee of All to any Eurobond….so it is not clear what the ‘fiscal union’ will actually be. It is to be decided in the future so we will only see then what it means. The problem for the current crisis, is that it does not really do anything specific for the short term crisis (or, perhaps, even for the medium---1-6 or more months challenges). Curently, no guarantee for any government debt except from the government concerned alone (and, as with Greece, that may not mean much to investors).

B: “REAL ECONOMY” ASPECTS OF THE CURRENT SITUATION:

--(1) GROWTH OF THE REAL ECONOMY problem: The future looks like one of LOW RATES OF ECONOMIC GROWTH so that everything becomes more difficult when the size of the ‘economic pie’ is not growing, or in some cases even shrinking. GDP growth rates are projected for only about +/- 1% or somewhat more in the EU. Some forecasts are for zero or even negative growth of the EU as a whole, depending on what occurs in the rest of the world’s economy.

--(2) UNEMPLOYMENT, ALREADY HIGH (in some countries) MAY RISE if growth stays low. Further negative impacts from rising unemployment are often felt especially by the young (less strongly connected to job; first to be let go), the less-well educated (few alternatives for work), and poorest (no savings to fall back on) and those living in countries with the least developed welfare systems (especially former communist countries like Poland, Hungary, Baltics, Bulgaria, Romania, and others with less public assistance programs in southern Europe).

Also as jobs decline, incomes decline and this can cause spread of business difficulties of finding consumers to buy from them.

--(3) BUSINESSES AND INVESTMENT are in an uncertain situation. Uncertainty makes businesses more cautious about new projects or expanding employment. In fact, businesses may become so cautious that employment is even reduced and spending cut back until the future is more clearly perceived. Negative effects are less new job creation, less investment means less income for other businesses and a downward ‘vicious cycle’ can continue to make the whole economic situation get worse and worse.

C: FISCAL (GOVERNMENT TAXES & SPENDING) ASPECTS OF SITUATION:

--(1) Low economic growth means the PUBLIC BUDGET of countries becomes a problem, a continuing FISCAL CRISIS OF THE STATE.

--(2) Low economic growth means TAX REVENUES STAY FLAT meaning governments have fewer financial resources to deal with the crisis.

--(3) The AUSTERITY PROGRAMS of many of the Eurozone economies means that PUBLIC EXPENDITURES DECLINE (‘Budget Cuts’) will be falling, while unemployment and household uncertainties means PRIVATE SPENDING STAGNATES or falls, and alongside this fall in public/private spending, businesses/companies will have declining sales, making them more uncertain about the future and increasingly there will be DECLINING PRIVATE BUSINESS INVESTMENT.

--(4) AUTOMATIC SOCIAL SPENDING INCREASES--High unemployment and rising poverty mean that social WELFARE expenditures (some automatically due to existing laws) of all kinds are RISING in real terms, and naturally as a proportion of GDP.

--(5) TAX REVENUES are additionally shrinking or barely rising, since people are earning LESS INCOME and even with TAX RATE INCREASES each portion of government debt financed at an interest rate of near 7% may become unsustainable.

D. GLOBAL ECONOMIC EFFECTS:

--(1) ‘AUSTERITY PROGRAMS’ IN MANY COUNTRIES: If many, or most of the important economies of the world also adopt restrictive (contractionary) budgets, it can mean that GLOBAL INCOME STAYS FLAT or even FALLS. Thus export growth, even for strong trading countries like Germany may begin to falter as EXPORT DEMAND FALLS for their products in the EU and the REST OF THE WORLD.

--(2) TRADE TENSIONS; In troubled economic times, perceptions of open trade enforcement becomes more important, since countries with economic difficulties may wish to show that they are trying to help their populations by not allowing ‘trade cheaters’ and new BARRIERS TO OPEN TRADE may further slow growth in the world economy as more and more countires pursue MORE AUTARKIC (self-reliant) TACTICS. (e.g. USA & China in their current trade disputes due to popular pressure in the USA about China ‘stealing American jobs’ and fierce national pride and a sense of growing economic power in China.)

So the ‘FINANCIAL’ and ‘GOVERNMENT DEBT’ crises of Europe, are, in part symbolic of perhaps an entire global market capitalist system under threat of stagnation, slow growth, or even more political (as well as economic challenges).

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Good Summaries or Graphics:

*Washington Post (USA):

-Several graphic explanations (a) the proposed (last week Dec.9) new treaty for Eurozone/EU (b) the opportunities to deal with it and failures; (c) countries compared in EU/Eurozone by data; (d) how crisis could affect U.S. citizens in a variety of ways (including as investors of savings): http://www.washingtonpost.com/wp-srv/special/world/european-debt-crisis-graphics/index.html this has all 4 links (a,b,c &d) including these pages below:

-(b-above) Timeline of steps along the way, what was done at each step, and why each step has failed to stop the crisis from continuing to develop:

http://www.washingtonpost.com/business/economy/missed-opportunities-in-the-european-economic-crisis/2011/12/06/gIQAp59uaO_graphic.html

-(c-above) Data on Eurozone countries {GDP & change in GDP since 2010; Debt/GDP; borrowing costs (interest rate) of government debt Aug-Dec.2011; and text about which countries seem to be in most trouble}

http://www.washingtonpost.com/wp-srv/special/world/state-of-the-euro-zone/

(d-above) How the crisis has/may in future affect: ( Jobs and Companies exporting (bad bad news!); US stock market (declines with each failure to resolve crisis); US money market mutual investors (could be big losses), House buyers (mortgage rates lower in US); travel overseas to Europe (dollar is relatively stronger vs.Euro, as people flee Euro and other European-linked investments)

http://www.washingtonpost.com/wp-srv/special/business/what-european-crisis-means-to-you/

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The “REAL ECONOMY”—normal people’s concern:

The financial system is obviously important to market capitalism today.

The other question thatmost normal people(non-economists, non financial workers)are really worried about is Jobs, Income opportunities, Growth….the Real Economyrather than the purely money/financial aspects of the banking ‘crisis’ or the debt ‘crisis’ per se.Most people have not studied these issues and most could care less about them…most find them complex and boring….they only worry that they will do them some personal harm.

Austerity or Stimulus (anti-austerity)

What is to be done about the “Real Economy” problems associated with the Euro crises (and the fallout from the US financial crisis beginning in 2008)?

The simplified troika of 3-ideological positions viewpoints among economists:

Right: Traditional Right advocated budget balancing in 1930s; today more subtle but austerity programs in Europe seem to come from this ideology about market capitalism. Not clear answer from these free market optimists; but at least a monetary policy that makes sure money supply does not contract as in 1929-33 in USA but expands as in 1933 (but how to do this is not certain in present circumstances since in 1933 government begain series of new steps involving public works, employment and spending and the Right has traditionally not advocated this).

Center: Large scale fiscal stimulus (government spending, tax cuts…..jump start the economy) and monetary easing of all kinds (innovative says Christine Romer…not sure what she means in article below); some types of employment policies perhaps.

http://www.nytimes.com/2011/12/18/business/financial-crises-impact-varies-widely-economic-view.html?ref=europeansovereigndebtcrisis

Left: Large scale fiscal stimulus (government spending increases, tax cuts…..jump start the economy) and monetary easing of all kinds, (these two policies shared with Center economists)…. and if these are not enough (as they are very probably not in the present crisis) then Left willing to spend even more from public budgets for major jobs creating programs (e.g. public works projects requiring a lot of labor, variety of possible employment subsidies to private employers to hire new workers, grants to unemployed who want to try and start businesses, subsidies for new energy saving companies, retraining subsidies for the unemployed, etc. etc. etc. nothing off the table for consideration…

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Moscowguy Studentki In this post I included the URL for the Christine Romer article about financial crises and how hard and long it is to exit from their effects. But she did make one error that was about the timing of Argentina to exit from its 'financial crisis of 2001...3 years not 8: see this correction http://www.cepr.net/index.php/blogs/beat-the-press/romer-on-financial-crises-getting-argentina-wrong