EURÓPÁBAN: OKOK, KÖVETKEZMÉNYEK ÉS VÁLASZOK

ABSTRACT

The crisis of the world’s stock exchanges and financial markets is increasingly spiraling out of control. Governments are being driven by developments which they are unable to influence. The panic on the stock markets shows that traders are expecting a deep recession, already heralded by stagnating growth and rising unemployment rates. Corporations will respond with new waves of layoffs, governments with further budget cuts. In Europe, governments and parties are arguing over whether the insatiable appetite of the financial markets can be satisfied by the creation of so-called euro bonds, or whether the euro should be abandoned and the highly indebted countries left to their fate.

The European economy is in the midst of the deepest recession since the 1930s, with real GDP projected to shrink by some 4%

in 2010, the sharpest contraction in the history of the European Union. Although signs of improvement have appeared recently, recovery remains uncertain and fragile. The EU’s response to the downturn has been swift and decisive. Aside from intervention to stabilize, restore and reform the banking sector, the European Economic Recovery Plan (EERP) was launched in December 2008. The objective of the EERP is to restore confidence and bolster demand through a coordinated injection of purchasing power into the economy complemented by strategic investments and measures to shore up business and labor markets. The overall fiscal stimulus, including the effects of automatic stabilizers, amounts to 5% of GDP in the EU. In the presenting paper, we analyze the causes, consequences and responses to the current economic downturn in Europe.

Keywords: Economic downturn, European Union, Financial market, budget cut etc.

ÖSSZEGZÉS

A világ tőzsdéinek és pénzpiacainak válsága spirálszerűen kerül ki az ellenőrzés alól. A kormányokat olyan fejlemények mozgatják, amelyeket képtelenek befolyásolni. A tőzsdei pánik azt mutatja, hogy a kereskedők a stagnáló növekedés és a növekvő munkanélküliségi ráta által már előre jelzett mély recessziót várnak. A vállalatok új elbocsátási hullámmal, a kormányok pedig további költségvetési megszorításokkal fognak reagálni. Európában a kormányok és a pártok azt vitatják, vajon a pénzpiacok kielégíthetetlen étvágyát az úgynevezett eurókötvények kibocsátásával ki lehet-e elégíteni, illetve hogy az eurót meg kellene-e szüntetni, és az erősen eladósodott országokat hagyják-e sorsukra. Az európai gazdaság a harmincas évek óta a legmélyebb recesszióját éli át, az előrejelzések 2010 előtt a reál GDP mintegy 4%-os csökkenését mutatták, amely az Európai Unió történetében a legmélyebb gazdasági visszaesésnek tekinthető. Bár mostanában javulás jeleit láthatjuk, a fellendülés továbbra is bizonytalan és törékeny. A visszaesésre az EU reakciója gyors és meghatározó volt. A bankszektor stabilizálását, helyreállítását és reformját szolgáló beavatkozásokon kívül 2008 decemberében elindult az Európai Gazdaságélénkítési Terv. Az EERP célja az, hogy helyreállítsa a bizalmat és ösztönözze a keresletet azáltal, hogy szervezetten növeli a gazdaságban lévő vásárlóerőt –stratégiai beruházásokkal és a munkaerőpiacot támogató intézkedésekkel kiegészítve. Az általános költségvetési élénkítés –beleértve az automatikus stabilizátorok hatását is– a GDP 5 %-át teszi ki az EU-ban. Ebben a tanulmányban a jelenlegi európai gazdasági visszaesés okait, következményeit és az arra adott válaszokat elemezzük.

Kulcsszavak: gazdasági visszaesés, Európai Unió, pénzpiac, költségvetési megszorítás stb.

197 INTRODUCTION

The European economy is in the midst of the deepest recession since the 1930s, with real GDP projected to shrink by some 4%

in 2009, the sharpest contraction in the history of the European Union. Although signs of improvement have appeared recently, recovery remains uncertain and fragile. The EU’s response to the downturn has been swift and decisive. Aside from intervention to stabilize, restore and reform the banking sector, the European Economic Recovery Plan (EERP) was launched in December 2008. The objective of the EERP is to restore confidence and bolster demand through a coordinated injection of purchasing power into the economy complemented by strategic investments and measures to shore up business and labor markets. The overall fiscal stimulus, including the effects of automatic stabilizers, amounts to 5% of GDP in the EU (EC, 2009a,b,c).

According to the Commission's analysis, unless policies take up the new challenges, potential GDP in the EU could fall to a permanently lower trajectory, due to several factors. First, protracted spells of unemployment in the workforce tend to lead to a permanent loss of skills. Second, the stock of equipment and infrastructure will decrease and become obsolete due to lower investment. Third, innovation may be hampered as spending on research and development is one of the first outlays that businesses cut back on during a recession. Member States have implemented a range of measures to provide temporary support to labor markets, boost investment in public infrastructure and support companies. To ensure that the recovery takes hold and to maintain the EU’s growth potential in the long-run, the focus must increasingly shift from short-term demand management to supply-side structural measures. Failing to do so could impede the restructuring process or create harmful distortions to the Internal Market. Moreover, while clearly necessary, the bold fiscal stimulus comes at a cost. On the current course, public debt in the euro area is projected to reach 100% of GDP by 2014. The Stability and Growth Pact provides the flexibility for the necessary fiscal stimulus in this severe downturn, but consolidation is inevitable once the recovery takes hold and the

risk of an economic relapse has diminished sufficiently. While respecting obligations under the Treaty and the Stability and Growth Pact, a differentiated approach across countries is appropriate, taking into account the pace of recovery, fiscal positions and debt levels, as well as the projected costs of ageing, external imbalances and risks in the financial sector (Furceri, D. and A. Mourougane, 2009). The aim of this study is to provide the analytical underpinning of such a coordinated exit strategy.

1. ROOT CAUSES OF THE CRISIS

The depth of the current global financial crisis is unprecedented in post-war economic history. It has several features in common with similar financial-stress driven crisis episodes. It was preceded by relatively long period of rapid credit growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector. Stretched leveraged positions and maturity mismatches rendered financial institutions very vulnerable to corrections in asset markets, deteriorating loan performance and disturbances in the wholesale funding markets.

Such episodes have happened before and the examples are abundant (e.g. Japan and the Nordic countries in the early 1990s, the Asian crisis in the late-1990s) (Bosworth and Flaaen, 2009).

But the key difference between these earlier episodes and the current crisis is its global dimension. When the crisis broke in the late summer of 2007, uncertainty among banks about the creditworthiness of their counterparts evaporated as they had heavily invested in often very complex and opaque and overpriced financial products. As a result, the interbank market virtually closed and risk premiums on interbank loans soared.

Banks faced a serious liquidity problem, as they experienced major difficulties to rollover their short-term debt. At that stage, policymakers still perceived the crisis primarily as a liquidity problem. Concerns over the solvency of individual financial institutions also emerged, but systemic collapse was deemed unlikely. It was also widely believed that the European economy, unlike the US economy, would be largely immune to

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the financial turbulence. This belief was fed by perceptions that the real economy, though slowing, was thriving on strong fundamentals such as rapid export growth and sound financial positions of households and businesses. These perceptions dramatically changed in September 2008, associated with the rescue of Fannie Mae and Freddy Mac, the bankruptcy of Lehman Brothers and fears of the insurance giant AIG (which was eventually bailed out) taking down major US and EU financial institutions in its wake. Panic broke in stock markets, market valuations of financial institutions evaporated, investors rushed for the few safe havens that were seen to be left (e.g.

sovereign bonds), and complete meltdown of the financial system became a genuine threat. The crisis thus began to feed onto itself, with banks forced to restrain credit, economic activity plummeting, loan books deteriorating, banks cutting down credit further, and so on. The downturn in asset markets snowballed rapidly across the world. As trade credit became scarce and expensive, world trade plummeted and industrial firms saw their sales drop and inventories pile up. Confidence of both consumers and businesses fell to unprecedented lows (Cerra and Saxena, 2008).

The heavy exposure of a number of EU countries to the US subprime problem was clearly revealed in the summer of 2007 when BNP Paribas froze redemptions for three investment funds, citing its inability to value structured products. At that point most observers were not yet alerted that systemic crisis would be a threat, but this began to change in the spring of 2008 with the failures of Bear Stearns in the United States and the European banks Northern Rock and Landesbank Sachsen. About half a year later, the list of (almost) failed banks had grown long enough to ring the alarm bells that systemic meltdown was around the corner: Lehman Brothers, Fannie May and Freddie Mac, AIG, Washington Mutual, Wachovia, Fortis, the banks of Iceland, Bradford & Bingley, Dexia, ABN-AMRO and Hypo Real Estate. The damage would have been devastating had it not been for the numerous rescue operations of governments. When in September 2008 Lehman Brothers had filed for bankruptcy the TED spreads jumped to an unprecedented high. This made investors even more wary about the risk in bank portfolios, and

it became more difficult for banks to raise capital via deposits and shares. Institutions seen at risk could no longer finance themselves and had to sell assets at 'fire sale prices' and restrict their lending. The prices of similar assets fell and this reduced capital and lending further, and so on. An adverse 'feedback loop' set in, whereby the economic downturn increased the credit risk, thus eroding bank capital further (IMF, 2009).

2. ECONOMIC CONSEQUENCES OF THE CRISIS

The financial crisis has had a pervasive impact on the real economy of the EU, and this in turn led to adverse feedback effects on loan books, asset valuations and credit supply. But some EU countries have been more vulnerable than others, reflecting inter alia differences in current account positions, exposure to real estate bubbles or the presence of a large financial centre. Not only actual economic activity has been affected by the crisis, also potential output (the level of output consistent with full utilization of the available production factors labor, capital and technology) is likely to have been affected, and this has major implications for the longer-term growth outlook and the fiscal situation. Against this backdrop this chapter first takes stock of the transmission channels of the financial crisis onto actual economic activity (and back) and subsequently examines the impact on potential output (Taylor, 2009).

2.1. IMPACT ON LABOUR MARKET AND EMPLOYMENT Labor markets in the EU started to weaken considerably in the second half of 2008, deteriorating further in the course of 2009.

Increased internal flexibility (flexible working time arrangements, temporary closures etc.), coupled with nominal wage concessions in return for employment stability in some firms and industries appears to have prevented, though perhaps only delayed, more significant labour shedding so far. Even so, the EU unemployment rate has soared by more than 2 percentage points, and a further sharp increase is likely in the quarters ahead. The employment adjustment to the decline in economic activity is as yet far from complete, and more