Thomas Wieser Director General Austrian Federal Ministry of Finance
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Thomas Wieser Director General Austrian Federal Ministry of Finance VOWI_Tagung_2011.indb 134 03.10.11 08:28 Macroeconomic Imbalances within the EU: Short and Long Term Solutions What is an Imbalance? tion of countries, and may have impor- What is a macroeconomic imbalance? tant spillover effects. It has an array of And do macroeconomic imbalances lending instruments at its disposal that matter? Two easy questions. Put them can be utilized if imbalances lead to to an economist and she or he will most capital flows that are inadequate for likely give you an authoritative descrip- satisfying the external financing needs tion or definition of such an imbalance; of a country. The G 20 process has re- and will then proceed to authoritatively discovered this issue in the light of tell you that they either matter enor- global imbalances in current account mously, or not at all. A pattern will positions, and has agreed on a surveil- emerge: first, the definitions or de- lance exercise. scriptions will not be consistent with each other; second: if they matter, then usually abroad. I will start off with a simple defini- tion: a macroeconomic imbalance is the (negative or positive) position of a do- mestic, external or financial variable in relation to a certain norm. This posi- tion may – if uncorrected over time – make the national savings/investment balance so untenable that it self-cor- rects abruptly, thereby causing signifi- cant adjustment shocks domestically; in the case of large economies also abroad. Imbalances are caused by economic policies, or by their absence. They are Addressing Potential Imbalances in the Euro Area therefore a lagged indicator of other variables that developed at a pace or in a Within the European Union risks of direction that is not commensurate macroeconomic imbalances were rec- with the overall balanced development ognized in the Treaty. A set of eco- of an economy. At stake therefore is the nomic policy coordination tools was issue of sustainability and liquidity. A designed in order to prevent such dis- deficit or a surplus per se may well be a equilibria; and a balance of payments desirable equilibrium outcome and thus support facility was set up in order to not an imbalance, for instance reflect- assist in overcoming such a crisis. ing an efficient international allocation The design of the euro area as per of capital. the Maastricht Treaty followed the As imbalances influence develop- principles that ments in partner countries they are an – at entry, fulfillment of and adher- important factor in international policy ence to the fiscal, financial, mone- making. At the global level the main tary and exchange rate criteria task of the IMF has been and is focused would guarantee that the relevant on preventing, detecting or mitigating economic parameters that could en- national economic imbalances that may gender imbalances were largely in lead to an unsustainable external posi- balance, 39th ECONOMICS CONFERENCE 2011 135 VOWI_Tagung_2011.indb 135 03.10.11 08:28 Thomas Wieser – market discipline will be sufficient Upon entry into monetary union for nudging the public sector to- and the elimination of exchange rate wards prudence and sustainability risk, risk premia moved downward by prohibiting monetary financing with great speed, by a good 800 basis and a privileged access of the public points for some Member States com- sector to the financial sector, and pared to only a couple of years previ- by a rule on not bailing out Member ously. Subsequent developments of States, rapid credit growth and accelerating – loose economic policy cooperation private indebtedness were undoubtedly and more stringent fiscal policy co- a result of these developments. There is ordination through the relevant a bright side to this, as increased private Treaty Article and (later) the Stabil- sector leverage post-1998 may have had ity and Growth Pact (SGP) would a one-off “convergence euphoria” com- be sufficient for keeping these vari- ponent. ables on track, together with an in- Economic policy cooperation in the dependent monetary policy geared euro area institutionally takes place exclusively towards price stability, (only) in the Eurogroup – the (monthly) – and such was the conviction that no meeting of euro area Finance Minis- imbalances could emerge that no fi- ters, the ECB President and the Com- nancial safety net was designed to missioner responsible for Economic and provide balance of payment support Financial affairs. It is prepared in the to euro area Member States in dif- Economic and Financial Committee/ ficulties. the Eurogroup Working Group. When setting up monetary union the For well over a decade the debates question of asymmetric shocks received were contentious primarily when it wide attention, as this was seen as the came to applying the SGP. Greece ac- weak flank of a monetary union with ceded EMU on a wrong statistical fiscal basis. Nearly ten years ago the Pact faced its first stern test in view of ex- cessive deficits in Germany and France. With the decisive meetings taking place under Italian Presidency the SGP was watered down. Beyond fiscal coordination a moni- toring of overall economic develop- ments takes place; Ireland in 2002/03 actually received a warning for expan- sive fiscal policies fuelling inflation that were considered to be untenable if not corrected. This produced political re- actions from the Irish side that were so less than perfect factor mobility across negative that other euro area Member national borders, and autonomous fiscal States were possibly shocked into a pol- policies. The issue of divergent devel- icy of non-interference especially in opments of competitiveness were less non-fiscal policy areas. widely discussed, and seen as a lesser In the meantime financial integra- order problem. tion was proceeding strongly after the adoption of the euro, and cross-border 136 39th ECONOMICS CONFERENCE 2011 VOWI_Tagung_2011.indb 136 03.10.11 08:28 Thomas Wieser capital flows into government debt, – and, finally, that the euro area had a non-tradeable sectors and interbank quasi-coercive policy instrument in markets were significant. The asset the form of the SGP, but no other price increases in the non-tradeable policy tool at its disposal that could sectors (mainly real estate) were ana- realistically be expected to influ- lyzed and discussed extensively, but ence policy behavior of national ac- with the exception of Spain policy reac- tors. As all other policies were tions were muted. And even the Span- firmly anchored in national respon- ish reaction to the real estate develop- sibility, from wage to financial poli- ments did not suffice, as later develop- cies the incentives were skewed ments showed. Stronger reactions were against policy coordination. Policy prevented by domestic interest groups cooperation in and of the euro area or simply due to analytical failure of was firmly confined to the Euro- domestic policy makers. The domestic group meetings of Finance Minis- imbalances were largely seen as consti- ters, and thus reflected the fiscal tuting a problem of the Member State approach to policy coordination as concerned, not of the euro area as a laid down in the Treaty. whole. The build up of negative current ac- Addressing Imbalances in the EU count positions of euro area Member In the European Union of 27 economic States over the last decade was on the policies, even though a matter of com- other hand – with a few exceptions – mon responsibility according to the not seen as critical. By contrast, the Treaty, were in reality not closely coor- drifting apart of competitive positions dinated. ECOFIN work tends to be fo- as measured by diverging relative unit cused on legislative acts required for labor costs was increasingly seen as a completing and deepening the Internal centrifugal issue for the euro area by Market. The Treaty based Economic the European institutions. President Policy Guidelines, beloved by their au- Trichet regularly attempted to con- thors and drafters, are decided upon by vince Finance Ministers that these de- Ministers without substantial discus- velopments were unsustainable, but the sion, and successfully shelved after the Ministers concerned did not act or re- traditional pre-summer decision. Pro- act sufficiently. The reasons for this cess produces papers, not substance, complacency were diverse, but could unless there is a negative externality as- include the following, namely sociated with policy inertia. – that imbalances in a currency area The issue of external imbalances ac- were considered to be self-correct- tually received increasing visibility ing through medium-term nominal amongst policy makers, inter alia in the adjustments that would, admit- context of the ERM II procedures as tedly, take some time to occur (but some new Member States prepared for occur they would – more or less au- or attempted entry into Monetary tomatically – as losses of price com- Union. petitiveness triggered the appropri- The most visible case of imbalances ate price/quantity adjustments), was that of Latvia, where euro area of- – that sovereign risk differentials in a ficials engaged in intensive debates with currency union virtually ceased to the authorities on the causes of their exist and as there was no risk there current account deficit, and appropri- would be no punishment, ate remedies. Seemingly, there were al- 39th ECONOMICS CONFERENCE 2011 137 VOWI_Tagung_2011.indb 137 03.10.11 08:28 Thomas Wieser ways good reasons for the large deficits sector was seen as being a consequence not being a concern – ranging from id- of high growth, and not a cause of over- iosyncratic shocks due to the import of heating and thus unsustainable growth; railway stock to the nearly tautological and increasing contingent liabilities due effect of growth differentials in the to forex exposures were seen as provid- catching up process.