The Eurozone in crisis Financial crisis and public debts trigger, course and responses

Transkript

1 The Eurozone in crisis Financial crisis and public debts trigger, course and responses Fakultät für Wirtschafts- und Organisationswissenschaften EU and Euro Crisis, UniBW Unit 8

2 Structure! Trigger The U.S. subprime crisis! Course I from the US subprime to the global financial crisis! Course II from the financial to the government-debt crises*! Policy responses*! Back on track economic growth in the aftermath of the crisis* *See also The Eurozone in crisis, McGraw-Hill Companies, Chapter 19 If not indicated otherwise, data based on the eurostat database 1

3 The U.S. subprime crisis Low interest rates and cheap mortgage loans Prospering economy 2

4 The U.S. subprime crisis Low interest rates and cheap mortgage loans Prospering economy Rising house prices Housing prices in the US (Index: January 2000 =100) 3

5 The U.S. subprime crisis Low interest rates and cheap mortgage loans Prospering economy Rising house prices New financial products e.g. Collateralized Debt Obligations (CDO): Combining a large amount of risky mortgage loans to an argubaly safe AA or even AAA mortgage portfolio (reasoning: though it is likely that one debtor of a risky mortgage loan cannot serve the bank, it is highly unlikely that all debtors cannot serve the bank) 4

6 The U.S. subprime crisis Low interest rates and cheap mortgage loans Prospering economy Rising house prices New financial products Lax provision of loans (no proof of income) Increasing volume of mortgage loans Greedy investors Fully deregulated banking sector 5

7 The U.S. subprime crisis Low interest rates and cheap mortgage loans Prospering economy Rising house prices New financial products Lax provision of loans (no proof of income) Increasing volume of mortgage loans Greedy investors Fully deregulated banking sector Increasing interest rates Cool down of the economy Falling house prices 6

8 The U.S. subprime crisis Increasing interest rates Cool down of the economy Falling house prices Housing prices in the US (Index: January 2000 =100) 7

9 The U.S. subprime crisis Low interest rates and cheap mortgage loans Prospering economy Rising house prices New financial products Lax provision of loans (no proof of income) Increasing volume of mortgage loans Greedy investors Fully deregulated banking sector Increasing interest rates Cool down of the economy Falling house prices CDO lose their good ratings Collapse of US housing market Defaults of loans Many sellers but no buyers 8

10 From the U.S. subprime to the global financial crisis Subprime crisis Thank god, Amerika is far away! 9

11 From the U.S. subprime to the global financial crisis! June 2007: 2 Hedge-Fonds of Investmentbank Bear Stearns fail due to engagement in mortgage loans! July 2007: Major problems of several European banks due to engeganement in US mortgage loans! banks grew suspicious of one another and stopped their mutual lending that makes up the interbank market! central banks provided liquidity directly to their banks.! Sept. 2007: Clients rush british Bank Northern Rock. The state is to acquire NR s capital and guarantees liquidity.! Oct. 2007: Many US and European banks issue profits warning! Febr. 2008: US launches stimulus packahge of 150 billion US$! March 2008: FED recommends to sell Bear Stearns to J.P. Morgan Chase. The state is to acquire BS s capital and guarantees liquidity. 10

12 From the U.S. subprime to the global financial crisis! Sept 2008:! The US-Government takes control on Fannie Mae and Freddie Mac.! Insolvency of Lehmann Brother.! Merrill Lynch is sold to Bank of America! FED provides a loan of 85 billion US$ to American International Group! Goldmann Sachs and Morgan Stanley become normal banks! Washington Mutual is sold to J.P. Morgan Chase.! The state of Ireland guarantees liquidity of Irish banks (up to 400 billion ) 11

13 From the U.S. subprime to the global financial crisis! Oct. 2008:! German government guarantees for savings deposits of private household! Six large central banks announce lowering of key interest rates! First signs of economic recession (car producer)! Nov. 2008:! Commerzbank and other German banks make use of financial help provided by the German government! Many governments launch stimulus packages (Germany 12 billion, China 600 billion US$, USA 1000 billion US$)! Dec. 2008:! FED-key interest rate has fallen to %! ECB-key interest rate has fallen to 2.5% 12

14 From the U.S. subprime to the global financial crisis! Summary! Policy makers (governments and central banks) follow the lessons learned from the Great Depression and rescue large financial institutions! Governments must bail out banks and other financial institutions! Central banks must provide liquidity to the financial system and adopt sharply expansionary policies! Deep distress in the financial system is soon followed by a profound and long-lasting recession! Governments must use fiscal policy to prevent a vicious cycle of recession (the London G20 Summit in 2009 called upon all governments to urgently adopt expansionary policies) 13

15 From the financial to the government-debt crisis! The public debt crisis! The rescue of banks and other financial institutions is followed by dramatic increases of public budget deficits Budget balance

16 From the financial to the government-debt crisis! The public debt crisis! Rising debts of EU s G7 countries 15

17 From the financial to the government-debt crisis! The public debt crisis! Rising debts scandinavian countries 16

18 From the financial to the government-debt crisis! The public debt crisis! Rising debts of eastern countries 17

19 From the financial to the government-debt crisis! The public debt crisis! Countries mostly affected (aside from G7 member Italy) 18

20 Policy responses! Expensionary policy! The instrument of expensionary fiscal policy was used more intensively in the US and UK 19

21 Policy responses! Fiscal austerity as a mean to return to economic growth! The dilemma on stimulus vs. austerity! Broad consense in favor of fiscal stimulus! Austerity policy increases the risk to cut public expenditures to soon and too much.! However, many countries only have limited fiscal space for stimulus packages.! Excessive debts put pressure on an ageing society, future generations cannot pay the interest and carry costs of social insurances.! Instable financial markets, another financial crisis could put enormous pressure on public households. Starting at high debt levels could cause severe problems for already highly indebted countries. 20

22 Policy responses! Financial assistence! Countries heavily affected by the crisis can apply for financial assistence! Creation of the European Financial Stability Fund (EFSF) for availability of financial resources in case of contagion! Replacement with the European Stability Fund (ESM) in 2012! Lending capacity of 500 billion Euro (could be increased up to 700 billion Euro) 21

23 Policy responses! Financial assistence! Financial assistence for Greece was against no-bailout clause of Article 125 of Lisbon Treaty! It was justified on the ground of potential contagious effects, that should be avoided! in fact Ireland, Portugal and Cyprus received loans as well! The contagion argument was critizised, as the indebtness of Greece, Ireland, Portugal or Cyprus was not strong enough to explain why these countries and not others struggled in the face of the crisis.! Other explanations would be! Monetary union might be problematic for economically weak countries, as Central banks cannot help government to overcome crisis! Policy mistakes! Competiveness issues (increases of the unit labour costs) 22

24 Policy responses! Increases of the unit labour costs

25 Back on track?! Real GDP USA 24

26 Back on track?! Real GDP EU 28, Eurozone 25

27 Back on track?! Real GDP G7 countries 26

28 Back on track?! Real GDP scandinavian countries 27

29 Back on track?! Real GDP eastern countries 28

30 Back on track?! Real GDP countries most affected from crisis 29

31 Back on track?! Real GDP countries most affected from crisis 30

32 The Eurozone in crisis! Lessons learnt! Fiscal discipline: very high debt creates serious difficulties! limits countercyclical fiscal policy! challenges monetary policy independence! possibly limits growth! Austerity policy should not hamper necessary investments! Institutional aspects! Members of the Eurozone face different problems, joint monetary policy cannot address all problems! Development of exit strategy for members of Eurozone (legal procedure)! Development of legal procedure, in case of a member s insolvency 31