”THE EURO And THE DEBT CRISIS ” Economist Henrik Herløv Lund

1. Presentation for ”Studydays of the GUE/NGL”Copenhagen, Hotel ScandicWednesday, 6. june 2012 ”THE EURO And THE DEBT CRISIS” Economist Henrik Herløv Lund

2. Initial Question: Is the euro as weknow it the solution or part of the problem of the debtcrisis?

3. CONTENT • BACKGROUND AND CAUSES FOR THE DEBTCRISIS. • STRATEGIES AGAINST AND SOLUTIONS FOR THE CRISIS • Appendix (if time): Possible scenarios for the near future?

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5. PERSONAL PRESENTATION: • NAME: Henrik Herloev Lund. • EDUCATION: Economist, University of Roskilde in Denmark. • JOBS: Finans and administration in the public sector in Denmark

6. WHAT I STAND FOR? • Economic theoretical basis: Left keynesianism • Ideological basis: Defense of Welfarestate and critics of neoliberalism. • Politically independent: Belong to center - left (No member of a specifik political party)

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8. 1 background And causes For the debtcrisis

9. CONTENT • BACKGROUND: THE FINANCIAL CRISIS • THE DEBT CRISIS: NATIONAL AND GENERAL CAUSES • IS THE EURO –AS WE KNOW IT - PART OF THE PROBLEM?

10. 1.1. THE FINANCIAL CRISIS

11. THE FINANCIAL CRISIS IS AN IMPORTANT REASON FOR THE DEBT CRISIS • The financial sektor and housing markets have been severely shaken by the financial crisis • Its meant a serious set back for businesses and a sharp rise in unemployment • There´s been large increases in public deficits and debts

12. UNEMPLOYMENT RATE 2008 -2011(% of labour force) Source: Euorstat

13. THE FINANCIAL CRISIS ALSO HAS IMPORTANT CONSEKVENSES FOR THE FUTURE • Because the Financial Crisis has been so deep a shock to western economy, • it´s going to take a long time to overcome it • The impact will be : LOW GROWTH ”AS FAR AS THE EYE CAN SEE”

14. PROSPECT OF L – ELLER W – SHAPED CRISIS Traditionallydownturn(V – shapedcurve) Multiple up - and downturnsaround a fundamentallyweakgrowth(w – shapedcurve) Longterm trend(L – shaped - curve) 2004 2009 2015/2020

15. 1.2. THE DEBT CRISIS: SPECIFIC NATIONAL AND GENERAL CAUSES

16. NATIONAL CAUSES:POLITICAL AND ECONOMIC MISMANAGEMENT • Part of responsability for the crisis do in some countries lie with uncontrolable debt • due to either political mismanagement (e.g. Greece) • or due to financial mismanagement by banks (e.g. Ireland and Spain)

17. BUT: MORE TO THE PICTURE THAN UNCONTROLLABLE DEBT • The ”Monetary” Union has from the start beenborn • with a deepinequality • in competitivenes

18. A LARGE INEQUALITY OF COMPETITIVENES • There has from the start been an fatal inequalitity between • on one side a group of ”surplus”- countries in northern Europe • And on the other side a group of ”deficit”- countries in southern Europa

19. ”SURPLUS” - COUNTRIES • In northern - and central Europe are Germany, Netherlands, Luxembourg, Finland and Austria • They have been characterized by having:- High productivity and competitiveness,- ”higher” growth rates, - and relatively large surplus in balance of payment.

20. ”DEFICIT” - COUNTRIES • In ”southern” and ”fringe”- Europe areGreece, Ireland, Portugal, Spain and Italy • They have been characterized by having - Lower producitivity and competitiveness,- higher unemployment and lower growth,- large deficits in balance of payment, - large government deficits and debts

21. INEQUALITITY IN COMPETITIVENESS BETWEEN ”SURPLUS” – AND ”DEFICIT-COUNTRIES HAVE BEEN INCREASING(balance of payment, % of GDP, EU – 12) Source: Central Bank of Denmark and Eurostat

22. 1.3. THE EURO - PART OF THE PROBLEM ?

23. BEFORE THE EURO • On onehand it must beadmitted, thatthisinequalitity in competitiveness did exsistbefore the euro • But at that time weakcompetitiveness in the South couldbecompensated • through the currencymarkets, throughexchange rates

24. THIS COMPENSATION WORKED THROUGH EXCHANGE RATES • Low competitiveness low exchange rate of currency, which on the other side favoured export • High competitiveness strong currency with high exchange rates • which then inhibited export

25. DEVALUATION • Sometimes weak competitiveness needed stronger compensation • This could be done by devaluation

26. AFTER THE EURO: • Countries with weak competitiveness • no longer have the possibility of compensating • through exchange rates

27. AND IN ADDITION: THE EURO ITSELF HAS WEAKENED COMPETITIVENES IN SOUTHERN EUROPE FURTHER • The exchange rate of the Euro has risen as a result of weakening of the american Dollar • And this has led to • a further weakening in competitivenes and exports of southern Europe

28. THE RESULT: HIGHER LEVEL OF UNEMPLOYMENT IN SOUTHERN EUROPE

29. HIGHER GOVERNMENT DEFICITSIN SOUTHERN EUROPE

30. AND A HIGHER AND RISING LEVEL OF GOVERNMENT DEBT IN SOUTHERN EUROPE

31. THE OTHER SIDE OF DEBT CRISIS IN SOUTHERN EUROPA: GERMANY HAS BENEFITED FROM THE EURO • If Germany still had D-mark, the economic strength and strong export of Germany • would have meant an large appreciation of D-mark (probably between 20 and 30 percent)

32. WITHOUT THE EURO, A MUCH SMALLER GERMAN EXPORTBOOM • Without the Euro D-mark would have had an exchange rate in the neighbourhood of, • the Schwiss Franc today • Which would have restrainted German exports severely

33. THE EURO HAS BENEFITED GERMANY AND DAMAGED SOUTHERN EUROPE ECONOMICALLY

34. GERMANY HAS BENEFITED FROM THE EURO • German exports have prospered from the low exchange rate of the euro • compared to what would have been the case if D –mark had still been around

35. BUT HASN´T GERMANY IN RETURN CONTRIBUTED MUCH TO RESCUE SOUTHERN EUROPE? • Yes, it s correct • that Germany has been a main contributor to the stabilisation funds • But Germany has gained many times more than this from the euro

36. German gains and ”losses” from the euro Source: Eurostat and Wikipedia

37. THE CONCLUSION: THE EURO –AS KNOW IT – IS PART OF THE PROBLEM • The euro did not create the inequalities of com-petitiveness • But the euro has prevented southern Europe from compensating weak competiveness through exchange rates and devaluation • And the rising exchange rate of the euro itself has enhanced this problem of competitiveness in southern Europe

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39. 2 SOLUTIONS AND STRATEGIES FOR THE DEBT CRISIS?

40. CONTENT • CAN THE PRESENT POLICY OF CUTBACKS ON WELLFARE SOLVE THE CRISIS? • IS EUROEXITA SOLUTION AND WITH WHAT CONSECVENSES? • IS A POLICY OF GROWTH - AND REDESTRIBUTION AN ALTERNATIVE?

41. 2.1. CAN THE PRESENT POLICY OF CUTBACKS ON WELLFARE AND SALARIES SOLVE THE CRISIS?

42. POLICY OF GOVERNMENT CUTBACKS • Most governments in the EU • have conducted a policy of cutbacks on government expenditure on wellfare • AND they have also focused on lowering wages and expanding labour output

43. A NEOLIBERALIST, MONETARIST STRATEGY • This is a strategy based on • a monetarist view of economic policy • And the ”Financial Treaty” reflects this neoliberal economic thinking

44. PROBLEM • The problem of this strategy is • That the cutbacks further enhances the decline of growth and of employment already caused by the debtcrisis • Thereby the indebted countries get trapped in a combination of low growth and high debt

45. REAL GDP GROWTH RATE IN SOUTHERN EUROPEAN COUNTRIES(2009 – 2012) Source:Eurostat

46. LARGE FISCAL SURPLUS IS NEEDED • To reduce the present very large government debts • the countries in southern Europe need a large fiscal surplus • through a long period

47. CUTBACKS WILL KILL GROWTH • If this surplus is to be created only by cutbacks in wealth and wellfare, • it might take 10 years or more, • where economy and wellfare in the meanwhile are brought to a standstill or even shrinks

48. Dangerous cure • The risc is • that the cure • will kill the patient

49. GROWTH IS ESSENTIAL • To escape from the combined trap of low growth and high debt • the indebted countries must increase competitiveness

50. POSSIBLE WAYS • This can be done either 1) By regaining economic-political independence by euroexitor • 2) By economic redistribution from the ”surplus” – countries to southern Europe + by growth policy in the EU