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The Euro Area:

Emerging from the Crisis
2011 Euro ChaIIenge orientation
www.euro-challenge.org
The current economic situation in the euro area
hat's the current situation of your favorite footbaII
team?
Imagine you had to describe the current
season of your favorite footbaII team
You can summarize their season by
focusing on different indicators
ames won, Iost, tied
TotaI yards, rushing, passing
Touchdowns, sacks, fieId goaIs
These are aII indicators
They heIp to expIain your teams' season
iII your team go to the SuperbowI?
! growth: a key economic indicator
ross Domestic Product (! is the
totaI vaIue of aII the goods (e.g. cars,
i!ods and services (e.g. haircuts,
insurance poIicies produced by an
economy
DP growth teIIs you by how much !
has increased compared to the Iast year
(or Iast quarter
! growth is expressed as a percentage
hen the economy is growing, !
growth is a positive number
In a recession, ! growth is negative
(! shrinks
Gross Domestic Product measures
everything produced by an economy
(both goods and services)
! growth: deep recession, fragiIe recovery
-5
-4
-3
-2
-1
0
1
2
3
4
2006 2007 2008 2009 2010 2011 2012
Euro area (16 countries) United States
%
Source: OECD, MF 5
&nempIoyment: stabIe, but stiII too high
%
0
2
4
6
8
10
12
2004 2005 2006 2007 2008 2009 2010
Euro area (16 countries) United States
Source: Eurostat, MF 6
InfIation: if anything, too Iow?
Source: Eurostat, MF
%
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2004 2005 2006 2007 2008 2009 2010
Euro area (16 countries) United States
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The European sovereign debt crisis
!eriphery countries:
!ortugaI, IreIand, reece,
Spain
The euro area: core and periphery countries
Core countries:
ermany, France,
NetherIands, Austria, etc.
onetary poIicy: one size fits aII
-10
-5
0
5
10
15
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Germany
reland
Source: MF
ReaI ! growth rate %
The origins of the reek crisis
reece's euro membership marked
by consumption, investment booms
ages rise faster than productivity,
competitiveness deteriorates
Low interest rates fueI credit growth
!oor fiscaI discipIine and weak
institutions
Large revisions to budgetary
statistics
&nsustainabIe pension, heaIth
systems
reece and the E& rise to the chaIIenge
ay 2010: reece adopts C110bn
program supported by the E& and IF
!rogram aims to restore sustainabIe
pubIic finances and recover Iost
competitiveness
Far-reaching structuraI reforms being
adopted (e.g. Iandmark pension reform
rastic cuts in pubIic expenditure across
aII IeveIs of government
!rogram wiII stabiIize debt ratio (but at a
high IeveI
The origins of the Irish crisis
IreIand experienced strong growth in
recent decades
Transformation from agricuIturaI
economy to "CeItic Tiger"
Strong presence of muItinationaI
companies, skiIIed workforce
But reckIess Iending by banks to
commerciaI property deveIopers
Bad debt of banks causes probIems
for whoIe economy
eep recession - 14% unempIoyment
IreIand and the E& rise to the chaIIenge
overnment aIready taking drastic
measures over Iast severaI years
November 2010: IreIand adopts C85bn
program supported by the E& and IF
!rogram aims to cut budget deficit and
repair the damage caused by the banking
crisis
Shrinking and restructuring of banking
sectors
rastic cuts in pubIic expenditure across
aII IeveIs of government
here wiII it end?
FinanciaI markets have become much
more reIuctant to Iend to euro area
countries . . .
. . . especiaIIy those with higher debt and
deficit IeveIs:
!ortugaI?
Spain?
ItaIy?
BeIgium?
FinanciaI markets exhibit 'herd behavior'
The great debate: wiII the euro survive?
The euro-skeptic view: euro break-up inevitabIe?
oomed from the start?
European countries too
different?
!ubIic debt IeveIs are not
sustainabIe?
Austerity measures are too
severe?
Leaving the euro wouId heIp?
"The euro wiII not survive the first
major European recession."
!rofessor iIton Friedman, 1912-2006
The case for the euro
E& wiII evoIve (&S monetary
union aIso did so
!oIiticaI commitment of
Ieaders to defend the euro
overnance of euro area wiII
be strengthened
ore sustainabIe pubIic
finances wiII heIp countries
Leaving the euro wouId
invoIve huge costs, make it
harder for countries to borrow
"If you didn't have that common
currency in Europe, they wouId have
bigger probIems than they have now."
!auI VoIcker, former FederaI Reserve
Chairman
Confronting the crisis
SeveraI euro area countries confronted by need to:
adopt drastic austerity measures
acceIerate reforms
But measures are unpopuIar (strikes, protests
StimuIus vs. austerity debate:
shouId governments use fiscaI stimuIus to support
economy?
or cut back deficits and bring down the debt IeveI?
CompIeting the Economic and onetary &nion
Bring down debt and
deficit IeveIs
ake more effective fiscaI
ruIes
Increase competition
CompIete the SingIe arket
Boost growth:
'Europe 2020' strategy
Europe 2020: smart, sustainabIe, baIanced growth
Economic reform program
developed at EU level
Each country adopts own
measures
Aims to spur more knowledge-
intensive, innovation-based growth
Raise employment rate to 75%
R&D spending should be 3%
Prepare for longer-term
challenges: aging, globalization
An agenda for growth and jobs
The crisis and the chaIIenges
igh debt and deficits
Deficit and debt levels rose sharply due
to the crisis
But already too high in several
countries
Countries now facing much higher
borrowing costs
Greece and reland forced to seek
assistance
Too high a debt level reduces
economic growth
Aging !opuIation
There are currently four people of
working age for every retired person
By 2050 there will be only two people of
working age for every retired person
As populations age, economic growth
slows, tax revenue falls (fewer workers)
ncreased 'age-related' spending on
healthcare, pensions
Crisis makes it even more urgent to
have low debt levels
Sustaining the SociaI eIfare System
Europe's Next Top odeI: ho iII You Vote For?
empIoyment protection
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Scandinavian:
high employment,
low inequality
EngIish-speaking: high
employment, high inequality
RhineIand: low
employment, low
inequality
editerranean: low
employment, high inequality
Adapting To TechnoIogicaI Change
!roductivity a measure of how much each worker produces
MorIe-CIoude
KorI-HeIz
Marie-Claude designed 5 web sites
Karl-Heinz designed 8 web sites
Who is more productive?
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Adapting To TechnoIogicaI Change
!roductivity a measure of how much each worker produces
MorIe-CIoude
KorI-HeIz
Marie-Claude designed 5 web sites
Karl-Heinz designed 8 web sites
Who is more productive?
Marie-Claude worked 200 hours
Karl-Heinz worked 400 hours
Now who is more productive?
Web sites designed per hour: Marie-Claude: 0.025
Karl Heinz: 0.020
arie-CIaude has a higher hourIy productivity than KarI-einz
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SIow growth
Sluggish growth due to:
Higher unemployment
Poor productivity
Structural problems
Boost growth by:
Stimulating competition?
Fostering innovation?
Education and training?