b. unger - debt conference

8/7/2019 B. Unger - Debt Conference

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byProf. Dr. Brigitte UngerUtrecht University School of Economics

Causes of the Debt Crisis

in the Eurozone

International Conference onDebt and Austerity Policies in Europe.The Proposals of the European Leftorganized by The Party of the European Left,

Synaspismos and Transform! Europe10th 12th March 2011


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Causes of the Debt Crisisin the Eurozone

1. Is there a debt crisis?

2. Public debt perception in history and in theory...its ups

and downs

3. True crisis is systemic unfair income and wealthdistribution


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Causes of the Debt Crisisin the Eurozone

1. Is there a Debt Crisis?

Public Debt in the Eurozone has increased

Especially after the financial crisis in 2008


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1. Is there a Debt Crisis?Public debt and deficits till 2014

-14

-12

-10

-8

-6

-4

-2

0

UK U.S.A

.

Japan

Euroar

ea

Spain

Greece

France

Germ

any

Austria

Italy

Public deficit 2010in % of GDP

Source: IMF, Economist, OeNB

0

50

100

150

200

250

300

Japan

U.S.A

.UK

Euroare

a

Greece Ita

ly

France

Germ

any

Austr

iaSpain

2007 2014

Public debt 2007-2014in % of GDP


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1. Public debt in percent of GDP in 2009 inEurope

2009

0

20

40

60

80

100

120

140

AUT

BEL

CZE

DEU

DNK

ESP

F

IN

FRA

GBR

GR

C

HUN

IRL

ITA

LUX

NLD

POL

PRT

SVK

SVN

SW

N

2009


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1. Public debt in percent of GDP till 2014 inEurope

0%

20%

40%

60%

80%

100%

120%

140%

160%

Ooste

nrijk

Belg

i

Dene

nmark

en

Finla

nd

Fran

krijk

Duits

land

Griek

enlan

d

Ierlan

dIta

li

Nede

rland

Noor

wege

n

Portu

gal

Span

je

Zwed

en

Veren

igdK

onink

rijk

StaatsschuldalspercentagevanhetB

BP

2014

2009


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Europen Union definition of maximum debt is verynarrow. Maastricht criteria of public debt not exceeding60% of GDP inappropriate.

For the Netherlands I showed that Dutch public debtcould double without having negative effects on growth.


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Room for Maneuver for Public Debt is large

Koetsier and Unger (2011) in Economisch StatistiekeBerichten, the Netherlands

Econom

icgrowth

Public Debt

in % of GDP

Threshold

45% -52% for small countries55% - 60% for big countries

90% - 103% for small countries109% - 120% for large countries


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Cause 1 of the Debt crisis :

Crisis is more an EU perception of public debt.Extrem anti inflation and anti debt policydictated by financial markets.

As debt increases: sanctioning of financialmarkets..


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2. Public Debt Perception in History - ups anddown

Public Debt in the Netherlands and the US in % of

Gross Domestic Product

0%

50%

100%

150%

200%

250%

1794 1804 1814 1824 1834 1844 1854 1864 1874 1884 1894 1904 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004

Year

Percentage

Source: CBS and DSI Databank; OECD


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Inflation Rates - OECD

0

2

4

6

8

10

12

14

1965 1975 1985 1995 2005

Year

Pe

rcentagechangeon

thesameperiod

lastyea

r

USAAustria

Germany

2. Perceptions of Public DebtPlay with Fears of Public Debt: Inflation


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Table 1 Predominant View of Public Debt over Time: Its Ups and Downs

1730 1880 1936 1980 2003

Public debtis a waste of

resources.

Publicdebtis no burden,we owe it toourselves.Debts arenecessaryfor full

employment.

Public debt means future taxesburdens future generations

who have no free choice.

Mercantilists Classics and Keynesians Ricardian EquivalenceNeoclassics Public Choice

Steuart Smith, Ricardo Keynes Barro, Buchanan

Publicdebtis amineof gold.A statewithoutdebt is

careless.

2. Public Debt Perception in Economic The


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3. The Crisis is a systemic one

Debt crisis is one of the many problematic effects ofglobalization...

True cause for financial crisis = cause for debt crisis =true cause for the next financial crisis....

is unfair income and wealth distribution


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3. Effects of unfair incomedistribution

alternative investors for higher asset returns:in new areas (private equity)new strategies (hedge funds) of financial investment

They enhance instability, impose shareholder values forcorporate governance

and exert considerable pressure on governments

are interested in low inflation, a large private sector andlow public debt


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3. Inequality falling wage sharesin developed countries


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3. Increase in Unemployment Rates

NL 3.9

5.5

US, EUF 10

Lettland 22.2

2009


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3. Extreme inequality of incomedistribution within the rich countriesPreviously

1: 2000An emperor had approximately 2.000 times as much as hissubordonates.

Today:

1 : 1 000 000Hedgefunds manager John Paulson. In July 2006 he founded a hedgefund with the sole strategy to bet on the collapse of the real estatemarket. In 2007 his Fund increased by 590%. John earned in thisyear 3,7 billion US dollar.

Problem: He cannot spend them in the real sector!


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3. The uneven development of real- and financial capitalof businesses

0

50

100

150

200

250

300

1960 1970 1980 1990 2000 2010

In%desBiP

Realkapital

Finanzkapital

Aktien, Investmentzertifikate, sonstige Beteiligungen

Investment certificates and other investments

Real capital

Financial capitalEquities,

United States


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3. The uneven development of real- and financial capitalof businesses

0

50

100

150

200

250

300

1960 1970 1980 1990 2000 2010

In%desBiP

Realkapital

FinanzkapitalAktien, Investmentzertifikate, sonstige Beteiligungen

Germany


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3. Imbalance of the Current account

Current account (% of GDP)

-80

-60

-40

-20

0

20

40

60

80

100

19801982198419861988199019921994199619982000200220042006200820102012

%change,1980=

0

Middle East

China

Deveolping Asia

Austria

France

EU

Africa

US

Source: IMF World Economic Outlook


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Leading economists worry about

increasing disequlibrium

We are outside

the corridor


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4. Recommendation

Restore income distribution

If third worldworkersnot any more unemployedlow income groupsget higher income and wealth they can buy goods

and services

Entrepreneurs can then sell their productsTaxes get paidFinance is 1:1 with the real sector and not 6:1

Interest rates are below growth rates

No Public Debt Problem any more!


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Prof. Dr. Brigitte UngerUtrecht UniversitySchool of Economics

Janskerkhof 123512BL Utrecht

Tel +31-30-2539809E-mail [email protected]

Thank you

b. unger - debt conference

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