Cernobbio, April 2019

The Global Dilemma and the European Paradox

Prof. Dr. Heiner Flassbeck

www.makroskop.eu We are living in extraordinary times: Never in history interest rates were so low Short term rate in the UK

flassbeck-economics.de We are entering a recession with zero interest rtates

Long-term real interest rates in Germany1) 8%

7%

6%

5%

4%

3%

2%

1%

0%

-1%

-2%

1970 1972 1974 1976 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1971 1973 1975 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1) Annual yield on 10-year government bonds (monthly basis), minus annual rate of change CPI (monthly basis) Source: OECD, Deutsche Bundesbank

Geneva and Zurich, February 2015 flassbeck-economics.de We are entering a recession without a revival of investment

Investment ratio of private companies in Germany 1) 25

24

23 nominal 22

21

20

19

18

17

16

15 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1) Bruttoanlageinvestitionen (neue Anlagen) im Verhältnis zur Bruttowertschöpfung der privaten Unternehmen ohne Grundstücks- und Wohnungswesen. Wert für 2018 berechnet mit Hilfe der Bruttoanlageinvestitionen der nichtstaatlichenSektoren ohne Wohnbauten. Quelle: Statistisches Bundesamt, eigene Berechnungen.

flassbeck-economics.de Regime change - back to the past - after 30 years of failure

Nominal Growth and nominal interest in the US

15

Interest ten year bonds

10 in % in 5

Growth rate GDP

0

-5

1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Quelle: Wachstumsrate des BIP im Vergleich zum Vorjahr, FRED. Zinssatz auf US-Staatsanleihen mit fester Laufzeit von 10 Jahren, FED.

flassbeck-economics.de The same is true for France

Growth and interest in France

20

15 Interest rate for ten year bonds

10 in % in

5

Growth rate GDP

0

-5

1962 1973 1994 2015 1961 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2017 2018

Quelle: Wachstumsrate des BIP im Vergleich zum Vorjahr, AMECO. Zinssatz auf französische Staatsanleihen mit fester Laufzeit von 10 Jahren, FRED.

flassbeck-economics.de ... and for Germany

Wachstum und Zinssatz für Staatsanleihen in Deutschland

15

10 in % in 5 Zinssatz 10-Jahres-Staatsanleihen

0 Wachstumsrate des BIP

-5

2000 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2002 2004 2006 2008 2010 2012 2014 2016 2018

Quelle: Wachstumsrate des BIP im Vergleich zum Vorjahr, Statistisches Bundesamt, AMECO. Zinssatz auf Bundesanleihen mit fester Laufzeit von 10 Jahren, OECD & AMECO.

flassbeck-economics.de But it is too late for a market solution! GDP-Growth1) , interest rate2) and public debt rate3) in the USA

15 120

GDP1) (left axis) 100 Interest rate2) (left axis)

10 80

60

in % in 5 40

3) in of % GDP Public Debt (right axis) 20

0 0

-20

-5 -40

1951 1993 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1) Gross Domestic Product, Percent Change from Preceding Period, Annual, Not Seasonally Adjusted 2) Market yield on U.S. Treasury securities at 10-year constant maturity, quoted on investment basis 3) Total Public Debt as Percent of Gross Domestic Product, Percent of GDP, Annual, Seasonally Adjusted

Source: FRED, FED

flassbeck-economics.de Fiscal policy is the only option left, government debt, not labour market flexibility is the solution

Unemployment rate and US budget balance

11 -12

10 -10 Budget balance 9 -8

8 -6

7 -4

6 -2

5 0 Unemployment rate 4 2

3 4

Unemployment Unemployment rate % in (annualaverage) US US balancebudgetin % GDP of (inverted scale) 2 6

1 8

0 10 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Federal Reserve Bank of St. Louis

flassbeck-economics.de In Japan as well, the government is the missing debtor But this solution is forbidden in Germany and in Europe Germany relies on current account surpluses to solve the problem of the missing debtor, but not everybody can do that

Financing balances1) of economic sectors in Germany 1991-2018 8 private households 6

4 Companies 2

0

-2 Government

in percent of GDP of percent in -4

-6

-8 Foreign countries2) -10

-12 )

2

2018

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

1) In % of nominal GDP; 2) Negative values mean foreign indebtedness 2) Estimate of the EU Commission Source: AMECO

flassbeck-economics.de That is why Europe is totally unable to solve ist unemployment problem

Unemployment rate1)

14 EMU2) 12

10

8 USA 6

Japan Quote in % Erwerbspersonen % in der Quote 4

2 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

flassbeck-economics.de Critical Analyses on Politics and Economics

Visit us at www.makroskop.eu

Publisher: Prof. Dr. Heiner Flassbeck & Dr. Paul Steinhardt Unit labour cost growth determines inflation rates

Inflation (CPI) und ULC Growth in different countries, 1970-1990 and 1990-2016

18%

16%

14% R² = 0,9719 12%

10%

8% annual rate of change of ULC in % ULC of ofchange annualrate

Ø 6%

4%

2%

0%

-2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Ø annual rate of change of CPI in %

Source: Ameco; Apart from Switzerland all countries are marked with two dots for the given period of time. Japan ab 1980. CPI stands for consumer price inflation. flassbeck-economics.de Evidently, the break is not to be found in the 50s

West Germany 1950 - 1960 15%

10%

Government Private Households

5% in % ofGDP% in

0%

Foreign2) -5%

Companies

-10%

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959

1) In % of nominal GDP; 2) Negative values mean foreign indebtedness Source: Statistisches Bundesamt Geneva and Zurich, February 2015 flassbeck-economics.de Not in the 60s

West Germany 1960 - 1975 10 Private households 8

6

4

in % of GDP of % in 2 Government

0 Foreign countries 2) -2

-4

-6 Companies

-8

-10

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1) As a percentage of nominal gross domestic product 2) Negative values mean foreign debt

Source: Deutsche Bundesbank,Geneva Ameco and. Zurich, February 2015 flassbeck-economics.de