Optionen für die Eurozone

Dr. Daniel Stelter

2

The two problems of the euro zone

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

Too much debt Competitiveness

500

450

400

350

300

250

200

150

100

50

0

Total debt (% of GDP)

348

241

419

188

241

183

309

199

251

213

210

191

259

182

254

229

20002011

130

120

110

100

0

150

140

Unit labor costs, Q1 2000 = 100

2000 2012

3

How to solve the euro crisis?

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

Address debt overhang

Restore com-petitiveness

Internal devaluation1

Permanent transfers from north to south

2

Grow out of the problem3 ? ?Organized debt restructuring and growth agenda

4

The inflation solution5 ? ?Debt restructuring and Euro zone exits6

4

Stereotyping in Europe

Source: PEW Research Center

Who is Trustworthy, Arrogant and Compassionate

EU nation most likely to be named...Views in:

Most Trustworthy

LeastTrustworthy Most Arrogant

Least Arrogant

Most Com-passionate

Least Com-passionate

Britain

France

Germany

Italy

Spain

Greece

Poland

Czech Rep.

5

Joint restructuring the euro zone debt overhang

Source: Eurostat; bto analysis

Pooling excess debt

Roll-in of government debt > 60% of GDP per country

Funding for private sector recapitalizations for debt > 90% of GDP per sector and country

Refinancing with Eurobonds

Features• Jointly guaranteed to

obtain AAA rating and low rates

• Staggered maturities matching repayment profile

• Repayment over 20 years

€5.1TEurozone

redemption fund

Accompanying measures• Structural and fiscal

reforms• Limits on new

indebtedness• Measures to reduce

private debt LT < 60% of GDP

Private househol

ds

€6T

€0.3T

Non-fin.

Corp.

€7T

€1.1T

Government

€5.5T

€3.7T>60% of GDP

>90% of GDP

Repayment optionsI. Each country repays own

debtII. Reallocation for GIPS debt

to Euro zone average (55% of GDP)

III. Reallocation for all countries according to GDP

IV. Euro zone wide wealth tax on household assets

6

Without reallocation, debt service costs

Option I: No reallocation

No reallocation

Debt burden for Greece already reduced after haircut

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

1,000

500

1,500

0

Total excess debt and costs to repay over 20 years per country (B€)

% GDP p.a.1

% Fin. Ass. p.a.1

Excess debt to GDP 51%

2.3%

1.1%

57%

2.4%

0.9%

49%

2.2%

1.1%

27%

1.2%

0.7%

63%

2.8%

1.3%

72%

3.2%

2.0%

49%

2.4%

2.0%

67%

3.1%

1.0%

179%

7.0%

3.6%

108%

5.4%

2.4%

EZ

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

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

% GDP p.a.1

% Fin. Ass. p.a.1

Excess debt to GDP

EZ

51%

2.3%

1.1%

63%

2.6%

1.0%

56%

2.5%

1.2%

34%

1.5%

0.8%

69%

3.1%

1.4%

51%

2.3%

1.4%

49%

2.4%

2.0%

74%

3.4%

1.1%

51%

2.0%

1.0%

51%

2.6%

1.1%

1,500

0

500

1,000

Total excess debt and costs to repay over 20 years per country (B€)Reallocation of

excess debt from GIPS to other

countries

8

High inflation differential required torealign competitiveness

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 2010-12Source: Thomson Reuters Datastream (Eurostat), CesIfo Working Paper No 4086, Goldman Sachs, European Economic Analyst No 3/2013; bto analysis

5

4

3

2

1

0

8

7

6

Eurozoneavg.= 3.6

0.00.00.0

1.3

2.5

3.8

5.5

9

Only together can we make it happen!

Deal with the debt problem

Reform labor markets

Improve education

Implement smart immigration policy

Redemptionfund