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

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

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

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  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 • It is the result of bad macroeconomic policies from the European authorities: • The “Troika” – European Central Bank, European Commission, IMF

  3. 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)

  4. 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?

  5. What policy failure looks like

  6. Real GDP (Index: 2007=100) Italy Trend vs. Actual and Projected GDP (percent)

  7. Real GDP (Index: 2007=100) Ireland Trend vs. Actual and Projected GDP (percent)

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

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

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

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

  12. 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.

  13. 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

  14. The human cost of economic mismanagement

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

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

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

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

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

  20. 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

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

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

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

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

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

  26. “Internal Devaluation” doesn’t work

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

  28. More fiscal consolidation

  29. 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

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

  31. 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

  32. 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

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