quels chocs pour sortir de la crise - CESW

QUELS CHOCS POUR SORTIR DE LA CRISE ? Prof. Dr. BRUNO COLMANT Membre de l'Académie Royale de Belgique

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Several issues to deal with Recession and huge social issues : unemployment , digitalisation Public debt : pensions, future welfare, taxation The euro : lack of congruence, redomestication, QE

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First, the subprimes…

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Then the disaster…

" Je pensais que nous achetions seulement une maison !" CSEW PRESENTATION.pptx

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Crises = catalyst for the globalization cycle Velocity of production factors : capital, labour and information 1893 & 1907 Agriculture, train, car, telephone

1929 Urbanity, radio

1974-1982 IT

2000 & 2008

2008

Internet and credit

Credit leniency followed by massive deleveraging

2008-2013

Systemic risk, but non Seismic replication of diversifiable/ 2000 insurable crash ?

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The reality of a deflation Homeopathic growth, low demand, underutilization of production capacities Fall of money velocity Increase of the real interest rates… ... compensated by a redomestication of public debt/retail savings at no costs How to get out of a structural deflation: >  Nobody knows, reason why the political/monetary policy mistakes are unforgivable >  Lower/negative rates are ineffective >  QE ? Bank QE (with the ECB being the bank controller ?) And a unknown : how long will the "social factor" remain stable ? CSEW PRESENTATION.pptx

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Velocity of circulation of money has been divided by 2 in 20 years with a strong dip after 2008 Velocity of the circulation of money for three monetary aggregates [1996 – 2013] 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2

M1 M2 M3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

M1= Currency in circulation + Overnight deposits, M2 = M1 + Deposits with agreed maturity   Low interest rates over a longer period of time can have various negative side-effects: –  Insurers face challenge of low current yields vs high historic guaranteed returns –  Intensified search for yield behavior by institutional investors –  Profitability pressures on bank net interest margins >  Sudden interest rate increases will have a negative impact on all financial institutions and for the governments

1) Three-month money market rates 2) 10-year benchmark government bond yields Source:

OECD, Roland Berger

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The relationship between financial institutions & governments becomes more and more imbricated Evolution of Bank sovereign debt detention Banks sovereign debt detention globally increases1) [2011-2013] 170

Italy Spain Portugal

160 150 140

France Euro area

130 120 110

Germany

100 90

Belgium

80 70 60 Nov 2011

Nov 2012

Comments >  European banks hold increasingly important amounts of sovereign debt of euro zone, especially in periphery countries >  Increased domestic intimacy between banks and governments may induce systemic fragility (vicious spiral) >  EU finance ministers agreed on the rules to force losses on creditors in failed banks, putting in place a piece of a banking union that could share the costs of future bank bailouts: –  Progressive reduction of interdependency >  Financial repression through regulation, leading inflation rate to surpass interest paid for savings

1) Base=100 in january 2011; Excluding insurance; Nationality of debt is not precised by ECB Source:

ECB, Roland Berger

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Government debt is increasingly owned locally Belgian government debt [EUR bn]

309

326

340

282

Foreign holdership

Domestic holdership

172 (61%)

186 (60%)

192 (59%)

186 (55%)

110 (39%)

123 (40%)

134 (41%)

154 (45%)

2007

2008

2009

2010

Source: Debt agency, Roland Berger

362

174 (48%)

188 (52%)

2011

375

166 (44%)

> New regulation is pushing both banks and insurers towards low risk investments > Additionally, we see that an increasingly larger share of government debt is being taken up by Belgian investors

210 (56%)

2012

> This implies that a significant share of new house-hold savings were used to pay for increasing govern-ment debt CSEW PRESENTATION.pptx

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50% 90%

45%

80%

40% 35%

70%

30% 60%

25% 20%

50%

15%

40%

10% 30%

5%

0% 20% 1826 1836 1846 1856 1866 1876 1886 1896 1906 1916 1926 1936 1946 1956 1966 1976 1986 1996 2006

% of countries with annual inflation over 20%

of countries in default or restructuring

Total public debt/GDP (word average) CSEW PRESENTATION.pptx

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The euro ? A political decision with insufficient economic ground : monetary federalism BUT budgetary confederalism Windfall effect (monetary expansion, German rating, low rates) Monetary mobility but increased government pressure

The euro is genetically recessionary CSEW PRESENTATION.pptx

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What are the key problems the euro ?

A country weakens its own banking system

Nobody considered the insolvency/bankruptcy of a country whereas the euro is like borrowing in a foreign currency

>  Financial repression (low rates, mandatory holding of public debt) >  Redomestication of public debt (debt migrates back to its origin) >  German logic : domestic private savings must finance domestic public debt >  Risk : rescheduling, etc. (Greece, Ireland, Cyprus) >  A banking union : not a pre-nationalization of the banks ? CSEW PRESENTATION.pptx

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Absent significant restructuring, required internal devaluation is large … Required real exchange rate adjustment sizable within the Euro area 50 45 40 35 30

Macro model Assuming no structural change and economies at potential

25 20 15 10 5 0 -5 -10 -15 -20 -25

GRC

IRE

ESP

Initial imbalance (mid 2008)

Euro area debt crisis escalates (Q2 2011)

Start of Euro area debt crisis (mid 2010)

Most recent jobs (Q2 2013)

PRT

ITA

GER

FRA

End of GS forecast horizon(Q4 2017)

NIIP : Net International Investment Position: external financial assets minus liabilities Source: Goldman Sachs Global Investment Research

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Welcome to euro austerity : a suicide

Unemployment rate : 12,1 % Austerity fuels recession…that requires more austerity The same mistake as in the Thirties (Hoover, Brüning, Laval, …) Risk of a global nationalization… Self-destructive

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Unemployment

Spring 2014 forecast of the European commission 8.2

Belgium Germany

5.1

Greece

24.0

Spain

24.0 10.2

France

12.5

Italy Netherlands United Kingdom Euro zone UE 28

7.3 6.3 11.4 10.1 CSEW PRESENTATION.pptx

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Laval deflation (1935)

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Weimar (1923)

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The situation today What should we do ?

> Debt deflation Massive deleveraging of assets (Fisher) > Consequences Impact on demand, recession, unemployment > Liquidity trap (Keynes) Deleveraging makes monetary stimulus ineffective

> Market are telling the answer : increase public deficit (US example), debt and monetize the debt ! > But the cohesion of the Euro is at stake ! > So we are caught in a deadly trap : – Euro cohesion prevents budgetary stimulus – German rigidity prevents monetary stimulus (debt monetization) > The final solution : A clean-up of the public debt through inflation or debt rescheduling in weaker cases CSEW PRESENTATION.pptx

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