EU policy impacts and perspectives Martin Myant ETUI

Is the crisis over? Need to remember origins… Started with credit and banking crisis in USA, taking hold in 2008, Spread around world with restrictions on credit, and what depends on credit; construction and some manufacturing industry Recovery for manufacturing fairly rapid ‘over’ for much of the world EU goes into renewed decline from 2010, ECB forecasts 0.4% drop in eurozone for 2013.

GDP, annual % change, IMF World USA euro Dev Asia

How is Europe (EU) different? Some countries; housing bubbles and construction booms, financed by credit, from outside that country (NOT only eurozone) Construction does not recovery (always dependent on credit) Also loss in car (exports), but quickly recovers Government policies from 2010, austerity and cutting spending, both where imposed (Greece) and where not imposed (Czech Republic) Variations between countries and widening divergences Takes us into prolonged depression, and affected thinking/attitudes/expectations Very hard to recover; saving more, accepting lower wages

Example - employment in Spain, millions, Eurostat Industry Construction Public sector All

And unemployment? % rates, Eurostat Euro Greece Spain Germany UK Ireland

So who are the unemployed? Links to construction booms Links to declining industries How could they be found alternative employment? What of youth unemployment? dramatic figures, partly misleading

Unemployment rates and ratios, end 2012, and RateRatioRateRatio euro Greece Spain Germany Denmark Estonia UK

EU analysis of crisis Frequent statements; Excessive public debt Excessive (unit) labour costs (interpreted as the same), so wages are too high Countries lack competitiveness and ran into debt, needs to be repaid and wages need to fall

Comments; no link to how we know crisis started, ignores variety among countries, ignores how debts arose Not a ‘competitiveness’ problem across eurozone (current account surplus 1.2% of GDP in 2012) Wage costs won’t change much, quickly, within eurozone (export quite different products, olive oil.v.cars, wages important over quite long time periods – where to put investment) Trade with rest of world as important (German exports do well, Portugal needs transformation – not lower wages – requires skills-education-investment)

More on variety among countries, on how debts arose eg Spain & Ireland, from banks after constr boom, Italy & Portugal from long-term low growth – latter failed to transform to exporting high value- added products, Greece, does include gvt spending, also banks Cyprus, banks, after lending to Greece BUT – figure they see is PUBLIC debt, after it has taken over private debt

Is public debt a problem? Barroso; ‘unsustainable’, root of problems Way for gvts to finance activities Borrow (from banks, funds, public – so it is from us) Repay, with interest Low rate of interest, economic growth, repay easily (-ve real rates of interest for short-term credits, now) ‘unsustainable’ = lenders will not trust in repayment, demand ever higher interest rate, cannot afford it, state bankruptcy NO SET LEVEL when that happens, eurozone has 60% of GDP limit Central bank can resolve it (create money, guarantee, not ideal, but) Levels rose with crisis (for most, NOT before), bank debts + low tax revenues + GDP falls

Gvt debt/GDP, %, IMF & Eurostat USA Germany Italy Greece Ireland UK (155)

Debt crisis Greece 2010, looked for IMF-EU help (troika), but high interest rates, so debts continued to grow, No resolution, new bail-out 2012, this time banks had to suffer losses, (total amount lent + promised more than annual GDP) Fears (by banks) of same – Ireland, Portugal, Spain, then Cyprus, because banks had lent to Greece Conditions; budget cuts and then labour market ‘reforms’ = pay cuts, restrict collective bargaining, less regulation New element for Cyprus, depositors pay Predicted quick recovery, but led to lower GDP (cuts spending, cuts wages, leads to consumer caution), solves no fundamental economic problem… Biggest ever IMF programmes and worst ever results Solution as in UK, central bank takes the debts, unacceptable… against its rules…

What has been resolved? Eurozone could have split up if a country defaults on debt, or leaves the common currency, establishing its own and (inevitably) devaluing, that hits banks that have lent and threatens financial chaos. Bad for all. But all countries have accepted the terms (some willingly, some reluctantly?). Could have bluffed? What if Spain leaves, or Italy? Mario Draghi, September 2012, will do everything necessary to save the euro, ECB found means to take over state debts, to ‘print money’ Still high interest rates for some, but very low for others (eg France)

Where are we now? – Greece Greatest ‘success’ in cutting wages, 20% drop in average real wages 2009 to 2012, Biggest fall in public sector No impact on export performance (anyway only about 20% of GDP) ‘internal devaluation’, but nothing new to export, little price sensitivity Lower incomes, lower imports, only ‘success’

Where are we now? – Ireland Presented as great success story, but no recovery here Exports over 100% of GDP, real wages fell by 4%, but more in public sector (irrelevant to exports) Exports actually declined in manufacturing (Dell moved out…) Big success in ‘computer services’, high wages, low employment (3% of total employment), come because of lower business tax than in UK Total employment fell ( ) 14%, 56% in construction, fairly stable in public sector, but no jobs in Ireland?

Where are we now? - Latvia Another claimed success story that is said to prove internal devaluation works Massive GDP fall and recovery, still 12% below 2007 level in Real wages fell by same amount Employment fell by 20%, but 12% decline in population ( ) or 19%, of prime working age Continual trade deficit, exports raw materials or goods on their way to (or from) Russia EU money to help

Where are they now? - Germany GDP fell in 2009 (cars/machinery) by 5.1%, but strong recover 2010 and 2011 (exporting to outside EU, growth elsewhere in world) Very low growth after that (affected by austerity at home and in EU) Exports in 2012 below 2008 level, but big growth for China (also USA) while declines from EU Current account surplus… 7% of GDP

What will happen now? Predict diverging trends; with no policy changes – further debt bail outs, Growth and structural transformations - not happening, prospect of more decline, stagnation, widening gaps, Some countries doing OK, but danger of loss of all their savings, and markets if the euro fails, default or break-up of eurozone threatens all, Pressure to do something, but can be policies that solve nothing (more internal devaluation) Fears from population, accept lower wages, lower living standards Immense political pressures around fears of state bankruptcy, gives legitimacy to austerity (fears in ALL countries, whether justified there or not) Political threats and uncertainties Solutions? Reduce the debt burdens, relax the rules, allow borrowing, allow wage rises and investment But not easy politically and no rapid improvement for economies