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1 © Vlerick Business School

UNDERSTANDING THE ECONOMIC CONTEXT


(MICRO-ECONOMICS)

MEMBA, JANUARY 2013


HANS GEEROMS
MODEL OF RICARDO
With a fixed amount of labour, two countries can produce and exchange:
(Terms of Trade: 1 ton steel = 1.0 ton wheat)

Euroland USA
5.0

Steel 25 + 5.0 - 5.0 = 25.0 ( 0.0 ) 50 + 5.0 - 2.5 = 52.5 ( 2.5 )

Wheat 10 - 2.0 + 5.0 = 13.0 ( 3.0 ) 100 - 5.0 + 5.0 = 100.0 ( 0.0 )

5.0

3| © Vlerick Business School January 2013 Macroeconomic Environment European Business


MODEL OF RICARDO

Euroland: 1 hour of labour = 10 Euro


USA: 1 hour of labour = 20 USD

National Currency Common Currency (€)


Exchange rate 1.2 USD=1EURO

Euroland USA Euroland USA


€ $
Steel 0.4 0.4 Steel 0.4 0.333

Wheat 1 0.2 Wheat 1 0.167

4| © Vlerick Business School January 2013 Macroeconomic Environment European Business


MODEL OF RICARDO
WAGE REDUCTION OR CURRENCY
DEPRECIATION
Wages in Euroland lowered by 30% Wages in Euroland kept constant at 10 Euro, but
to 7 Euro Euro depreciates by 30% to 1 EURO= 0.84 USD

Common Currency (€) Common Currency (€)


Exch. Rate 1.2 USD=1EURO Exch. Rate 0.84 USD=1EURO

Euroland VSA Euroland VSA


(1) (2) (3)=(2)/(1) (1) (2) (3)=(2)/(1)
Steel 0.28 0.33333 1.190 Steel 0.4 0.476 1.190

Wheat 0.7 0.16667 0.238 Wheat 1 0.238 0.238

5| © Vlerick Business School January 2013 Macroeconomic Environment European Business


COMPETIVINESS SINCE EURO
(NOMINAL UNIT LABOUR COSTS COMPARED TO EUROZONE; 2000=100)
125

120
Belgium Germany
Ireland Greece
Spain France
115
Italy Netherlands
Austria Portugal
110 Finland

105

100

95

90

85

80
62000 © Vlerick Business
2001 2002 School2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
NEGATIVE ELECTRICITY PRICES

Wholesale electricity markets sometimes result in prices below zero.


That is, sellers pay buyers to take the power. This situation arises
because certain types of generators, such as nuclear, hydroelectric,
and wind, cannot or prefer not to reduce output for short periods of
time when demand is insufficient to absorb their output. Sometimes
buyers can be induced to take the power when they are paid to do so.

7 © Vlerick Business School


Source: US Energy Information Administration
NEGATIVE ELECTRICITY PRICES IN EUROPE
In the first couple of weeks of 2012, the
frequency of negative hourly prices in the
Central West European power markets,
mainly in Germany, multiplied compared
to previous quarters. The main reason for
the more frequent occurrence of negative
prices was the increasing share of wind
generation in the power mix coupled with
inflexible load and relatively mild weather
in January.

Source: European Commission, quarterly report on


electricity markets

8 © Vlerick Business School


MAXIMUM PRICES FOR DOCTORS: QUEUES

9 © Vlerick Business School


MAXIMUM PRICES FOR RENT OF HOUSES

10 © Vlerick Business School


MINIMUM PRICES FOR MILK: WASTE

11 © Vlerick Business School


FORGET IT: NOBODY CAN BEAT THE MARKET FORCES

12 © Vlerick Business School


BOLL WEEVIL

The boll weevil (Anthonomus grandis) is a beetle measuring


an average length of six millimeters, which feeds on cotton
buds and flowers.
13 © Vlerick Business School
TAX WEDGE
The tax wedge – a measure of the difference
between labour costs to the employer and the
corresponding net take-home pay of the
employee – which is calculated by expressing
the sum of personal income tax, employee plus
employer social security contributions together
with any payroll tax, minus benefits as a
percentage of labour costs. Employer social
security contributions and – in some countries –
payroll taxes are added to gross wage earnings
of employees in order to determine a measure
of total labour costs.
© Vlerick Business School
TAX WEDGE (AVERAGE)
Figure I.1 Income tax plus employee and employer contributions less cash benefits, 2011
As % of labour costs, by family-type1
Single no child Married one-earner couple 2 children

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%
Belgium
Germany
Hungary
France
Austria
Italy
Sweden
Finland
Slovenia
Czech Republic
Estonia
Spain
Portugal
Slovak Republic
Denmark
Netherlands
Turkey
Norway
Luxembourg
Poland
Iceland
United Kingdom
Canada
Japan
United States
Ireland
Australia
Switzerland
Korea
Israel
Mexico
New Zealand
Chile
2
Greece2
1. Corresponds to Table I.1, columns 2 and 5.
2. The 2011 average earnings figure for Greece was not available at the final compilation stage.
© Vlerick Business School
Figure I.6 Marginal rate of income tax plus employee and employer
contributions less cash benefits, 2011
As % of labour costs, by family-type1
Single no child Married one-earner couple 2 children
0% 10% 20% 30% 40% 50% 60% 70% 80%
Belgium
Hungary
Austria
(MARGINAL)
TAX WEDGE

Germany
Finland
Ireland
Luxembourg
Italy
France
Norway
Slovenia
Portugal
Czech Republic
Spain
Sweden
Netherlands
Slovak…
Iceland
Estonia
Denmark
Turkey
United States
Canada
United…
Israel
Poland
Japan
Australia
New Zealand
Korea
Switzerland
Mexico
Chile
2
Greece2
1. Corresponds to Table I.6, columns 2 and 5.
2. The 2011 average earnings figure for Greece was not available at the final compilation stage.

© Vlerick Business School


UNDERSTANDING THE ECONOMIC CONTEXT
(MACRO-ECONOMICS)
MACROECONOMICS: THE BIG
PICTURE (CHAPTER 21 IN KRUGMAN)

 Read for yourself

18 © Vlerick Business School


A FUNDAMENTAL CONCEPT: GDP
(KRUGMAN, PAGES 624-640)

Definition:
value added
income received
Spending

19 © Vlerick Business School


CALCULATING GDP (KRUGMAN, PAGES)

20 © Vlerick Business School


NOMINAL AND REAL GDP

21 © Vlerick Business School


NOMINAL AND REAL GDP (AND AT
PPPS)

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
http://www.oecd.org/
http://www.imf.org/external/index.htm
http://data.worldbank.org/
http://www.gapminder.org/

22 © Vlerick Business School


EMPLOYMENT AND UNEMPLOYMENT

 Population at working age


 Active population or labour force
 Active population= working or looking for a job
 Unemployment rate= unemployed/active population

23 © Vlerick Business School


LONG RUN ECONOMIC GROWTH
(CHAPTER 24)

If interested (and if we have time) we can discuss


emerging economies and China later on.

24 © Vlerick Business School


OVERVIEW

 The Euro
 Banks and Money
 The crisis of the euro
 Impact on the economy of the
eurocrisis
 Policy response

25 © Vlerick Business School


OVERVIEW

 The Euro
 Banks and Money
 The crisis of the euro
 Impact on the economy of the
eurocrisis
 Policy response

26 © Vlerick Business School


WHY IS A COMMON CURRENCY USEFUL?

It facilitates trade because it reduces


exchange rate risks
More trade is beneficial for all
(remember the model of international
trade of Ricardo, first lecture)

27 © Vlerick Business School


THE THEORY OF
OPTIMUM CURRENCY AREAS

Monetary efficiency
gain for the joining country
GG

Degree of economic integration between the


joining country and the exchange rate area
28 © Vlerick Business School
IMPORTANCE OF INTERNATIONAL TRADE
(DEGREE OF OPENNESS: AVERAGE OF EXPORT AND IMPORT OF
GOODS AND SERVICES AS A PERCENTAGE OF GDP)

29 © Vlerick Business School


WHY IS A COMMON CURRENCY USEFUL?

 It facilitates trade because it reduces


exchange rate risks
 More trade is beneficial for all
 It facilitates mobility of workers
 It facilitates mobility of capital

30 © Vlerick Business School


MOBILITY OF WORKERS

 Polish workers (low wages) move to work in


Germany or in Belgium (high wages)
 Advantages for:
 Mobile Polish workers as they earn more
 Employers in high wage country as their profits
increase
 Consumers as prices go down
 Disadvantages for:
 Domestic workers who face competition
 Foreign employers who lack workforce
 Overall net welfare increase
31 © Vlerick Business School
MOBILITY OF WORKERS: CAVEAT

 If labour market does not function and the


immigrant worker remains unemployed:
welfare loss for domestic economy
 If labour market does not function and there
are bottlenecks (seasonal work,
construction, nurses,...): even bigger profits
from labour migration

32 © Vlerick Business School


Therefore: search for stable
exchange rates

33 © Vlerick Business School


MAP OF THE ROMAN EMPIRE 100 AD

34 © Vlerick Business School


VICTOR HUGO IN 1855:

"Une monnaie continentale … ayant pour point


d'appui le capital Europe tout entier et pour moteur
l'activité libre de 200 millions d'hommes, cette
monnaie, une, remplacerait et résorberait toutes les
absurdes variétés monétaires d'aujourd'hui … ;
variétés qui sont autant de causes
d'appauvrissement, car, dans le va et vient
monétaire, multiplier la variété, c'est multiplier le
frottement, c'est diminuer la circulation. En
monnaie, comme en toute autre chose, circulation
c'est unité."

35 © Vlerick Business School


PURSUING FIXED EXCHANGE RATES IS
INHERENT TO INTERNATIONAL BUSINESS

 1792: ‘Coinage Act’ under the leadership of


Alexander Hamilton, the secretary of the treasury,
established the dollar as the basic unit of account
for the USA. ("dollar" is derived from "thaler“)
 1865: Latin Union (FR+IT+CH+BE)
 19th century : gold standard - invisible hand (price
specie flow mechanism).
 1945-71 : Bretton-Woods : gold-$
 later : several attempts with varying success
- Smithsonian Agreement (71) : tunnel
- Plaza (85) - Louvre (87)
36 © Vlerick Business School
MONETARY INTEGRATION IN THE EU

Rapport Werner: 1970


aim: monetary union in 1980
problem: end of Bretton Woods & oil
crises
alternative: snake in the tunnel
EMS (1979)

37 © Vlerick Business School


MEMBER STATES OF THE EUROZONE

http://www.ecb.int/euro/intro/html/map.en.html

38 © Vlerick Business School


1999: BIGGEST MONETARY UNION EVER
(GDP IN BN USD)

16000

14000

12000

10000

8000

6000

4000

2000

0
USA EA 17 China Japan UK India Canada
Series1 15064 13355 6988 5855 2480 1843 1759

Source: IMF

39 © Vlerick Business School


MAJOR PROBLEM WITH A COMMON
CURRENCY: THE LOSS OF THE EXCHANGE
RATE INSTRUMENT

 If an economy looses competitiveness, it can


not depreciate/devalue anymore
 If an economy is booming and faces
inflation, it can not appreciate/revalue
anymore
 To what extent is that important?
 The loss of the exchange rate instrument is
less important if certain conditions are met:

40 © Vlerick Business School


The Theory of
Optimum Currency Areas1 defines
the conditions for a successful
monetary zone.

1Mundell, Robert A., “A Theory of Optimum Currency Areas”, American


Economic Review, 51, Nov. 1961, pp. 509-17

41 © Vlerick Business School


1. Members of the currency zone have similar business cycles. In
that case there is less need to devalue/revalue the own
currency. If the economic structure is diversified, the risk that a
country experiences different business cycles (asymmetric
shocks) decreases.

2. There is sufficient flexibility to correct differences in economic


performance:

a) Labour and capital mobility across the Member States is high.


Therefore, market forces can quickly allocate economic resources
(capital and labour) where they are needed most.

b) There is price and wage flexibility. These act as a substitute for


currency revaluations/devaluations.

3. If 1 or 2 do not apply, there should be sufficient fiscal transfers


to redistribute income to regions or countries in order to soften
the impact of asymmetric shocks.
42 © Vlerick Business School
THE THEORY OF
OPTIMUM CURRENCY AREAS
Economic stability
loss for the joining country

LL

Degree of economic integration between the


joining country and the exchange rate area
43 © Vlerick Business School
THEORY OF
OPTIMUM CURRENCY AREAS

The Decision to Join a Currency Area: Putting


the GG and LL Schedules Together

The intersection of GG and LL


 Determines a critical level of economic integration
between a fixed exchange rate area and a country
 Shows how a country should decide whether to fix
its currency’s exchange rate against the euro

44 © Vlerick Business School


Theory of
Optimum Currency Areas
Gains and losses
for the joining country

GG

Losses exceed 1 Gains exceed


gains losses

LL

1 Degree of economic integration


between the joining country and
45 © Vlerick Business School
the exchange rate area
IS THE EU AN OCA? HOW TO MEASURE?

46 © Vlerick Business School


ECONOMIC INTEGRATION IN THE EA
(ANNUAL ECONOMIC GROWTH)
12,0%

10,0%

Eurozone
8,0%
Belgium
Germany
6,0% Estonia
Ireland

4,0% Greece
Spain
France
2,0%
Italy
Luxembourg
0,0% Netherlands
Austria

-2,0% Portugal
Slovenia
Slovakia
-4,0%
Finland

-6,0%

1995199619971998199920002001200220032004200520062007200820092010201120122013
-8,0%

47 © Vlerick Business School Source: EC


Finland 0.97
Italy 0.96
France 0.96
Austria 0.94
ECONOMIC Denmark
Belgium
0.94
0.93
INTEGRATION IN THE EA Netherlands 0.91
(CORRELATION OF ANNUAL Germany 0.90
ECONOMIC GROWTH WITH UK 0.89
EUROZONE AVERAGE: 1995- Slovenia 0.88
Sweden 0.87
2011)
Luxembourg 0.87
Spain 0.87
Estonia 0.81
Latvia 0.80
Hungary 0.77
Portugal 0.75
Ireland 0.74
Lithuania 0.72
Cyprus 0.66
Malta 0.63
Czech Republic 0.61
Slovakia 0.58
Poland 0.52
Source: EC
Greece 0.48
Bulgaria 0.41
48 © Vlerick Business School
Romania 0.35
IS THE EU AN OCA? LABOUR MOBILITY

49 © Vlerick Business School


50 © Vlerick Business School
51 © Vlerick Business School
IS THE EU AN OCA? FISCAL TRANSFERS

52 © Vlerick Business School


THE THEORY OF
OPTIMUM CURRENCY AREAS ‘FORGOT’
ONE CRUCIAL CONDITION

CONTROL OVER THE CURRENCY IN


WHICH THE DEBT IS ISSUED 1 (ECB
AS LENDER OF LAST RESORT)

1 Paul De Grauwe (2011): Managing a Fragile Eurozone, CESifo Forum, 12(2), 40-45

53
53 © Vlerick Business School
IS THE EU AN OCA?

 Most EU countries export 20% to 30% of their output


to other EU countries.
 Labour is much more mobile within the U.S. than
within Europe.
 Federal transfers and changes in federal tax
payments provide a much bigger cushion for region-
specific shocks in the U.S. than do EU revenues and
expenditures.
 Almost for sure: Germany, France, Nordics, Benelux,
some central European new member states.
 May be not: Greece, Cyprus, Malta, Portugal, Italy (?)

54 © Vlerick Business School


“Errors made when the euro was first created
effectively doomed the single currency from
the start to the spiralling debt crisis it now
finds itself in”

Jacques Delors (who created the euro) in the Daily Telegraph,


Friday, 2nd of December 2011 (some 20 years after the idea
of the euro).

55 © Vlerick Business School


OVERVIEW

 The Euro
 Banks and Money
 The crisis of the euro
 Impact on the economy of the
eurocrisis
 Policy response

56 © Vlerick Business School


Chapter 29
Money, Banking, and the Federal Reserve System

Money, Banking, (and theFederal


and the ECB!) Reserve
System
 The various roles money plays and
the many forms it takes in the
economy.
 How the actions of private banks
WHAT YOU and the Federal Reserve
WILL LEARN determine the money supply.
IN THIS  How the Federal Reserve uses
CHAPTER open-market operations to change
the monetary base.

58
THE MEANING OF MONEY
 Money is any asset that can easily be used to
purchase goods and services.

 Currency in circulation is cash held by the


public.

 Checkable bank deposits are bank accounts


on which people can write checks.

 The money supply is the total value of


financial assets in the economy that are
considered money.
59 © Vlerick Business School
ROLES OF MONEY
 A medium of exchange is an asset that
individuals acquire for the purpose of trading
rather than for their own consumption.

 A store of value is a means of holding


purchasing power over time.

 A unit of account is a measure used to set


prices and make economic calculations.

60 © Vlerick Business School


GLOBAL COMPARISON
THE BIG MONEYS

61 © Vlerick Business School


TYPES OF MONEY
 Commodity money is a good used as a
medium of exchange that has other uses.

 A commodity-backed money is a medium of


exchange with no intrinsic value whose
ultimate value is guaranteed by a promise that
it can be converted into valuable goods.

 Fiat money is a medium of exchange whose


value derives entirely from its official status as
a means of payment.

62 © Vlerick Business School


MEASURING THE MONEY SUPPLY

 A monetary aggregate is an overall measure of


the money supply.

 Near-moneys are financial assets that can’t be


directly used as a medium of exchange but can
readily be converted into cash or checkable bank
deposits.

63 © Vlerick Business School


PITFALLS
What’s Not in the Money Supply

 Are financial assets like stocks and bonds part of


the money supply? No, not under any definition,
because they’re not liquid enough.

 M1 consists, roughly speaking, of assets you can


use to buy groceries: currency, traveler’s checks,
and checkable deposits.

 M2 is broader, because it includes things like


savings accounts that can easily and quickly be
converted into M1.
64 © Vlerick Business School
PITFALLS

What’s Not in the Money Supply

 Normally, for example, you can switch funds


between your savings and checking accounts with
a click of a mouse or a call to an automated
phone service.

 By contrast, converting a stock or a bond into


cash requires selling the stock or bond. That
makes these assets much less liquid than bank
deposits. So stocks and bonds, unlike bank
deposits, aren’t considered money.

65 © Vlerick Business School


MONETARY AGGREGATES, AUGUST 2008

66 © Vlerick Business School


M3 (ECB, END OF 2011)

67 © Vlerick Business School


FOR INQUIRING MINDS

What’s with All the Currency?

• $1000 billion of currency in circulation. That’s


$3000 in cash for every man, woman, and child
in the United States. How many people do you
know who carry $3000 in their wallets?
 Not many.
 So where is all that cash?
 Part of the answer is that it isn’t in
individuals’ wallets: it’s in cash registers.

68 © Vlerick Business School


FOR INQUIRING MINDS

What’s with All the Currency?

• Economists also believe that cash plays an


important role in transactions that people want
to keep hidden.

• Small businesses and the self-employed


sometimes prefer to be paid in cash so they can
avoid paying taxes by hiding income from the
Internal Revenue Service.

• Most important, the Federal Reserve estimates


that 60% of U.S. currency is actually held
outside the United States.

69 © Vlerick Business School


EURO BANKNOTES IN CIRCULATION

Banknote Amount of notes Value Share


(thousands) (million euro)
500 465 232 35,6%
200 157 31 4,8%
100 1.214 121 18,6%
50 3.885 194 29,8%
20 2.334 47 7,2%
10 1.856 19 2,8%
5 1.368 7 1,1%
TOTAL 11.278 651

Source: ECB
70 © Vlerick Business School
GDP includes all market transactions,
also the «Underground economy »
(SIZE OF UNDERGROUND ECONOMY AS A PERCENT OF GDP)

30

25

20

15

10

0
Fr s

D any
G and

G ly
S w nd

Sp l
Fi rk

en

Po um

e
Ire e
ria

SA
er K

n
n
ga
nd

ec
c

Ita

pa
ai
U

a
a
an

ed
st

rtu

U
i
m
la

m
l

lg
nl

re

Ja
Au

en

Be
er
h
et
N

Sources: Schneider, Geeroms. Method=monetary method. 1999/2000


71 © Vlerick Business School
ASSETS AND LIABILITIES OF FIRST STREET
BANK
A T-account summarizes a bank’s financial
position. The bank’s assets, $900,000 in
outstanding loans to borrowers and reserves of
$100,000, are entered on the left side. Its
liabilities, $1,000,000 in bank deposits held for
depositors, are entered on the right side.

72 © Vlerick Business School


THE PROBLEM OF BANK RUNS

 A bank run is a phenomenon in which many


of a bank’s depositors try to withdraw their
funds because of fears of a bank failure.

 Historically, they have often proved


contagious, with a run on one bank leading to
a loss of faith in other banks, causing
additional bank runs.

73 © Vlerick Business School


BANK RUN ON NORTHERN ROCK (2007) AND
ON NY BANK (1930)

74 © Vlerick Business School


BANK REGULATIONS
 Deposit insurance — guarantees that a
bank’s depositors will be paid even if the bank
can’t come up with the funds, up to a
maximum amount per account.
 USA: The FDIC currently guarantees the first
$250,000 of each account.
 EU: minimum 100,000 Euro per family per
bank. 27 national systems.

75 © Vlerick Business School


BANK REGULATIONS
 Capital requirements — regulators require
that the owners of banks hold substantially
more assets than the value of bank deposits.
In practice, banks’ capital is equal to 7% or
more of their assets.

76 © Vlerick Business School


77 © Vlerick Business School
TIER I RATIO

Ratio of a bank's core equity capital to its total


risk weighted assets (RWA).
Core equity capital: common stock and disclosed
(retained) reserves and may also include non-
redeemable non-cumulative preferred stock.
Risk-weighted assets: all assets held by the bank
weighted by credit risk determined by the
Regulator. (cash has zero risk, certain loans have
up to 100% risk)
Basel Committee on Banking Supervision (BIS)

78 © Vlerick Business School


BASEL III: MAIN PRINCIPLES: PHASED IN
ARRANGEMENTS

79 © Vlerick Business School


BANKING SUPERVISION

 NOW:
 National Supervisors (central banks or
other authorities)
 Weak EU coordination (ESFS)
 NEAR FUTURE:
 ECB supervises
 EU Bank resolution Fund
 EU Deposit Guarantee Fund?

80 © Vlerick Business School


BANK REGULATIONS

USA:
 Reserve requirements — rules set by the Federal Reserve
that determine the minimum reserve ratio for a bank. For
example, in the United States, the minimum reserve ratio for
checkable bank deposits is 10%.
 The discount window is an arrangement in which the
Federal Reserve stands ready to lend money to banks in
trouble.
EU:
 Reserve requirements - 2% on Overnight deposits,
deposits with agreed maturity or period of notice up to 2
years, debt securities issued with maturity up to 2 years,
money market paper (1% starting 18th January 2012)
 Emergency Liquidity Assistance (ELA)
81 © Vlerick Business School
DETERMINING THE MONEY SUPPLY

Effect on the money supply of a deposit at First


Street Bank

Initial effect before bank makes new loans:

82 © Vlerick Business School


DETERMINING THE MONEY SUPPLY
Effect on the money supply of a deposit at First
Street Bank

Effect after bank makes new loans:

83 © Vlerick Business School


HOW BANKS CREATE MONEY

84 © Vlerick Business School


RESERVES, BANK DEPOSITS, AND THE
MONEY MULTIPLIER

 Excess reserves are bank reserves over and above


the bank’s required reserves.

 Increase in bank deposits from $1,000 in excess


reserves =
$1,000 + ($1,000 × (1 − rr)) + ($1,000 × (1 − rr)2)
+
($1,000 × (1 − rr)3) + . . .

 This can be simplified to:


Increase in bank deposits from $1,000 in excess
reserves = $1,000/rr

85 © Vlerick Business School


THE MONEY MULTIPLIER IN REALITY
 The monetary base is the sum of currency in
circulation and bank reserves.

 The money multiplier is the ratio of the money


supply to the monetary base.

86 © Vlerick Business School


IMPORTANCE OF INTERBANK MARKET

 loans between banks


 up to one month
 overnight loans are very important and allow banks
to solve illiquidity problems
 malfunctioning at times of recent financial and
eurocrises

87 © Vlerick Business School


THE FEDERAL RESERVE SYSTEM

 A central bank is an institution that oversees


and regulates the banking system and controls
the monetary base.

 The Federal Reserve is a central bank—an


institution that oversees and regulates the
banking system, and controls the monetary
base.

 The Federal Reserve system consists of the


Board of Governors in Washington, D.C., plus 12
regional Federal Reserve Banks.

88 © Vlerick Business School


THE FEDERAL RESERVE SYSTEM

89 © Vlerick Business School


EUROPEAN SYSTEM OF CENTRAL BANKS

ESCB

Eurosystem
Executive Board
of the ECB
European Central Bank

National Central Banks Governing Council


of the euro area countries of the ECB

General Council
of the ECB

National Central Banks of the


EU countries outside the euro area

90
90 © Vlerick Business School
GOVERNING COUNCIL OF THE ECB

91 © Vlerick Business School


RESERVE REQUIREMENTS AND THE
DISCOUNT RATE

 The federal funds market allows banks that


fall short of the reserve requirement to borrow
funds from banks with excess reserves.

 The federal funds rate is the interest rate


determined in the federal funds market.

 The discount rate is the rate of interest the Fed


charges on loans to banks.

92 © Vlerick Business School


Macroeconomic Environment 93
93 © Vlerick Business School
European Business
OPEN-MARKET OPERATIONS

Open-market operations by the Fed are the


principal tool of monetary policy: the Fed can
increase or reduce the monetary base by buying
government debt from banks or selling
government debt to banks.

The Federal Reserve’s Assets and Liabilities:

94 © Vlerick Business School


OPEN-MARKET OPERATIONS BY THE
FEDERAL RESERVE
An Open-Market Purchase of $100 Million

95 © Vlerick Business School


OPEN-MARKET OPERATIONS BY THE
FEDERAL RESERVE
An Open-Market Sale of $100 Million

96 © Vlerick Business School


OPEN MARKET OPERATIONS ECB
(REPO’S)
ECB offers liquidity to banks
 banks make a bid (tender)
 lowest rate is the official rate monthly
decided by the Governing Council
Highest bid gets the liquidity
 collateral (financial assets with minimal
rating)

97
97 © Vlerick Business School
OVERVIEW

The Euro
 Banks and Money
 The crisis of the euro
 Impact on the economy of the
eurocrisis
 Policy response

98 © Vlerick Business School


MACRO-ECONOMIC ACCOUNTING

M+Y=C+I+G+X
Y= C + I + G + (X - M)
Y= C + I + G + (X - M) + T – T
But: (Y – T – C) = S
So: S = I + G – T + (X – M)
Or: (S – I) + (T – G) = (X –M)
Y=Total income or GDP
C= consumption of families
I=investment; G=government spending
X= exports; M=imports; T= taxes; S=savings
X-M: current account balance (bar few corrections)
99 © Vlerick Business School
AN ECONOMY CAN BECOME INSOLVENT

Total debt of a nation = Government debt +


private sector debt
Total debt= sum of Current Account balances
over the years (plus capital account balance plus changes in
prices of assets)

Total debt can be financed by the savings of the


country or from abroad.

if external debt becomes too important financial


markets start doubting about capacity to repay
debts and increase the price for lending money

100 © Vlerick Business School


WE FIRST LOOK AT X-M

101 © Vlerick Business School


COMPETIVINESS SINCE EURO
(NOMINAL UNIT LABOUR COSTS COMPARED TO EUROZONE; 2000=100)
125

120
Belgium Germany
Ireland Greece
Spain France
115
Italy Netherlands
Austria Portugal
110 Finland

105

100

95

90

85

80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
102 © Vlerick Business School
LABOUR COSTS AND PRODUCTIVITY 2000-
2007, ANNUAL CHANGE
6

-1

-2

-3

-4
IE ES EL IT PT BE NL FR EA 17 FI AT DE
Labour Costs Labour productivity ULC

Source: ECB
103 © Vlerick Business School
WE NOW LOOK AT:

(T-G) OR THE GOVERNMENT


DEFICIT

AND THEN TO:

(S-I) OR THE SAVINGS DEFICIT


OR SAVINGS SURPUS OF THE
PRIVATE SECTOR

104 © Vlerick Business School


DESPITE FISCAL RULES TO PREVENT
EXCESSIVE SOVEREIGN DEBTS

 Maastricht Treaty:
 deficit < 3% of GDP
 debt < 60% GDP or sufficiently declining
 Stability and Growth Pact (SGP, Waigel,
1997): apply the same rules after euro was
introduced
 In 2004, Germany and France breached the
3% GDP ceiling and the Pact was not applied

105 © Vlerick Business School


'FISCAL FATIGUE' AFTER THIRD PHASE OF EMU (% OF GDP)

12 120
10 100
8 80
6 60
4 40
2 20
0 0
-2 -20
-4 -40
-6 -60
-8 -80
France

Portugal

Sweden
Belgium

Italy

Austria
Denmark

Ireland

Spain

Finland

UK
Germany

Greece

Luxembourg

Netherlands
Change in cyclically adjusted primary balance

1992 till 1998 1998 till 2004 Government debt in 2007 (right hand scale; red if increase since 1998)

106 © Vlerick Business School


WE NOW LOOK AT:

(S-I) OR THE SAVINGS DEFICIT


OR SAVINGS SURPUS OF THE
PRIVATE SECTOR

107 © Vlerick Business School


CONVERGENCE OF INTEREST RATES (10 YEARS)
25,00

Euro Area Belgium


20,00
Germany Ireland

Greece Spain

15,00
France Italy

Netherlands Austria

10,00
Portugal Finland

5,00

0,00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

108 © Vlerick Business School


LOANS TO FAMILIES AND HOUSE PRICES
Bank laons to families 1999- House prices, 1999 = 100)
2007, annual increase
35 280

260
30
240

25 220

200
20
180

15
160

140
10

120

5
100

80
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
EL IE ES FI AT PT IT NL FR EA BE DE
ES IE FR EL IT

Source: ECB. BE NL EA FI DE
109 © Vlerick Business School
DEBT OF FAMILIES, PERCENT OF GDP

140 140

120 120

100 100

80 80

60 60

40 40

20 20

0 0
2008
1999

2000

2001

2002

2003

2004

2005

2006

2007

2009

2010

2009
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2010
EL IT FR BE
ES PT IE NL EA17
DE EA17 AT FI

Source Eurostat.
110 © Vlerick Business School
SAVINGS AND DEBTS
(SUM OF NET-BORROWING TOWARDS REST OF THE
WORLD, 2002-2011, % OF GDP)

80

60

40

20

-20

-40

-60

-80

-100

-120

111 © Vlerick Business School


REASONS FOR HIGH DEBT?

 Government debt: Greece, Portugal, Italy


 Private debt of households and enterprises:
Greece, Portugal, Ireland
 Real estate crisis and weak banks in Ireland,
Spain

112 © Vlerick Business School


LINK BETWEEN SOVEREIGN AND BANK
DEBT

1 CDS premium on sovereign debt EU


2 CDS premium on bank debt EU
113
113 © Vlerick Business School
WHO FINANCED DEBT OF GIPSI COUNTRIES?

114 © Vlerick Business School


FUNDAMENTALS OF GIIPSI’S VERSUS OTHERS

115 © Vlerick Business School


GIIPSI COUNTRIES (PIGS)

 PIGS or GIPSI became GIIPSI, then


also Slovenia and Cyprus in problems
 Common parameters: high public and
private debt, negative external position,
low growth

116 © Vlerick Business School


PANIC ON FINANCIAL MARKETS: SPREAD
INCREASES!

Spain
Emission After 1 year
Bond 100.0 € 90.0 €
Coupon 5.0 € 5.0 €
interest rate in % 5.00 5.56

Germany
Emission After 1 year
Bond 100.0 € 109.0 €
Coupon 4.5 € 4.5 €
interest rate in % 4.50 4.13

Spread (basis points)


50 143

117 © Vlerick Business School


SPREADS ON 10 YEAR GOVERNMENT BONDS

118 © Vlerick Business School


SOVEREIGN AND FINANCIAL CDS PREMIA

119 © Vlerick Business School


Reversal of capital flows

120 © Vlerick Business School


CRISIS ARE TYPICAL FOR FREE MARKET
ECONOMY

EUROCRISIS

2010

121
121 © Vlerick Business School
Break up of the euro

122 © Vlerick Business School


COSTS OF EURO BREAK UP (UBS)

 A weak country leaving the euro:


 would cost 9500-11500 € per person in the exciting
country the first year; this is a loss of 40-50% of
income
 and 3000 to 4000 euro per person the years after
 A strong country (Germany) leaving the euro:
 would cost 6000 to 8000 euro for every German the
first year. That is 20-25% of income
 and 3500 to 4500 euro per person the years after.

123 © Vlerick Business School


BREAK UP OF THE EURO (ING)

124 © Vlerick Business School


BREAK UP OF THE EURO (ING):
OUTPUT LOSS

125 © Vlerick Business School


126 © Vlerick Business School
127 © Vlerick Business School
OVERVIEW

 The Euro
 Banks and Money
 The crisis of the euro
 Impact on the economy of the
eurocrisis
 Policy response

128 © Vlerick Business School


THE IMPACT ON THE REAL ECONOMY OF
EUROCRISIS

The main channels of transmission:


i. Credit channel: banks are reluctant to grant
loans  higher financing costs  lower
investment
ii. Confidence channel: sharp fall in both
consumer and business confidence  lower
consumption and investment
iii. Wealth channel: Drop in both financial and
housing wealth  lower consumption
iv. Deleveraging of private debt  lower
consumption
129 © Vlerick Business School
THAT MEANS LESS DEMAND AND
LESS GROWTH

Y= C + I + G + (X - M)

130 © Vlerick Business School


ECONOMIC CRISES
ECONOMIC GROWTH (PERCENTAGE CHANGE IN REAL GDP)

Source: IMF, World Economic Outlook, September 2012

131 © Vlerick Business School


ECONOMIC CRISES: EA MEMBER STATES

132 © Vlerick Business School Source: European Commission, Autumn 2012


ECONOMIC CRISES
UNEMPLOYMENT RATE
22
20
18 2008

16 2009
2010
14
2011
12
2012
10
8
6
4
2
0
m
27

l
nd

nd
ly

n
y
s

SA
e
ria

ce

ga
an
nd

pa
ai
ec
U
Ita
iu

la

la
an
st
EU

rtu

U
Sp
lg
rl a

Ja
m

re
Po

Ire
Au

Fr
Be

Po
er

G
he

G
et
N

Source: EC
133
133 © Vlerick Business School
OUTLOOK VERY UNSURE

BUSINESS AND CONSUMER SURVEY RESULTS


November 2012

Graph 1: Economic sentiment indicator (s.a.)


120

110

100

90

80
EU EA
70
long-term av erage (1990-2011) = 100
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
source: European Commission services

Economic sentiment increases in both the EU and the euro area


In November the Economic Sentiment Indicator (ESI) increased by 2.0 points in the EU, to 88.1, and by 1.4
points in the euro area, to 85.7. The upswing follows a deceleration in the ESI's downturn since September. The
industrial investment survey, however, hints at stagnating real investment in 2013, casting some doubts on
these first ©
134
signals of a recovery. While EU sentiment improved across all sectors, except for construction, where
Vlerick Business School
it remained unchanged, the euro area registered increases in industry and retail trade, which were partly offset
OUTLOOK VERY UNSURE
FLASH CONSUMER CONFIDENCE INDICATOR
FOR EU AND EURO AREA
December 2012

In December 2012, the DG ECFIN flash estimate1 of the consumer confidence indicator2
remained broadly unchanged in both the EU (-24.1 after -23.8 in November 2012) and the
euro area (-26.6 after -26.9 in November 2012).

-5 EU EA

-10
Balances, %

-15

-20
EU long-term average
-25

-30

-35
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1
This month's Flash CCI for the EU aggregate is computed on the basis of consumer survey data from 23 EU countries, covering
135 © Vlerick Business School
about 98.5% of the total private final consumption expenditure. For the euro-area indicator, the 16 countries included represent
Risks to the outlook

• Intensification of euro area instability further


dampening global confidence.
• Excessive fiscal contraction, especially in the US.
Risks to the outlook

• Continued disappointment in labour market


outcomes knocking consumer confidence.
• Further increases to already high oil prices.

136 © Vlerick Business School


World trade has stopped growing
30 65
World goods and services trade, annualised q-o-q change, per cent
PMI, Global Manufacturing New Export Orders Index (RHS)¹
20 60

10 55

0 50

-10 45

-20 40

-30 35

-40 30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Note: 1. Values greater than 50 signify an increase in new export orders.


137 © Vlerick Business School
Source: OECD National Accounts database; and Markit Economics Limited.
ECONOMIC GROWTH: DIVERGENCE IN THE
EUROZONE
(PERCENTAGE CHANGE IN REAL GDP)

5%

4%

3%

2%

1%

0%

-1%
Average growth 2010-2013

-2% Average growth 2000-2010

-3%

-4%

Source: EC, Spring 2012


138 © Vlerick Business School
OVERVIEW

 The Euro
 Banks and Money
 The crisis of the euro
 Impact on the economy of the
eurocrisis
 Policy response

139 © Vlerick Business School


MACRO-ECONOMIC POLICY

Y= C + I + G + (X - M)

How to increase each component?


 Monetary Policy: lower interest rates to
stimulate C and I, depreciating currency and
improve X-M
 Budget or Fiscal policy to increase G and
reduce T

140 © Vlerick Business School


MONETARY POLICY OF THE ECB

141 © Vlerick Business School


THE FINAL OBJECTIVE OF THE ECB
Treaty of Maastricht:
 maintain price stability
 without prejudice to that, support the
general economic policies in the EU
 act in accordance with the principles of
an open market economy, favouring an
efficient allocation of resources

142 © Vlerick Business School


ECB'S DEFINITION OF PRICE STABILITY
 October 1998: annual increase in
the HICP for the euro area of less
than 2% in the medium term
 May 2003: annual increase in the
HICP for the euro area of less than,
but close to, 2% in the medium
term

143 © Vlerick Business School


COSTS OF HIGH INFLATION

 improving the transparency of the price mechanism; to better


recognise changes in relative prices without being confused by
changes in the overall price level;
 reducing inflation risk premia in interest rates; this reduces real
interest rates and increases incentives to invest;
 avoiding unproductive activities to hedge against the negative
impact of inflation or deflation;
 reducing distortions of inflation or deflation, which can
exacerbate the distortionary impact on economic behaviour of
tax and social security systems;
 preventing an arbitrary redistribution of wealth and income as a
result of unexpected inflation or deflation;
 and contributing to financial stability.
144
144 © Vlerick Business School
Hyperinflation during
Weimar republic

145 © Vlerick Business School


146 © Vlerick Business School
Hyperinflation
Zimbabwe 2008-
2012

147 © Vlerick Business School


HICP INFLATION IN THE EUROAREA

148
INFLATION TARGET: SECURITY MARGIN
 zero lower bound of nominal
interest rates
 positive measurement bias in the
HICP
 downward nominal rigidities in
wages
 inflation differentials across euro
area countries

149 © Vlerick Business School


0,0
1,0
2,0
3,0
4,0
5,0
6,0
2000M01

150
2000M05

2000M09

2001M01

2001M05

2001M09

2002M01

2002M05

© Vlerick Business School


2002M09
LOW LEVELS

2003M01

2003M05

2003M09

2004M01

2004M05
EONIA

2004M09
1 month rate

2005M01
3 months rate

2005M05
Official deposit rates
Official lending rates
6 months interest rate
12 months interest rate

2005M09

2006M01

2006M05
Official refinancing operation rates

2006M09

2007M01

2007M05

2007M09

2008M01

2008M05

2008M09

2009M01

2009M05

2009M09

2010M01
ECB POLICY RATES CUT TO HISTORICAL

2010M05

2010M09

2011M01

2011M05

2011M09

2012M01

2012M05
MONETARY POLICY: CENTRAL BANK
ACTIONS

 Conventional tools: cut interest rates

 Unconventional tools

151 © Vlerick Business School


ECB: UNCONVENTIONAL ACTIONS

152 © Vlerick Business School


ECB: UNCONVENTIONAL ACTIONS

 December 2011: 490 bn euro at 3 years, full


allotment, 1% to 523 banks (VLTRO)
 1st of March 2012: 530 bn euro to 800 banks,
VLTRO
 This is more than 1 trillion euro or 10% of GDP
of the Euro area
 Use of ELA (Emergency Liquidity Assistance)
 September 2012: OMT or Outright Monetary
Transactions: interventions in sovereign bond
markets subject to economic reform

153 © Vlerick Business School


ECB: UNCONVENTIONAL ACTIONS, CRITICS

 Creates “Zombie” banks


 Money not used to buy sovereign debt nor for
private credits, but put at deposits with ECB
 The problem of “Target II” imbalances=weak
banks of Southern Europe are indebted to the
Eurosystem, while Nordics are large net
creditors

154 © Vlerick Business School


RISK TO INFLATION?

January 2006 =100

170

Base money M3
160

150

140

130

120

110

100

155 © Vlerick Business School


TARGET II BALANCES IN THE EUROZONE
(END OF 2011)

156 © Vlerick Business School


German
Net positions against the Eurosystem
(TARGET2) 3 the Net
NET POSITIONS
EUR bn AGAINST TARGET II (BN EURO)
The qu
counter
1,000
the safe
800
600 German
400 bank de
200 effects
0 It is equ
-200
-400
investm
-600
Accordi
-800
-1,000
TARGE
07 08 09 10 11 12 assets.
ES BE IT GR PT IE
FR DE LU FI NL
22
157 © Vlerick Business School Sources: National central banks, DB Research The ba
FISCAL OR BUDGETARY POLICY

158 © Vlerick Business School


FISCAL OR BUDGETARY POLICY
(KEYNESIAN POLICY)

159 © Vlerick Business School


160 © Vlerick Business School
RULES FOR FISCAL POLICY

Stability and Growth Pact:


start in 1999
2004-2005: not respected by
France and Germany
2005: more realistic SGP
December 2011: new SGP as part
of the "Six Pack"
161 © Vlerick Business School
PREVENTIVE ARM OF SGP
A. Medium Term Objective (MTO): country specific,
vary from a structural deficit of 1 % of GDP (MS
with low debt level and high potential growth rate)
to equilibrium or surplus (for high debt countries
with lower potential growth rate).
 Structural deficit: deficit corrected for business cycle and
temporary measures.
 MS not at MTO: reduction of structural deficit with at least
0,5 % GDP per year.
B. Expenditure benchmark: if a MS has not yet
reached its MTO, the rate of growth of primary
expenditure should be below medium term GDP
growth (unless compensated by new revenues).
162
162 © Vlerick Business School
DEFICIT CONCEPTS

163 © Vlerick Business School


CORRECTIVE ARM OF SGP
A. Deficit not exceeding 3 % of GDP and debt/GDP below
60% or sufficiently declining.
Exceptions:
 Unusual event,
 Severe economic downturn.
B. Debt reduction rule: if debt/GDP > 60%, then the gap
between actual debt level and the 60% reference should
be reduced by 1/20th annually (on average over 3
years).

164
164 © Vlerick Business School
EUROPEAN ECONOMIC RECOVERY PLAN
TOTAL BUDGETARY SUPPORT TO ECONOMIC
ACTIVITY

BE

DE

ES

FR
Budget 2009
IT
Budget 2010

NL Outside budget 2009

PL

UK

EU-27

0,0 2,0 4,0 6,0 8,0 10,0


% GDP

165 © Vlerick Business School


PUBLIC INTERVENTIONS IN BANKS 31/10/2010

166 © Vlerick Business School


SHARPLY DETERIORATING PUBLIC FINANCES

167 © Vlerick Business School


SHORT TERM FISCAL IMPACT OF THE CRISIS

© Vlerick Business School 168


PUBLIC FINANCES AND EDP

Source: European Commission


169 © Vlerick Business School
THE EUROCRISIS IS NOT YET OVER,
IT REMAINS THE MAIN WEAKNESS
OF THE WORLD ECONOMY

170 © Vlerick Business School


SOVEREIGN DEBT CRISES LOOMING (DEBT IN
BILLION EURO’S)

2871
3188 Safe debt (GE, NL, AU, FI, SL, SI,
others)
Intermediary (FR, BE, IR)

Risky debt (IT, SP, PO, GR)

2226

Source: EC, own calculations

171 © Vlerick Business School


WHAT IS TO BE DONE? 1

1. Stimulate growth
2. European Bank union
3. Solve the sovereign debt crisis
4. Big leap forward in EU economic
governance

1 Vladimir Iljitsj Lenin, Что делать?, 1902

172 © Vlerick Business School


1. STIMULATE GROWTH

"Nothing is possible anymore. No room


for an expansionary policy”
No room for budget or Keynesian
policy
Little room for cheaper money

173 © Vlerick Business School


DEMAND FROM OUTSIDE THE EUROZONE?

 USA: not possible


 Government deficit: -10.0% GDP
 Government debt: 97.6% GDP (62% GDP in 2007)
 Fiscal Cliff: end of 2012: Budget Control Act of 2011 goes into effect,
choices to be made.
 Current account balance: - 3.0% GDP
 Japan: not possible
 Government deficit: -8.9% GDP
 Government debt: 212% GDP
 Current account balance: +2.2% GDP
 China:
 Government deficit: -1.2% GDP
 Current account balance: +3.1% GDP
 But refuses appreciation of renminbi

174 © Vlerick Business School


BUT CHINA IS STILL TOO SMALL TO ACT AS
LOCOMOTIVE OF THE WORLD ECONOMY

USA
22% EA 17
32% China
Japan
UK
India
19%
Canada
2%
Rest
3%
4% 8% 10%

175 © Vlerick Business School


CHINA ITSELF FACES DECLINE IN ECONOMIC
GROWTH

176 © Vlerick Business School Source: IMF


THERE ARE SOME POSSIBILITIES
HOWEVER TO STIMULATE GROWTH
1. Germany has accepted higher inflation and
higher wage increases
2. Slower fiscal consolidation in core countries
1. and 2. also improve internal imbalances of the eurozone.
3. OMT by ECB
4. Depreciating euro
5. Infrastructure spending, mainly in periphery:
 European Investment Bank
 Project bonds
 Budget for the Eurozone?
6. Structural reforms
177 © Vlerick Business School
OECD SAYS:
ECO/WKP(2011)3
Table 5. Steady-state effects of “unit” reforms on GDP per capita by countries

Labour Market Policies Taxation


Average
Implicit tax
Average Employment Maternity Standard weekly Average Marginal Share of
Childcare Childcare on
replacement protection leave retirement normal tax tax consumption and
benefits support continued
rate legislation weeks age hours and wedge wedge property taxes
work
overtime
size of the +10
-10 ppt. -1 point -1 ppt. + 10 ppt. +1 year -10 ppt. +1 hour -10 ppt. -10 ppt. +10 ppt.
shock weeks
AUS 3.6 2.7 0.3 0.1 0.0 0.2 0.4 ... 5.6 1.1 2.5
AUT 3.9 3.4 0.2 0.1 0.0 0.2 0.6 0.1 6.1 1.1 2.5
BEL 5.3 2.7 0.3 0.2 0.0 0.3 0.7 0.1 8.2 1.1 2.5
CAN 3.2 2.7 0.2 0.1 0.0 0.2 0.4 0.1 4.9 1.1 2.5
CHE 3.2 3.4 0.2 0.1 0.0 0.2 0.4 0.1 4.9 1.2 2.5
CZE 5.1 3.8 0.1 0.1 0.0 0.4 0.9 0.1 7.9 1.0 2.5
DEU 4.4 3.6 0.2 0.1 0.0 0.2 0.6 0.1 6.9 1.1 2.5
DNK 3.7 2.9 0.1 0.1 0.0 0.2 0.5 0.1 5.8 1.1 2.5
ESP 4.3 3.2 0.2 0.1 0.0 0.3 0.8 0.1 6.7 1.0 2.5
FIN 3.8 4.3 0.1 0.1 0.0 0.2 0.5 0.1 6.0 1.1 2.5
FRA 4.8 2.5 0.1 0.1 0.0 0.3 0.6 0.1 7.4 1.1 2.5
GBR 3.7 3.0 0.2 0.1 0.0 0.2 0.4 0.1 5.8 1.1 2.5
GRC 4.9 1.5 0.3 ... 0.0 0.3 0.8 0.1 7.6 1.1 2.5
HUN 5.9 3.8 0.2 0.2 0.0 0.4 1.0 0.1 9.2 1.1 2.5
IRL 3.5 3.3 0.2 0.1 0.0 0.2 0.5 0.1 5.5 1.1 2.5
ISL 2.7 2.5 0.2 0.1 0.0 0.1 0.3 ... 4.1 1.1 2.5
ITA 5.5 3.0 0.3 0.2 0.0 0.4 0.9 0.1 8.6 1.0 2.5
JPN 4.1 3.1 0.2 0.1 0.0 0.3 0.7 ... 6.3 1.0 2.5
KOR 4.9 3.6 0.3 0.1 0.0 0.3 0.8 ... 7.5 1.1 2.5
LUX 3.9 2.4 0.2 0.1 0.0 0.2 0.5 0.1 6.1 1.2 2.5
MEX ... 1.7 0.3 0.2 0.0 0.3 0.6 ... 8.1 1.2 2.5
NLD ... 2.5 0.2 0.1 0.0 0.2 0.4 0.1 5.2 1.1 2.5
NOR 3.7 2.0 0.2 0.1 0.0 0.2 0.4 0.1 5.7 1.1 2.5
NZL 3.3 2.9 0.2 0.1 0.0 0.2 0.4 ... 5.1 1.1 2.5
POL 7.4 2.6 0.3 0.2 0.0 0.5 1.1 0.1 11.5 1.1 2.5
PRT 4.0 2.6 0.2 0.1 0.0 0.3 0.6 0.1 6.1 1.1 2.5
SVK 5.9 3.9 0.2 0.2 0.0 0.4 0.9 0.1 9.2 1.1 2.5
SWE 3.5 3.2 0.1 0.1 0.0 0.2 0.4 0.1 5.4 1.1 2.5
TUR 15.9 3.0 1.1 0.5 0.0 0.7 1.7 ... 24.7 1.1 2.5
USA 4.4 0.5 0.3 0.1 0.0 0.2 0.5 0.1 6.8 1.2 2.5
OECD avg. 4.7 3.0 0.2 0.1 0.0 0.3 0.6 0.1 7.3 1.2 2.5
Notes: “..” denotes missing data on the policy variable.

178 © Vlerick Business School


ECO/WKP(2011)3
Table 5. Steady-state effects of “unit” reforms on GDP per capita by countries (cont.)

Product Market Regulation Openness R&D Incentives Human Capital


R&D Average
REGREF- REGREF- REGREF- REGREF- REGREF- REGREF- REGREF- FDI Tariff R&D tax PISA
REGREF direct years of
Gas Electricity Road Rail Air Post Telecom restrictions barriers subsidies score
subsidies schooling
size of the +0.1 +10
-0.1 point -0.1 point -0.1 point -0.1 point -0.1 point -0.1 point -0.1 point -0.1 point -0.5 points -2 ppt. +10 ppt. +1 year
shock points points
AUS 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.2 0.0 0.1 1.5 0.1 1.0 5.1
AUT 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.2 0.0 0.1 1.9 0.0 1.0 4.8
BEL 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.1 0.0 0.0 1.9 0.1 1.0 5.0
CAN 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.3 0.0 0.1 1.1 0.2 1.0 4.9
CHE 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.5 0.0 ... ... ... 1.0 5.0
CZE 0.3 0.3 0.3 0.3 0.3 0.3 0.3 1.8 0.0 0.0 0.7 0.0 0.9 4.5
DEU 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.1 0.1 0.1 ... 0.1 1.0 4.8
DNK 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.1 0.1 0.1 1.3 0.1 1.1 5.4
ESP 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.3 0.1 0.1 0.6 0.0 1.0 4.9
FIN 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.3 0.0 0.1 ... 0.0 1.1 5.3
FRA 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.3 0.1 0.1 0.5 0.0 1.1 5.4
GBR 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.1 0.2 0.1 1.7 0.1 1.1 5.7
GRC 0.3 0.3 0.3 0.3 0.3 0.3 0.3 2.1 0.0 0.1 7.9 ... 1.0 4.8
HUN 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.7 0.0 0.0 1.1 0.1 0.9 4.7
IRL 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.7 0.0 0.0 1.6 ... 1.0 4.8
ISL 0.2 0.2 0.2 0.2 0.2 1.5 0.0 ... ... 0.1 1.1 5.6
ITA 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.3 0.1 0.1 1.6 0.1 1.0 4.9
JPN 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.6 0.1 0.2 1.6 0.2 0.9 4.5
KOR 0.5 0.5 0.5 0.5 0.5 0.5 0.5 3.4 0.1 0.0 1.1 0.0 0.9 4.4
LUX 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.0 ... 0.0 ... 0.1 1.1 5.3
MEX 0.7 0.7 0.7 0.7 0.7 0.7 0.7 4.5 0.0 0.0 ... 0.4 1.4 7.0
NLD 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.1 0.1 0.1 2.3 0.2 1.0 5.2
NOR 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.8 0.1 0.6 0.9 0.1 1.1 5.4
NZL 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.7 0.1 0.1 ... 0.1 1.1 5.3
POL 0.3 0.3 0.3 0.3 0.3 0.3 0.3 2.3 0.1 0.0 7.9 0.2 1.0 5.0
PRT 0.3 0.3 0.3 0.3 0.3 0.3 0.3 1.9 0.1 0.1 0.7 0.2 1.2 6.0
SVK 0.3 0.3 0.3 0.3 0.3 0.3 0.3 1.8 ... ... ... 0.1 0.9 4.6
SWE 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.1 0.1 0.1 ... 0.0 1.1 5.3
TUR 0.6 0.6 0.6 0.6 0.6 0.6 0.6 4.3 0.0 ... 0.9 0.2 1.4 7.1
USA 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.0 0.1 0.1 2.4 0.0 1.1 5.6
OECD avg. 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.7 0.1 0.1 1.9 0.1 1.1 5.2
Notes: “..” denotes missing data on the policy variable.

179 © Vlerick Business School


28
WORLDBANK: EASE OF DOING BUSINESS

http://www.doingbusiness.org/rankings

180 © Vlerick Business School


2. SOLVE THE BANKING PROBLEM

European single supervisor (ECB)


Bank resolution Fund, financed by
contribution of banking industry
Deposit guarantee scheme?
Prevent problems via new banking
system: Vickers report, Volcker rule,
Liikanen report in the EU (split or ringfence
retail and investment banking)

181 © Vlerick Business School


3. CREATE A COMMON EURO GOVERNMENT
DEBT 1

 Replace all sovereign debt of the EA 17 by one


single European debt=Eurobonds and Eurobills.
 Germany opposed (for the time being).
 Better: create a European Debt Agency1:
 issues common bonds and bills
 allocates receipts to EA 17 based on respect for
Stability and Growth Pact
 At differentiated interest rates

1 Hans Geeroms and Wim Moesen, The EU at a Crossroads, CES, November 2011

182 © Vlerick Business School


4. BIG LEAP FORWARD IN EU ECONOMIC
GOVERNANCE

 New Treaty “Fiscal Compact”:


 includes Golden Rule of zero deficit, enshrined in
constitution
 In fact: structural deficit may not be below -0.5%
GDP (structural deficit=normal deficit corrected for impact
of economic cycles and corrected for one off measures)
 New steps needed for economic policy
coordination (december 2012):
 Minister of Finance for the Eurozone?
 Budget for the Eurozone?
 Question of democratic deficit.
 Question of two speed Europe.
183 © Vlerick Business School
THANK YOU VERY MUCH FOR YOUR ATTENTION.

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