Abstract
This chapter reviews the recent economic situation, trends and perspectives of the Eurozone. First, we summarize the main features of the double crisis that hurt the euro area since 2008–2009, including the more recent slow recovery. Second, we discuss the policies adopted in the Eurozone during and after the crises, including the monetary policy by the European Central Bank, that became—some years later with respect to the Fed and other central banks—progressively more accommodative over time; but we also emphasize the limits of fiscal policies, in particular their “austerity” approach. Third, we stress the need to change the current macroeconomic policies, to make more robust the economic recovery (in countries like Greece and Italy real output is still below the pre-crisis levels) and improve the social condition, severely deteriorated because of the long crisis. Macroeconomic policies should be targeted at the support of aggregate demand and especially investment, that in most euro area’s countries has collapsed. The consequent improvement of the economic and social situation will also make more feasible the adoption of institutional reforms, necessary to guarantee the continued existence of the euro in the long-run.
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Notes
- 1.
By focusing not only on this variable, but also on other considerations, Brezinski (2019) states that “macroeconomic calculations show that Germany seems to be the biggest winner of the introduction of the Euro” (p. 183).
- 2.
A more complete account of the crisis can be found in Marelli and Signorelli (2017a).
- 3.
The countries considered in the table are the three major Eurozone countries and the economies hit by the sovereign debt crisis; in addition, the United Kingdom and the aggregates (Eurozone and EU-28) are reported; finally, the two largest non-European countries with a market economy (US and Japan) are also included.
- 4.
Notice that China, India and other emerging economies had only a mild deceleration in the year of the Great Recession.
- 5.
In fact, the original financial imbalances were, similarly to the US case, in the private sector, with very high private debt over GDP ratios in many EZ and EU countries (the United Kingdom, Ireland, Spain, etc.); many private banks (in Germany, France, etc.) were exposed to the debts of peripheral countries. In this situation, during crisis periods, sudden capital outflows may occur, causing imbalances in the EZ’s payment system (Acocella 2016; Beker and Moro 2016).
- 6.
Partly due to a lower level or dynamics in the imports.
- 7.
Similarly to the United States, that has been the engine of the world for many years, thereby accepting to experience large current account deficits.
- 8.
From Table 2, we can see that even the “Pigs” now exhibit current account surpluses (only Greece still has a deficit, but decreasing over time).
- 9.
That is the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM). Notice however that big countries like Italy or also Spain would be, in any case, both too big to bail out (because of the limited size of the mentioned funds) and too big to default: their failure would almost certainly cause a systemic crisis and the likely collapse of the euro.
- 10.
Financial help was given in 2010–2011 to Greece, Ireland, Portugal and the following year to Spain and Cyprus (see Marelli and Signorelli 2017a, Chapter 6).
- 11.
The previous Securities Market Program (SMP), adopted in 2010–2011, was more limited in size, duration and it was targeted to specific countries.
- 12.
The Main Refinancing Operation (MRO) rate reached exactly 0% in 2016; the rate on overnight deposits, negative since 2014, is now (from September 2019) equal to −0.5%. Figure 1 shows that both in the first decade after euro’s introduction and in the subsequent crisis period (2008–2014) monetary policy was more active and expansionary in the United States than in the EZ; but interest rates began to rise in the United States in 2016 and, despite the recent reductions in 2019, are still higher than the zero-rate by the ECB.
- 13.
The QE ended in December 2018, leading to a doubling in size of the ECB budget (from 2000 to 4000 billion euros). It has been restarted in November 2019 (with monthly net purchases of bonds equal to 20 billion) thanks to the latest Draghi’s decision, also motivated by the deceleration of the euro area’s growth occurred in 2019.
- 14.
The weaker link between monetary base (and other monetary aggregates) and inflation is a general phenomenon in developed countries and can be due to several factors, including the deflationary pressures in globalized markets (i.e. low costs/prices of goods exported from emerging countries like China) and the macroeconomic conditions (i.e. persisting low growth or stagnation with significant unemployment and output gaps). In addition, especially in some countries, a partial “liquidity trap” exists (also favoured by an excessive presence of non-performing-loans in the banking sector) and this makes less effective the monetary policy transmission to real economy.
- 15.
In addition, structural reforms should not imply (as suggested in neoliberal approaches) large reductions in taxation, if this leads to a cut in fundamental social services, expenditures for health or education, incentives to researchand development. Notice that such expenditures have already been heavily cut in the crisis period and in some countries are extremely low. Instead, the reduction of fiscal pressure should be realized by contrasting all forms of tax evasion and elusion.
- 16.
In countries like Italy they have been negative over the whole decade since 2008. Moreover, the real output gaps are probably larger than the ones computed by the EU Commission (its methodology tends to underestimate the magnitude of the economic cycle by assuming pronounced hysteresis effects). This entails two wrong policy implications: (i) attaching too much importance to structural policies with respect to aggregate demand management; (ii) requiring an excessive budgetary adjustment, because of the (apparently) high structural public deficits.
- 17.
For the EZ as whole the public investment/GDP ratio declined from 3.3% in 2008 to 2.8% in 2019; in all countries there has been a reduction vs. the initial levels, except for Germany (where the incidence is however relatively small).
- 18.
In the short-run the survival of the Eurozone is favoured by the high costs and risks (compared to advantages) of “exit”; on this assessment, an investigation, referred to the Italian case can be found in Marelli and Signorelli (2018).
- 19.
However, the “sovereign bond-backed securities” proposed in the same document is, according to us, the second best solution compared to the Eurobonds proposal, for which the political consensus is still lacking.
- 20.
The “Budgetary instrument for convergence and competitiveness” (Bicc), recently proposed in view of the multiannual financial framework 2021–2027, would be of the second type. It will finance packages of structural reforms and public investments in the euro area. It is a first attempt to introduce a specific budget (section) for the Eurozone, but it presents two great limits: it has a base of 17 billion euro (only!) and the resources will be collected from the EU overall budget.
- 21.
A widely accepted (by experts) solution is a partial (up to 60% of GDP of each country) transformation of national debts into Eurobonds.
- 22.
These bonds are formed from the senior tranche of a diversified portfolio of euro area sovereign bonds, but do not imply any risk sharing; a common warranty only applies to the new bonds issued at the European level (see Brunnermeier et al. 2016).
- 23.
Germany and other “core” countries ask all countries, especially in the periphery, to reduce (in the first place) the non-performing loans and also the weight of domestic debt in the assets of private banks.
- 24.
- 25.
Nevertheless, it should be recognized that public spending in education (especially tertiary) and R&D can have a growth impact partly similar to public investments.
- 26.
For example, long planning and implementation times, budgets continuously revised upward, corruption episodes (at least in some countries).
- 27.
Such programmes, however, did not provide specific resources at the European level to reach the stated objectives, apart from the traditional “structural cohesion funds” (that are just equal to 0.5% of EU’s GDP).
- 28.
For instance, Eurobonds at 10 years could be issued at a low interest rate (lower than 2%).
- 29.
See the recent “InvestEU Programme” proposed for the 2021–2027 horizon: a newly created “InvestEU Fund” will mobilize private and public investment using guarantees from the EU budget (just 15.2 billion euro); thanks to a large leverage, a total of 650 bn. new investments is estimated. It will focus on four policy areas: sustainable infrastructure; research, innovation and digitisation; small businesses; social investment and skills.
- 30.
The debt service could be limited, given the current low interest rates; we can assume it, in a precautionary way, to be around 2% on 20-years maturity bonds, equivalent to 10 billion euros for the whole Eurozone.
- 31.
Some progresses towards a well-designed democratic “federal Europe” (a sort of “United States of Europe”) would be desirable to give the necessary political role to (a large part of) the “Old Continent” in the global context.
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Marelli, E., Signorelli, M. (2021). Eurozone: Crisis, Policies and Reforms. In: Andreff, W. (eds) Comparative Economic Studies in Europe. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-48295-4_8
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