1. The economic crisis in Europe – causes, effects, policies, alternatives Presentation to PERC seminar on the crisis in the Baltics, Vilnius, 9 June 2009

2. Andrew Watt © etui (2009) Economic crisis - Vilnius 2 Overview Causes Current situation Green shoots? EU policy response Critique – what needs to be done

3. Andrew Watt © etui (2009) Economic crisis - Vilnius 3 Causes – not just a financial crisis Sharp rise in commodity prices Sharp appreciation of the euro Lagged effect of past interest-rate rises Imbalances and (housing) booms in some EU countries Then shock from US hit Europe: US consumer retrenchment Fed rate cuts led to more appreciation of euro Toxic assets held by EU banks Emerging markets and world trade hit

4. Andrew Watt © etui (2009) Economic crisis - Vilnius 4 Grim prospects for EU (worse than US) Note: following charts from European Commission Spring Forecast

5. Andrew Watt © etui (2009) Economic crisis - Vilnius 5 Massive output drop – but no unsustainable boom

6. Andrew Watt © etui (2009) Economic crisis - Vilnius 6 Severe lagged impact on (un)employment

7. Andrew Watt © etui (2009) Economic crisis - Vilnius 7 Severe lagged impact on fiscal position

8. Andrew Watt © etui (2009) Economic crisis - Vilnius 8 Bottoming out? – sentiment indicators

9. Andrew Watt © etui (2009) Economic crisis - Vilnius 9 Bottoming out? – share prices

10. Andrew Watt © etui (2009) Economic crisis - Vilnius 10 Bottoming out? - industrial production

11. Andrew Watt © etui (2009) Economic crisis - Vilnius 11 Downside risks Renewed rise in commodity prices Unexploded bombs in the financial sector (especially in Europe!) Collapse of the US-dollar Currency crises in eastern Europe Premature exit strategies

12. Andrew Watt © etui (2009) Economic crisis - Vilnius 12 Policy response in Europe – too little too late

13. Andrew Watt © etui (2009) Economic crisis - Vilnius 13 Cut in interest rates limited impact on firms borrowing costs

14. Andrew Watt © etui (2009) Economic crisis - Vilnius 14 Policy response in Europe – too little too late Simple average Weight ed averag e Total fiscal package 09/101.701.79 in 20090.991.02 in 20100.610.59 revenue side52% expenditure side48%

15. Andrew Watt © etui (2009) Economic crisis - Vilnius 15 Policy response in Europe – too little too late ATBEDKFIFRDE HUHUITLUNLNOPTESSEUK Overall size of fiscal package2.4 0. 92.21.512.6400.2 1 4.62.41.5 in 2009 1 0. 41.210.71.200.21.70.40.71.22.31.21.4 in 2010 1.4 0. 410.50.31.500.1 0.5 1.1-0.1 expenditu re side 3060 206446 50808475803410

16. Andrew Watt © etui (2009) Economic crisis - Vilnius 16 Assessment of fiscal packages The fiscal packages in the EU are too small they offer a ‘quantum of solace’ to Europe and fail to address global imbalances. Current self-satisfaction by policymakers completely inappropriate. The distribution across countries varies considerably. On the positive side, to some extent this is justified economically and widespread free-riding seems to have been avoided (success for EU). However, the supposed ‘fiscal room for manoeuvre’ seems to be a binding constraint on more cyclically appropriate policies. Particularly problematic in eastern Europe (IMF). Failure of European fiscal solidarity. Mixed picture in terms of content of the packages. Considerable focus on public investment, but concerns about distribution, lack of attention to labour market crisis and missed opportunity on green issues.

17. Andrew Watt © etui (2009) Economic crisis - Vilnius 17 Critique Overall European macroeconomic policy is behind the curve and too timid Policy coordination was evident but inadequate Lack of European solidarity (especially vis-a- vis eastern Europe) Social and distributional issues not addressed Missed opportunity for longer-term reforms (especially climate change)

18. Andrew Watt © etui (2009) Economic crisis - Vilnius 18 Policy alternatives – save the economy and address distributional crisis Make support for financial sector more conditional Expand fiscal packages Ease constraints on fiscally challenged countries to enable them to run expansionary policies and prevent downward spirals EU investment program especially in ‘green’ growth Equitable exit strategy (higher top rate of income tax, financial transactions tax) Reform of financial sector regulation Guidelines for management remunerations schemes Support for collective wage bargaining institutions