The economic crisis in Europe – causes, effects, policies, options

1、The economic crisis in Europe causes, effects, policies, alternativesPresentation to PERC seminar on the crisis in the Baltics, Vilnius, 9 June 2009Andrew Watt etui (2009)Economic crisis - Vilnius2OverviewCausesCurrent situation Green shoots?EU policy responseCritique what needs to be doneAndrew Wat

2、t etui (2009)Economic crisis - Vilnius3Causes not just a financial crisisSharp rise in commodity pricesSharp appreciation of the euroLagged effect of past interest-rate risesImbalances and (housing) booms in some EU countriesThen shock from US hit Europe:US consumer retrenchmentFed rate cuts led to

3、more appreciation of euroToxic assets held by EU banksEmerging markets and world trade hitAndrew Watt etui (2009)Economic crisis - Vilnius4Grim prospects for EU (worse than US)Note: following charts from European Commission Spring ForecastAndrew Watt etui (2009)Economic crisis - Vilnius5Massive outp

4、ut drop but no unsustainable boomAndrew Watt etui (2009)Economic crisis - Vilnius6Severe lagged impact on (un)employmentAndrew Watt etui (2009)Economic crisis - Vilnius7Severe lagged impact on fiscal positionAndrew Watt etui (2009)Economic crisis - Vilnius8Bottoming out? sentiment indicatorsAndrew W

5、att etui (2009)Economic crisis - Vilnius9Bottoming out? share pricesAndrew Watt etui (2009)Economic crisis - Vilnius10Bottoming out? - industrial productionAndrew Watt etui (2009)Economic crisis - Vilnius11Downside risksRenewed rise in commodity pricesUnexploded bombs in the financial sector (especi

6、ally in Europe!)Collapse of the US-dollarCurrency crises in eastern EuropePremature exit strategiesAndrew Watt etui (2009)Economic crisis - Vilnius12Policy response in Europe too little too lateAndrew Watt etui (2009)Economic crisis - Vilnius13Cut in interest rates limited impact on firms borrowing

7、costsAndrew Watt etui (2009)Economic crisis - Vilnius14Policy response in Europe too little too lateSimple average Weighted averageTotal fiscal package 09/101.701.79in 20090.991.02in 20100.610.59 revenue side52%52%expenditure side48%48%Andrew Watt etui (2009)Economic crisis - Vilnius15Policy respons

8、e in Europe too little too lateATBEDKFIFRDEHUITLUNLNOPTESSEUKOverall size of fiscal package2.40.92.21.512.6400.214.62.41.5in 200910.41.210.71.200.21.70.40.71.22.31.21.4in 20101.40.410.50.31.500.10.51.1-0.1expenditure side30606020644650808475803410Andrew Watt etui (2009)Economic crisis - Vilnius16Ass

9、essment of fiscal packagesThe fiscal packages in the EU are too small they offer a quantum of solace to Europe and fail to address global imbalances. Current self-satisfaction by policymakers completely inappropriate.The distribution across countries varies considerably. On the positive side, to som

10、e extent this is justified economically and widespread free-riding seems to have been avoided (success for EU). However, the supposed fiscal room for manoeuvre seems to be a binding constraint on more cyclically appropriate policies. Particularly problematic in eastern Europe (IMF). Failure of Europ

11、ean fiscal solidarity. Mixed picture in terms of content of the packages. Considerable focus on public investment, but concerns about distribution, lack of attention to labour market crisis and missed opportunity on green issues.Andrew Watt etui (2009)Economic crisis - Vilnius17CritiqueOverall Europ

12、ean macroeconomic policy is behind the curve and too timidPolicy coordination was evident but inadequateLack of European solidarity (especially vis-a- vis eastern Europe)Social and distributional issues not addressedMissed opportunity for longer-term reforms (especially climate change)Andrew Watt et

13、ui (2009)Economic crisis - Vilnius18Policy alternatives save the economy and address distributional crisisMake support for financial sector more conditionalExpand fiscal packagesEase constraints on fiscally challenged countries to enable them to run expansionary policies and prevent downward spiralsEU investment program especially in green growthEquitable