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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
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

slide2
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
slide3
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)
slide4
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?
slide6
Real GDP (Index: 2007=100)

Italy

Trend vs. Actual and Projected GDP (percent)

slide7
Real GDP (Index: 2007=100)

Ireland

Trend vs. Actual and Projected GDP (percent)

slide8
Real GDP (Index: 2008=100)

Greece

Trend vs. Actual and Projected GDP (percent)

slide9
Real GDP (Index: 2008=100)

Portugal

Trend vs. Actual and Projected GDP (percent)

slide10
Real GDP (Index: 2008=100)

Spain

Trend vs. Actual and Projected GDP (percent)

slide11
Real GDP (Index: 1998=100)

Argentina

Trend vs. Actual GDP (percent)

slide12
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.
slide13
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
slide15
Unemployment Rate

(Seasonally Adjusted)

Ireland

(percent)

Source: Eurostat

slide16
Unemployment Rate

(Seasonally Adjusted)

Greece

(percent)

Source: Eurostat

slide17
Unemployment Rate

(Seasonally Adjusted)

Italy

(percent)

Source: Eurostat

slide18
Unemployment Rate

(Seasonally Adjusted)

Portugal

(percent)

Source: Eurostat

slide19
Unemployment Rate

(Seasonally Adjusted)

Spain

(percent)

Source: Eurostat

slide20
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
slide21
Inflation

(Seasonally-Adjusted, year over year)

Ireland

(percent)

Source: Eurostat

slide22
Inflation

(Seasonally-Adjusted, year over year)

Greece

(percent)

Source: Eurostat

slide23
Inflation

(Seasonally-Adjusted, year over year)

Spain

(percent)

Source: Eurostat

slide24
Inflation

(Seasonally-Adjusted, year over year)

Italy

(percent)

Source: Eurostat

slide25
Inflation

(Seasonally-Adjusted, year over year)

Portugal

(percent)

Source: Eurostat

slide27
Real Effective Exchange Rate

(Based on Unit Labor Costs of 27 Trading Partners)

(Index: 2008QI=100)

Source: Eurostat

slide29
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

slide30
Projected Net Interest Payments

(% of GDP)

Greece

(% of GDP)

Source: IMF

slide31
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
slide32
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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