paganetto (ed.) - public debt, global governance and economic dynamism (2013)

Public Debt, Global Governance and Economic Dynamism Luigi Paganetto Editor Public Debt, Global Governance and Economic Dynamism Luigi Paganetto Editor Public Debt, Global Governance and Economic Dynamism 123 Editor Luigi Paganetto Tor Vergata Foundation for Economic Research Rome Italy ISBN 978-88-470-5330-4 ISBN 978-88-470-5331-1 (eBook) DOI 10.1007/978-88-470-5331-1 Springer Milan Heidelberg New York Dordrecht London Library of Congress Control Number: 2013937600 Ó Springer-Verlag Italia 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. 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While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) We would like to thank the Italian Ministry of Foreign Affairs for the financial contribution to realize this publication Contents Introduction 1 Luigi Paganetto Part I US Growth Policies in the Election Year Five Economic Challenges for the Next US President 7 Moreno Bertoldi The Multiplier, Sovereign Default Risk, and the US Budget: An Overview 25 William R. Cline Cyclical Policies, Structural Imbalances and Growth of the U.S. Economy 39 Dominick Salvatore Part II Assessing the Impact of Labor Market Reforms Short-Time Work Scheme and Unemployment Insurance Program Beneficiaries: The Analysis of Employment Outcomes 55 Giuseppe De Blasio, Leopoldo Mondauto and Maurizio Sorcioni Part III Imbalances, Tensions and Possible Readjustments: Evidence from Intertemporal Accounting and the Financial Accounts In Need of Sectoral and Regional Rebalancing in the Euro Area: A Euro Area Sectoral Accounts (Flow-of-Funds) Perspective 67 Philippe de Rougemont v Patterns in Financial Flows? A Longer-Term Perspective on Intersectoral Relationships 85 Daniele Fano and Giovanni Trovato Part IV G20, Global Governance and Regional Integration The Determinants of Macroeconomic Imbalances in the Euro Area: The Role of External Performances 105 Paolo Guerrieri and Piero Esposito The Group of Twenty: Origins, Prospects and Challenges for Global Governance 127 Homi Kharas and Domenico Lombardi Then and Now: European Trade, Payments, and Financial Regionalism in Historical Perspective 145 Juan Carlos Martinez Oliva What Is Wrong with the G20? 159 Ignazio Angeloni Part V Multipliers, the Crisis and Beyond Fiscal Multipliers and Public Debt Dynamics in Consolidations 167 Jocelyn Boussard, Francisco de Castro and Matteo Salto The Effects of Expenditure Shocks in Italy During Good and Bad Times 213 Francesco Caprioli and Sandro Momigliano Part VI EU Governance, Growth and the Eurozone Crisis EMU in Crisis: What’s Next? 235 Francesco Paolo Mongelli and Ad van Riet Europe: Is Austerity Compatible with Endogenous Growth? 253 Luigi Paganetto and Pasquale Lucio Scandizzo Germans at the Crossroad: Preserve Their Socio-Economic Model or Save the Euro? 265 Luigi Bonatti and Andrea Fracasso vi Contents The Austerity Debate 301 Carlo Cottarelli Part VII EMU Policy and Public Debt The Sovereign Debt Crisis in Europe: How to Move from Bad to Good Equilibrium? 311 Pier Carlo Padoan, Urban Sila and Paul van den Noord Interest Rate Shock and Sustainability of Italy’s Sovereign Debt 327 William R. Cline EMU Sovereign Spreads and Macroeconomic News 343 Daniela Arru, Davide Iacovoni, Libero Monteforte and Filippo Maria Pericoli Objectives and Instruments of Economic Policy in the Eurozone: How to Overcome the Crisis 365 Rainer Masera From Collapse to Constitution: The Case of Iceland 379 Thorvaldur Gylfason Part VIII Policy Recommendations Conclusive Intervention 421 Maurizio Melani Contents vii Introduction Luigi Paganetto Abstract Public debt and euro continue to be the most challenging questions Europe is trying to face. Public debt and euro continue to be the most challenging questions Europe is trying to face. Imbalances and large differences in the rate of growth are still worrying figures of the international economic scenario. The inadequacy of economic dynamism is the main problem for the most advanced countries, mainly in Europe. According to some commentators (see for instance De Grauwe 2011; Tabellini 2011 and Wyplosz 2011) the Eurozone has been saddled in a bad equilibrium because the ECB waited too long before using its Big Bazooka and has refused to act as a lender of last resort. They believe that if the next rescue operation were only big enough, the Eurozone drama would come to a happy end. The near-term costs of austerity mean we should keep thinking about alterna- tives, such as making commitments to future tightening more credible (e.g., entitlement-programme reforms). However, the presence of a sovereign-risk channel also provides a strong argument for focusing on ways to limit the transmission of sovereign risk into private-sector borrowing conditions. Tornell has put in evidence that the problems come from tragedy-of-the-com- mons transpiring in the Eurosystem, where the ECB and the 17 national central banks share a common pool of money demand. The Eurosystem is not a unitary textbook decision-maker. • Interest rates are set in a centralised fashion by the ECB’s governing board, but • Each national central bank has de facto power over the expansion of central bank credit to banks in its jurisdiction. L. Paganetto (&) Tor Vergata Foundation for Economic Research, Rome, Italy e-mail: luigi.paganetto@uniroma2.it L. Paganetto (ed.), Public Debt, Global Governance and Economic Dynamism, DOI: 10.1007/978-88-470-5331-1_1, Ó Springer-Verlag Italia 2013 1 Generally, a private bank can borrow from its national central bank as long as the bank (1) is financially sound and (2) has eligible collateral. What opens the door to the tragedy-of-the-commons is the way in which these conditions are implemented: • Supervisory powers reside with national authorities, not with the ECB in Frankfurt. The opportunities for institutional advancement in the EU created by the dismal management of the Eurozone crisis may well include the establishment of a banking union. Lack of centralised supervision and mandated supervisory action are main missing elements in the proposals that have been tabled so far. Here, a decision must be taken, first of all, on the competent authority at EU level. The European council already has the legal power to implement the central- ization of supervision at the ECB while EBA could be realized with ordinary legislation. By mid-2012 it is clear that the global recovery is at risk. By increasing uncertainty, while depressing demand in an important part of the world economy, the Eurozone crisis is dangerously slowing growth in the US and emerging economies. This is particularly worrying since the US economy could easily be pushed close to the recession zone. By 2010, governments on both sides of the Atlantic had clearly adopted diverging strategies: • for the US restoring self-sustained growth was the priority; • for Europe the priority was to bring budgets back into balance. The problem is that reducing budget deficits without harming growth had become trickier (Wolf 2010). The conclusion is easy to draw. Eurozone governments have to acknowledge that their response to the sovereign crises has been wrong. In present circum- stances, bringing budgets back to balance as quickly as possible and at any cost for growth is a recipe for disaster. The strategy adopted in May 2010 has not just failed to achieve its aims: restore debt sustainability, avoid contagion and reduce moral hazard. It has not produced a solution that is likely to bring the crisis to its end. Policy makers are facing a dilemma. Still high deficits, rising debt ratio and the volatility of financial markets all argue for continued fiscal consolidation. The IMF Fiscal Monitor (April 2012) points out that too little fiscal consoli- dation could roil financial markets, but too much risks further undermining the recovery. Fiscal tightening could be expected to reduce short term growth mainly while output gaps are negative. If fiscal multipliers are large and public debt is high, fiscal adjustment may appear counterproductive in the short run. 2 L. Paganetto What is the appropriate pace of fiscal consolidation? A gradual and more flexible approach could be preferable? Or is still needed, as suggested by Wyploz a U turn in the policies adopted to face the crisis in Europe? Unfortunately it will be costly. We have to take account in general, that self fulfilling depressionary expecta- tions push the economies below their potential. The dynamism in an economy may be undermined by negative externalities that negatively influence the perspectives of endogenous growth. Tax increase and expenditures cuts reduce the confidence in the future of the economy. Is austerity self-defeating? Is it keeping Europeans underemployed for years and destroying the very growth needed to pay off the debt? Or is it steering nations clear of Greek-like tragedies? References De Grauwe P (2011) The Governance of a Fragile Eurozone. CEPS Working Document No. 346, May 2011 Tabellini G (2011) The Eurozone crisis: what needs to be done. www.VoxEU.org, 15 July 2011 Wyplosz C (2011) Eurozone Leaders Still don’t Geti it. www.VoxEU.org, 25 Oct 2011 Wolf M (2010) Why plans for early fiscal tightening carry global risks. Financial Times, 16 June 2010 Introduction 3 [...]... International Economic Seminar, Rome, June 26–28, 2012 W R Cline (&) Peterson Institute for International Economics, Washington, USA e-mail: wcline@piie.com L Paganetto (ed.), Public Debt, Global Governance and Economic Dynamism, DOI: 10.1007/97 8-8 8-4 7 0-5 33 1-1 _3, Ó Springer-Verlag Italia 2013 25 26 W R Cline At full employment the monetary authority will not be pursuing a zero interest rate policy and there... Institute for International Monetary Affairs and at the Economic Research Institute of the Economic Planning Agency M Bertoldi (&) European Commission, Brussels, Belgium e-mail: moreno.bertoldi@ec.europa.eu L Paganetto (ed.), Public Debt, Global Governance and Economic Dynamism, DOI: 10.1007/97 8-8 8-4 7 0-5 33 1-1 _2, Ó Springer-Verlag Italia 2013 7 8 M Bertoldi all five challenges are closely interrelated Therefore... heuristic and can best be thought of as potential consumption measured in the same units as GDP The Multiplier, Sovereign Default Risk, and the US Budget: An Overview Table 2 Total welfare-equivalent multiplier including default risk Debt/GDP % 60 80 v: H: 0 1 2 3 4 0 -0 .38 0.12 0.60 1.06 1.50 0.2 -1 .04 -0 .48 0.07 0.60 1.10 29 100 120 0.4 -1 .71 -1 .08 -0 .46 0.13 0.71 0.6 -2 .38 -1 .68 -0 .99 -0 .33 0.31... high and the debt ratio is low In the lower-left corner, 1 % of GDP fiscal stimulus boosts welfare by 1.5 % of GDP.3 As unemployment falls, however, so does the welfare gain Even if there is Table 1 Multiplier as a function of excess unemployment Direct (l) Crowding out effect (-k) v: 0 1 2 3 4 0 0.375 0.75 1.125 1.5 -0 .38 -0 .25 -0 .15 -0 .07 0.00 Total -0 .38 0.12 0.60 1.06 1.50 v unemployment rate - 5... wall street: the dodd-frank act and the new architecture of global finance John Wiley and Sons, New York Baker S, Bloom N, Davies S (2012) Has economic policy uncertainty hampered the recovery? In: Ohanian L, Taylor J, Wright J (eds) Government policies and the delayed economic recovery Hoover Institution Press, Stanford, pp 39–56 Bertoldi M (2010) Will Obama succeed in setting-up a new growth model?,... ‘‘Countries of the G20—IMF and G-Groups’’ at the Directorate General for Economic and Financial Affairs of the European Commission He is also the Commission representative in the G20 Framework for Growth Working Group Prior to this, he was head of the unit for ‘‘Coordination of country-specific policy surveillance’’ and head of the unit dealing with ‘‘Economies of America and Asia, IMF and G7/G8’’ From 2001... recession 2007–2009 -1 7.4 Recovery 2009–2010 2.3 (2) (3) Fraction of total growth (or loss) captured by top 1 %, (%) (4) 58.0 6.4 52 98.7 20.3 45 -3 0.8 -6 .5 57 61.8 6.8 65 -3 6.3 -1 1.6 49 11.6 0.2 93 Computations based on family market income including realized capital gains (before individual taxes) Incomes exclude government transfers (such as unemployment insurance and social security) and non-taxable fringe... the country (with possible effects on interest rates and the value of the dollar) and in the medium to long-term may weigh negatively on its growth performance [Reinhard and Rogoff (2011)] However, a new short-term fiscal stimulus should not be ruled out completely: a deterioration of the global outlook and/ or a further retrenchment in effective demand due to the continuation of deleveraging trends,... to 2006 he was the economic and financial counsellor at the delegation of the European Commission to the United States, and from 1996 to 2001 he held the position of political and economic counsellor at the delegation of the European Commission to Japan (1996–2001) In 1997, while in Tokyo, he was visiting research fellow at the Institute for International Monetary Affairs and at the Economic Research... knowing what tax rates or other provisions will be Demand for investment will increase if policy unpredictability is reduced And consumption demand will increase if workers’ incomes increase on a more permanent basis’’ If this analysis is correct, the positive spill-over effects of a credible and coherent medium-term fiscal consolidation strategy on economic activity through the reduction of uncertainty . Public Debt, Global Governance and Economic Dynamism Luigi Paganetto Editor Public Debt, Global Governance and Economic Dynamism Luigi Paganetto Editor Public Debt, Global Governance and Economic. and Economic Dynamism 123 Editor Luigi Paganetto Tor Vergata Foundation for Economic Research Rome Italy ISBN 97 8-8 8-4 7 0-5 33 0-4 ISBN 97 8-8 8-4 7 0-5 33 1-1 (eBook) DOI 10.1007/97 8-8 8-4 7 0-5 33 1-1 Springer. jurisdiction. L. Paganetto (& ;) Tor Vergata Foundation for Economic Research, Rome, Italy e-mail: luigi .paganetto@ uniroma2.it L. Paganetto (ed. ), Public Debt, Global Governance and Economic Dynamism, DOI: