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Optionen für die Eurozone

Optionen für die Eurozone. Dr. Daniel Stelter. The two problems of the euro zone. Too much debt. Competitiveness. Total debt (% of GDP). Unit labor costs, Q1 2000 = 100. 500. 150. 450. 419. 140. 400. 348. 350. 309. 130. 300. 259. 254. 251. 241. 250. 210. 120. 200.

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Optionen für die Eurozone

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  1. Optionenfür die Eurozone Dr. Daniel Stelter

  2. The two problems of the euro zone Too much debt Competitiveness • Total debt (% of GDP) Unit labor costs, Q1 2000 = 100 500 150 450 419 140 400 348 350 309 130 300 259 254 251 241 250 210 120 200 150 110 241 229 • 213 100 199 • 191 • 188 182 • 183 50 100 • 0 0 2000 2012 2011 2000 Note: debt data based on unconsolidated total liabilities (for corporates only loans) at market prices (exception: Belgium non-financial sector debt is consolidated) Source: Eurostat; bto analysis

  3. How to solve the euro crisis? Address debt overhang Restore com-petitiveness Source: Robert Gordon, "Is U.S. economic growth over? Faltering innovation confronts the six headwinds", NBER Working Paper 18315, http://www.nber.org/papers/w18315 1 Internal devaluation 2 • Permanent transfers from north to south ? ? 3 • Grow out of the problem 4 • Organized debt restructuring and growth agenda ? ? 5 • The inflation solution 6 • Debt restructuring and Euro zone exits

  4. Stereotyping in Europe Who is Trustworthy, Arrogant and Compassionate EU nation most likely to be named... Source: PEW Research Center

  5. Joint restructuring the euro zone debt overhang Pooling excess debt Refinancing with Eurobonds >90% of GDP • Features • Jointly guaranteed to obtain AAA rating and low rates • Staggered maturities matching repayment profile • Repayment over 20 years €1.1T €0.3T >60% of GDP €3.7T €5.1T Eurozone redemption fund €7T €6T €5.5T Government Non-fin. Corp. Private households • Repayment options • Each country repays own debt • Reallocation for GIPS debt to Euro zone average (55% of GDP) • Reallocation for all countries according to GDP • Euro zone wide wealth tax on household assets • Accompanying measures • Structural and fiscal reforms • Limits on new indebtedness • Measures to reduce private debt LT < 60% of GDP Roll-in of government debt > 60% of GDP per country Funding for private sector recapitalizations for debt > 90% of GDP per sector and country Source: Eurostat; bto analysis

  6. Without reallocation, debt service costs Option I: Noreallocation • Debt burden for Greece already reduced after haircut Total excess debt and costs to repay over 20 years per country (B€) No reallocation 1,500 1,000 500 0 EZ Excessdebtto GDP 57% 49% 27% 63% 72% 49% 67% 179% 108% 51% % GDP p.a.1 2.4% 2.2% 1.2% 2.8% 3.2% 2.4% 3.1% 7.0% 5.4% 2.3% % Fin. Ass. p.a.1 2.4% 3.6% 1.0% 2.0% 2.0% 1.3% 0.7% 1.1% 0.9% 1.1% 1. Costs p.a. based on 20 year repayment horizon, interest rate for pooled debt of 2.75%, forecasts for euro zone inflation 2.1%, and real growth 1.7% plus an additional 0.5% growth following structural reforms (different growth forecast assumed for each country) Note: Excess debt (above 60% for governments, and above 90% of GDP each for household and for non-fin. corporations) is assumed to be pooled and paid down by raising extra taxes. Debt refers to non-consolidated gross debt (exception: Greek government debt is consolidated and Belgium non-financial sector debt is consolidated). Data for LTM Q3 2011 (pro-forma after Greek haircut). Source: Eurostat; ECB; EIU forecasts; bto analysis

  7. Reallocation of GIPS excess debt manageable Option II: Reallocation to GDP for GIPS • Excess debt burden for GIPS reduced to 54% of GDP, for all other countries increased by 4–5 pp Total excess debt and costs to repay over 20 years per country (B€) Reallocation of excess debt from GIPS to other countries 1,500 1,000 500 0 EZ Excessdebtto GDP 63% 56% 34% 69% 51% 49% 74% 51% 51% 51% % GDP p.a.1 2.6% 2.5% 1.5% 3.1% 2.3% 2.4% 3.4% 2.0% 2.6% 2.3% % Fin. Ass. p.a.1 1.1% 1.0% 1.1% 2.0% 1.4% 1.4% 0.8% 1.2% 1.0% 1.1% 1. Costs p.a. based on 20 year repayment horizon, interest rate for pooled debt of 2.75%, forecasts for euro zone inflation 2.1%, and real growth 1.7% plus an additional 0.5% growth following structural reforms (different growth forecast assumed for each country) Note: Excess debt (above 60% for governments, and above 90% of GDP each for household and for non-fin. corporations) is assumed to be pooled and paid down by raising extra taxes. Debt refers to non-consolidated gross debt (exception: Greek government debt is consolidated and Belgium non-financial sector debt is consolidated). Data for LTM Q3 2011 (pro-forma after Greek haircut). Source: Eurostat; ECB; EIU forecasts; bto analysis

  8. High inflation differential required torealign competitiveness • 8 7 • 6 5.5 5 Euro zone avg. = 3.6 3.8 • 4 3 2.5 • 2 1.3 1 0.0 0.0 0.0 • 0 1.Based on Goldman Sachs calculation: The realignment is supposed to achieve external debt sustainability, so that the net foreign asset or debt position reduces to less than 25% of GDP 2. Average for 2010-12 Source: Thomson Reuters Datastream (Eurostat), CesIfo Working Paper No 4086, Goldman Sachs, European Economic Analyst No 3/2013; bto analysis

  9. Deal with the debt problem Redemptionfund Reform labor markets • Improve education • Implement smart immigration policy Only together can we make it happen!

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