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What’s Wrong with Europe (and how to fix it)?* Paolo Manasse University of Bologna, Italy Athens, Biennale, 12 October 2013 with Isabella Rota Baldini, forthcoming on CEPR Policy Insight Discussion Paper and Voxeu.org

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AGORA Economic Conference 4th Athens Biennale 2013 12/10/13

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Page 1: Presentation paolo manasse

What’s Wrong with Europe (and how to fix it)?*

Paolo ManasseUniversity of Bologna, Italy

Athens, Biennale, 12 October 2013

with Isabella Rota Baldini, forthcoming on CEPR Policy Insight Discussion Paper and Voxeu.org

Page 2: Presentation paolo manasse

1. The Eurozone, unlike the US, is not recovering from the crisis (persistence)

2. Some countries are more vulnerable than others (heterogeneity): Why?

3. «Demand shocks» - Fiscal austerity (the Troika) - Credit crunch (Sovereign default)3. «Supply Factors»: - Wage and Price rigidities4. «EU Institutions»: Europe’s «upside down»5. What should be done?

Outline of the talk

Page 3: Presentation paolo manasse

1. The Eurozone is not recovering: GDP per capita

Page 4: Presentation paolo manasse

1. The Eurozone is not recovering :Divergence in real incomes

Eurozone USA

7.5 8 8.5 9 9.5 10 10.5 11 11.5-0.06

-0.04

-0.02

2.77555756156289E-17

0.02

0.04

0.06

0.08

Figure 3.1: Less Convergence in Eurozone

2007-2000 Linear (2007-2000) 2012-2007Linear (2012-2007)

Initial per capita GDP

Cum

ulat

ive

gro

wth

in G

DP p

c

10 10.5 11 11.5 12 12.5-0.005

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

Figure 3.2: More Divergence in USA

2000-2007 Linear (2000-2007) 2007-2012Linear (2007-2012)

Initial per capita GDPC

umul

ativ

e gr

owth

in G

DP

pc

Page 5: Presentation paolo manasse

1. The Eurozone is not recovering :Unemployment keeps rising

Page 6: Presentation paolo manasse

2. Why Are More Country Vulnerable? «Demand Shocks and Supply Rigidity»

Page 7: Presentation paolo manasse

2. «Supply Factors»: Unemployment rises more were already high

Eurozone USA

2 4 6 8 10 12 14 16 180

2

4

6

8

10

12

Figure 6.1: Divergence of unemployment in Eurozone

Ave Unempl. 2000-08

Cum

ulat

ive

incr

ease

in u

nem

-pl

oym

ent 2

012-

2008

3 4 5 6 7-1

0

1

2

3

4

5

Figure 6.2: Divergence of unem-ployment in US

Ave Unempl. 2000-08

Cum

ulat

ive

incr

ease

in u

nem

-pl

oym

ent

2012

-200

8

Page 8: Presentation paolo manasse

2.«Supply Factors»: Income falls more where productivity growth was lower (but also demand matters)

-0.1 -0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

Figure 5: TFP and crisis in the Eurozone

cumulative TFP growth 2000-08

Cu

mu

lati

ve p

c G

DP

G

row

th 2

00

8-1

2

Page 9: Presentation paolo manasse

3. «Demand Factors»: Debt and DeficitsThe Role of federal/state budget (debt) in US/EUZ

Deficits Debts

Page 10: Presentation paolo manasse

3. «Demand Factors»: Income falls more where budget tightens more (but also supply matters)

-1 0 1 2 3 4 5 6 7-25-20-15-10-505

101520

Figure 10: Fiscal Adjustment and pc GDP in Eurozone

Cumulated Change in the Budget/GDP 2009-12

Cu

mu

late

d c

han

ge

in

pc G

DP

0

9-1

2

Page 11: Presentation paolo manasse

CountryNet contribution (€

Millions)% GDP

Belgium -1369 -0,36Bulgaria 725 1,94Czech Republic 1455 1,01Denmark -836 -0,34Germany -9002 -0,34Estonia 350 2,31Ireland 383 0,31Greece 4622 2,22Spain 2994 0,29France -6405 -0,31Italy -5933 -0,38Cyprus 6,8 0,04Latvia 731 3,62Lithuania 1368 4,63Luxembourg -75 -0,24Hungary 4418 4,67Malta 67 1,15The Netherlands -2213 -0,36Austria -805 -0,27Poland 10975 3,10Portugal 2983 1,81Romania 1451 1,08Slovenia 490 1,40Slovak Republic 1160 1,71Finland -652 -0,34Sweden -1325 -0,33UK -5565 -0,32

Table 1: Net contributions to the EU budget

Source: Eu commission, 2011 data

4.«Institutions»: Redistribution/insurance in EU almost absent

Page 12: Presentation paolo manasse
Page 13: Presentation paolo manasse
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4.EU institutions: «upside down»

No Budget for Stabilization against aggregate shocks/ No Redistribution-insurance

Fiscal Policy at country level + ineffective contraints (GSP, fiscal compact)

Bail-out system: costly and ineffective (ex-post)

No Debt restructuring mechanism (Threat of Exit)

Page 15: Presentation paolo manasse

5. What should be done?

Each Country: Fix Supply Side: Restore convergence and resilience- reduce market power of firms and unions,

banks (supervision /regulation); improve productivity growth

Fix Demand Side:- Budget Deficit (Corruption, Burocracy,

Political Fragmentation and Electoral Rules, Fiscal Rules)

Page 16: Presentation paolo manasse

5.What should be done?

EU architecture EU Budget for Stabilization/Insurance

(e.g.backed by VAT) Fiscal Rules at country level (No Troika,

please) + No bail out commitment Debt restructuring mechanism Difficult! But alternative is Euro disintegration: risks of widespread insolvencies, competitive devaluations, restrictions on movements of goods, services, people

Page 17: Presentation paolo manasse

Thanks for your attention!