Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment?

1. Macroeconomic Policy in the Eurozone: Are There Alternatives to Slow Growth and High Unemployment? Mark Weisbrot, Co-Director Center for Economic and Policy Research September 24, 2011

2. Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing

3. Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing • It is the result of bad macroeconomic policies from the European authorities:

4. Europe’s crisis, stagnation, and unemployment are not the result of unsustainable borrowing • It is the result of bad macroeconomic policies from the European authorities: • The “Troika” – European Central Bank, European Commission, IMF

5. Three most important macroeconomic policies: Fiscal, monetary, and exchange rate

6. Three most important macroeconomic policies: Fiscal, monetary, and exchange rate • Not helping, or actively causing damage, in troubled eurozone economies (Greece, Ireland, Portugal, Spain, Italy)

7. Troika, especially ECB has played game of brinksmanship with troubled economies since early 2010

8. Troika, especially ECB has played game of brinksmanship with troubled economies since early 2010 • Repeatedly pushing Europe, and now much of the world economy, to the edge of serious crisis

9. Troika, especially ECB has played game of brinksmanship with troubled economies since early 2010 • Repeatedly pushing Europe, and now much of the world economy, to the edge of serious crisis • Why?

10. What policy failure looks like

11. Real GDP (Index: 2008=100) Italy Trend vs. Actual and Projected GDP (percent)

12. Real GDP (Index: 2008=100) Ireland Trend vs. Actual and Projected GDP (percent)

13. Real GDP (Index: 2008=100) Greece Trend vs. Actual and Projected GDP (percent)

14. Real GDP (Index: 2008=100) Portugal Trend vs. Actual and Projected GDP (percent)

15. Real GDP (Index: 2008=100) Spain Trend vs. Actual and Projected GDP (percent)

16. Real GDP (Index: 1998=100) Argentina Trend vs. Actual GDP (percent)

17. Lessons from Argentina:

18. Lessons from Argentina: • Despite chaotic default, financial collapse, and no outside help, Argentine economy begins to recover just one quarter after default

19. Lessons from Argentina: • Despite chaotic default, financial collapse, and no outside help, Argentine economy begins to recover just one quarter after default • Argentina reaches pre-recession GDP within 3 years, despite much deeper recession – compare to more than a decade in Greece.

20. Passes trend GDP in 2006 (compare to eurozone – when?)

21. Passes trend GDP in 2006 (compare to eurozone – when?) • Real GDP growth more than 90 percent 2002-2011

22. Passes trend GDP in 2006 (compare to eurozone – when?) • Real GDP growth more than 90 percent 2002-2011 • There are ALWAYS alternatives to the years of recession, stagnation, and high unemployment that the Troika is offering to the troubled eurozone economies

23. The human cost of economic mismanagement

24. Unemployment Rate (Seasonally Adjusted) Ireland (percent) Source: Eurostat

25. Unemployment Rate (Seasonally Adjusted) Greece (percent) Source: Eurostat

26. Unemployment Rate (Seasonally Adjusted) Italy (percent) Source: Eurostat

27. Unemployment Rate (Seasonally Adjusted) Portugal (percent) Source: Eurostat

28. Unemployment Rate (Seasonally Adjusted) Spain (percent) Source: Eurostat

29. Low inflation implies there is plenty of room for expansionary monetary and fiscal policies – but eurozone countries that need it can’t implement these policies

30. Inflation (Seasonally-Adjusted, year over year) Ireland (percent) Source: Eurostat

31. Inflation (Seasonally-Adjusted, year over year) Greece (percent) Source: Eurostat

32. Inflation (Seasonally-Adjusted, year over year) Spain (percent) Source: Eurostat

33. Inflation (Seasonally-Adjusted, year over year) Italy (percent) Source: Eurostat

34. Inflation (Seasonally-Adjusted, year over year) Portugal (percent) Source: Eurostat

35. “Internal Devaluation” doesn’t work

36. Real Effective Exchange Rate (Based on Unit Labor Costs of 27 Trading Partners) (Index: 2008QI=100) Source: Eurostat

37. More fiscal consolidation

38. Primary Balance 2011 (percent of GDP) Source: IMF

39. Total Projected Fiscal Consolidation 2010-2016 (percentage points of GDP) *Note: 2010 overall balance in Ireland excludes 21% of GDP in financial sector assistance. Source: IMF

40. Projected Net Interest Payments (% of GDP) Greece (% of GDP) Source: IMF

41. Conclusion • Euro zone crisis primarily a result of wrong macroeconomic policies

42. Conclusion • Euro zone crisis primarily a result of wrong macroeconomic policies • European authorities will probably resolve current crisis with bigger EFSF or other rescue mechanisms, interventions in bond markets, bank bailouts, even Greek debt restructuring

43. Conclusion • But continued wrong macroeconomic policies will cause unnecessary unemployment and suffering; cuts to health care, pensions, education; trillions of dollars in lost output, and possibly more crises